Apple's top manufacturing partner had profit decline even before COVID-19 outbreak

Apple's top manufacturing partner had profit decline even before COVID-19 outbreak
Contract manufacturer Foxconn, also known as Hon Hai Precision Industries Cos., assembles the majority of iPhone models produced every year. The company's assembly lines also churn out products designed by Huawei, Xiaomi, Motorola, Sony and more. According to Bloomberg, today the company reported a 24% drop in its quarterly earnings to the equivalent of $1.58 billion from the $2.05 billion it earned during last year's quarter.

Lower profits during the coronavirus outbreak might not seem terribly surprising, but the problem is that the three month quarter included in this report covers October through December of last year before anyone had heard of COVID-19. The company was affected not by a virus during the fourth quarter, although it was subsequently affected by the coronavirus during the current quarter (more on that in a bit). What impacted Foxconn's 2019 fourth quarter were things that seem forgotten in the wake of the COVID-19 outbreak; the U.S.-China trade war and the tariffs imposed by the U.S. on imports from China affected Foxconn's earnings during the final quarter of last year. Also, weakening demand for smartphones hurt the company's bottom line during the same period.

Foxconn had to offer a higher signing bonus to attract the usual number of seasonal workers

Half of Foxconn's revenue is generated by assembling the iPhone and other Apple devices. Even though the company is slowly gearing up its assembly lines to produce the 2020 5G iPhone models, these devices aren't expected to go through the manufacturing process until July and already there are conflicting reports about whether Apple will be able to unveil and launch the iPhone 12 family in September as it traditionally does. That's because Foxconn relies on Apple's supply chain to deliver the components and parts it needs to build the phones. And any minor hiccup in the supply chain could result in delays.

Recently, Foxconn announced that it has hired the usual number of seasonal workers needed to run its factories at full speed during the summer although higher "signing bonuses" had to be promised. And while that will certainly help with the supply end of the equation, the COVID-19 outbreak has many questioning the demand side of the industry. The U.S. and China signed off on "Phase One" of a possible trade agreement which means that smartphones won't be hit by the U.S. import tax. It also reduced the tariff amount charged on other tech imports. But smartphone demand has been sluggish even before the current crisis began. Still, as the transition to 5G continues, the industry should get a boost as consumers make the switch to a 5G phone. And depending on how the foldables niche pans out, additional demand might be seen as foldables become less expensive and more useful.

But the big question is how bad will the global economy be hit by the time the coronavirus is no longer a threat to everyone's lives. It is going to take time to get the economy running close to normal and buying a shiny new smartphone might not be at the top of everyone's to-do list once the pandemic is over with. Foxconn has already reduced its revenue projection for 2020. Any blip up in smartphone demand could be a year or two away at best.

The relationship between the U.S. and China certainly remains a wild card although the upcoming presidential election could shake things up. Still, Foxconn is looking to expand its production facilities and is spending $561 million to build factories in both India and Vietnam. Foxconn already builds certain iPhone models in the former and Vietnam has often been mentioned as a possible new home for Apple.

Foxconn shares closed at the equivalent of $2.31 USD each on the Taiwan Stock Exchange today, a decline of .14%. The 52 week high is $3.21 USD and the 52 week low is $2.17 USD. Apple is expected to release its fiscal second-quarter report on May 5th.

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