If Terry Gou had taken his planned stake in Sharp last year, he would be only a sixth in the red following a trebling of its shares in six months. Still, he did not and it would not have helped Hon Hai Precision anyway, the company he founded that trades under the name Foxconn. Results released this week were weak and Apple, Hon Hai’s biggest customer, is now flirting with rivals. Has the peak for Hon Hai passed?
Trying to follow the tangled relationships in Asia’s supply chain is akin to keeping up with a daily soap opera. About two-fifths of Hon Hai’s business is Apple-driven. Sharp, with which Mr Gou still has a joint venture producing liquid crystal display panels, provides iPhone panels for Apple. But Sharp has also taken investments from Qualcomm, an Apple supplier, and Samsung, the US giant’s biggest rival and most crucial supplier. Meanwhile, Hon Hai is facing pressure from relative upstarts like Pegatron, which of course also supplies Apple.
So Hon Hai’s weak first quarter only adds to the drama. A one-fifth drop in sales year-on-year undershot forecasts. Margins were weaker than expected. At the gross level that was due in part to an accounting change that shifted some expenses, including licensing fees, from the operating level up to production costs. But the operating margin hardly benefited. At 1.7 per cent, it is a reminder of the pressure all the Asian suppliers live under. In Hon Hai terms, it was the second lowest in more than five years. The fact that, in addition to Apple, the company gets another two-fifths of its business from PCs, an industry in decline, does not help.