May 15, 2019 / 3:54 AM / 8 months ago

Breakingviews - Trade row adds to headaches for next Foxconn boss

Foxconn Technology Group founder and chairman, Terry Gou, speaks during a news conference after his trip to the U.S., in Taipei, Taiwan May 6, 2019. REUTERS/Tyrone Siu

HONG KONG (Reuters Breakingviews) - An intensifying trade spat is one more headache for Foxconn’s next boss. The Taiwanese iPhone assembler reported a worse-than-expected drop in quarterly earnings on Tuesday, against a backdrop of cooling tech demand. Now it has to deal with straining U.S.-China ties too. Chairman Terry Gou has sought to diversify away from Apple’s phones, in part by scrambling up the value chain. His successor will have to climb faster.

Revenue at the $36 billion company, formally known as Hon Hai Precision Industry, ticked up slightly on the same quarter last year but squeezed margins meant net profit fell almost 18%. Part of the issue, Fubon Research reckons, may be a write-off of iPhone X and XR inventory. The headwinds are no secret: the contract manufacturer derives around half its revenue from Apple, and the smartphone market seems to have peaked. Shipment volumes declined 6.6% year-on-year in the first quarter, according to IDC.

The trouble is that Foxconn’s challenges are multiplying. Founder Gou is eyeing the exit in order to contest Taiwan’s 2020 presidential election but there is still plenty of uncertainty around his replacement. Worse, trade tensions between Washington and Beijing have escalated in recent days, and rancour could well linger even after a deal. If Washington expands tariffs that hit iPhones and other consumer electronics, the cost of producing the smartphone could shoot up 10% or more over time, Wedbush Securities estimates.

The risks are not all new. Gou has for years been looking to diversify away from the Cupertino-based giant. That logic was part of the reason it bid to take control of Japanese electronics outfit Sharp. The group also snapped up Belkin, a maker of accessories and routers, plus Nokia’s phone business. Meanwhile, it has sought to expand production outside China, too.

Recognising a problem, though, is easier than fixing it: the Nokia division, for instance, now mostly gains attention for hefty losses. Gou’s successor, which Reuters reported on Monday may be its chip unit boss Liu Young, will have his work cut out. He has to edge away from both Apple and China, and capture more of the higher-margin areas of the electronics business. Thanks to U.S. President Donald Trump, the clock may be ticking faster.


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