Market Calls
Handset maker Foxconn International (2038) last Monday issued its first-half results, in which it reported a loss of US$17.6 million. This follows a loss of US$219 million last year. Can the firm, which has also seen a string of worker suicides, turn things around?
Chialin Lu (Samsung Financial) attributes much of Foxconn's profitability problems to salary rises at its mainland plants, done largely to appease workers following the suicides.
'A key reason for Foxconn's losses has been labour salary increases. They raised wages twice last year, and [the result] was more than a 60 per cent rise,' Lu says. 'Even without the suicides, they would have had to increase salaries, but that was the trigger.'
He says the suicide rate has been falling. Foxconn has installed enhanced entertainment areas at dormitories. It has also installed safety nets around its buildings to catch workers who jump out of windows.
Peter Liao (Nomura) says Foxconn has been hurt by its dependence on clients Nokia and Motorola, which have been losing market share to the likes of Apple and BlackBerry, and other smartphone makers.
'The smartphone is a hot device and is replacing many feature phones,' Liao says. Feature phones are a category down from smartphones.
The firm has been losing orders to this trend. Meanwhile, it has also seen its labour costs rise thanks to increasing salaries, even though the firm cut its staff numbers by 20 per cent in the past year, Liao says.
Bonnie Chang (Yuanta) sees light at the end of Foxconn's tunnel. She upgraded the firm to a buy after it issued its results.
She notes that while Foxconn does not make smartphones for the global vendors, it does make them for the mainland firm Huawei. She expects Huawei will ship 20 million smartphones this year (up from 1.8 million units last year), many of which will be built by Foxconn.
She also likes the company's move to set up a major plant in Hebei in northern China. She says that labour costs are cheaper inland and that workers are happier there, as distances for migrant workers to go will be shorter.
She adds that the firm did not book any impairment charge in the first half related to the cost of making this move. The cost had been a drag on earnings.
'For the second half, when the seasonality kicks in and when the firm's revenues run at a higher rate, cost-efficiency will kick in,' Chang says. 'We think the firm will turn around.'
The views stated here are those of analysts, and are not stock calls by the South China Morning Post
