Hon Hai seen on right track with strategic shift

Hon Hai Precision Industry's decision to move away from major client Apple and the lower-value electronics contract manufacturing business is a long-term bet that will improve margins and offset rising labour costs, analysts say.

The Taiwanese company, better known by its trading name Foxconn, is building an integrated service package ranging from electronic devices to software applications and cloud computing as it strives to become more consumer-driven.

This strategic shift is in its early days: Hon Hai still draws an estimated 40 per cent to 50 per cent of its revenue from assembling iPhones and iPads, a slight decline from 60 per cent a year ago. But analysts said the move was likely to boost profit margins this year and in the longer term for the world's largest assembler of electronic devices as well as balance out rising wages and costs at its factories on the mainland.

"Its enlarging scale will help Hon Hai's margins in [the third and fourth quarter]," said Kylie Huang, an analyst at Daiwa Securities.

"This has a leverage effect: in the very long run, working closer with the carriers will help Hon Hai to understand the needs of consumers when introducing TVs, tablets, game consoles and smartphones," she added, citing the fourth-generation mobile licences the company recently bought.

Hon Hai yesterday announced a better-than-expected net profit of NT$30.75 billion (HK$8.05 billion) for the third quarter, higher than a median forecast of NT$25.99 billion by 13 analysts polled.