Internet & Tech

Supply squeeze

Foxconn rejects Apple’s demand to slash its prices

iphone w

But what will the iPhone 7 do?

In the financial markets, September is known as one of the riskier months, when stocks have a tendency to fall sharply. In the corporate calendar, however, the month is more synonymous with the launch of Apple’s latest killer consumer product.

Apple’s shareholders and suppliers will hope that this September will be no different. So far, it has not had a very good year. Its share price has underperformed the NASDAQ benchmark, due to declining iPhone sales. These were down 23% during the most recent quarter and the company has guided for a further 10% fall during its final fiscal quarter of the year. Then this week, Apple was hit with a record breaking €13 billion ($14.5 billion) fine from the European Commission. The allegation is that Ireland gave it a sweetheart deal facilitating a tax rate of just 0.005% (helpful in boosting Apple’s $232 billion cash pile, no doubt).

So a lot looks to be hinging on September 7, when the world expects to get its first official glimpse of the new iPhone 7, as well as the second-generation Apple Watch.

What’s coming up? Social media commentators have been less than impressed with rumours that the phone will dispense with earphone jacks (“how will I listen to music on public transport?” being one common refrain). There is a little more excitement, reports the Cult of Mac website, that the smartphone will feature a dual-lens camera (HTC first adopted one in 2014) using technology from an Israeli acquisition it made, and which could dramatically improve the iPhone’s photo quality, particularly in poor light.

However, as 9to5Mac reports, the true killer product may be what is being billed as Airpods: wireless headphones that make Apple’s iconic white headphone leads look as old fashioned as getting up to switch channels on your TV.

Next year also marks the 10th anniversary of the iPhone, and Apple watchers expect more radical design changes in the years ahead. These include the possibility of a complete glass casing and potentially the return of a flip phone using foldable OLED (Organic Light Emitting Diode) technology.

OLED’s potential is one of the main reasons why Foxconn purchased Sharp for $3.8 billion in April, in what we reported in WiC315 as one of Terry Gou’s greatest gambles.

The Taiwanese company derives 50% of its revenues from Apple and the Foxconn founder is hoping to make sure it is at the forefront of any moves to revamp the iPhone, especially in deploying glass casings.

In early August, Nikkei reported that Foxconn was working on the development of a pure glass case. However, the company is unlikely to have done itself many favours by refusing Apple’s recent demand to cut its component prices by 20%, reports Beijing News. China Business Journal adds that Foxconn and fellow Taiwanese firm ASE are both unwilling to give up on their manufacturing margins. Foxconn was already stung, it likewise reports, by Apple reducing its orders by 30%. The Wall Street Journal says this slashing of orders may have contributed to a 31% year-on-year decline in the company’s second quarter net profit to NT$17.7 billion ($558 million) – a fall that’s occurred in spite of Foxconn’s introduction of stringent cost control measures.

The cost reductions made fewer headlines than two more suicides at one of Foxconn’s biggest manufacturing plants. CBN reports that two members of staff jumped off the top of the Zhengzhou plant shortly after getting jobs there. Staff members also told the newspaper that wages are at a level at which they can only make money if they top them up with overtime, and these privileges are being restricted to preferred employees, including those who refer new recruits.

Foxconn was once Apple’s sole supplier of casings, but the Californian firm has diversified its supply chain so as not to be overly reliant on a single firm.

That is one reason that many analysts are wary about Foxconn’s immediate prospects, particularly given its Taiwan-listed parent Hon Hai Precision has seen its stock drop 4% year-to -date. The view of HSBC’s research team: “We think the structural challenges (market share loss within Apple) make the current risk/reward profile unattractive.”

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.