Foxconn saga: What analysts are saying

Foxconn saga: What analysts are saying
SAN JOSE, Calif. -- Lately, it's been a tumultuous period for Taiwan's Hon Hai Precision Industry Co. Ltd. Hon Hai, the world's largest contract electronics manufacturer (CEM), trades as Foxconn and makes electronic products for such brands as Apple, Dell, Hewlett-Packard and Sony.

As reported, Foxconn International Holdings Ltd. (FIH) recently announced it will more than double the salaries of employees at its factory in Shenzhen, China within months in response to a global outcry over recent worker suicides at the site.

Now, there are unconfirmed reports that FIH may re-locate some operations in Shenzhen to lower cost regions in China. Here's what analysts are saying about Foxconn's troubles:

Impact of salary hikes for Foxconn

Jamie Wang, an analyst with Gartner, said: ''This wage hike may increase Foxconn's operational costs and affect its profitability, but the company cannot afford further tragic suicides, and this action will improve relations with its workers in China and help to deflect potential negativity from its outsourcing clients.

''For now, Foxconn needs to concentrate on handling recent events sensitively, which will affect its cost competitiveness in the short term. However, a continuous focus on improving quality and productivity will be recognized by Foxconn's OEM customers over the long term.''

HSBC analysts Yolanda Wang and Joyce Chen said: ''Following the June 2 announcement that FIH was raising pay for its production workers by 30 percent (from RMB900 to RMB1200) effective June 1, the company announced further significant pay hikes of 67 percent (from RMB1200 to RMB2000) on June 7 for production line workers based in Shenzhen, China (effective October 1).

''In the meantime, the company is reviewing potential pay hikes for workers in other areas of China. We estimate the latest 67 percent salary and wage increases could impact FIH’s operating profit by another 66 percent.''

HSBC analysts Wanli Wang and Carrie Liu, said: ''We cut 2010/11 EPS estimates by 5 percent and 11 percent, respectively, (for FIH) to reflect the further labor cost increase. We forecast 2010 sales will rise 32 percent year-over-year. LCD TV, Apple iPad and 4G iPhone, and (notebooks) are the growth drivers. Desktop PCs and servers are likely to benefit from replacement demand. The risk to our forecasts is rising component prices.

Hon Hai produces more than 50 percent of global desktop PCs. The company should be a major beneficiary of the corporate replacement cycle. Hon Hai is the key assembler for Apple iPhone 4G. iPhone will contribute about 15 percent of Hon Hai's total sales in 2010.

Moreover, iPad continues to see strong demand globally. We believe 2H10 unit shipments will grow more than 50 percent vs 1H10. Hon Hai will ship only 2 million LCD TV units in 1H10. The other 4 million units will kick in during 2H10, with new orders mainly from Sony.''

Impact on supply chain

HSBC analysts Yolanda Wang and Joyce Chen said: ''FIH’s pay increase could have an impact on the entire manufacturing supply chain, which shares a similar labour pool, especially in the Shenzhen area.''

HSBC analysts Wanli Wang and Carrie Liu, said: ''The salary increase is a structural issue; we expect it to extend to other manufacturing companies in China. In addition to Hon Hai, Honda and TPV also recently announced plans to raise employee base salaries by 20 percent in China.''