Foxconn: diversifying revenues away from Apple is proving costly
The fortunes of Foxconn, Apple’s main supplier, are closely tied to the US iPhone maker. As iPhone 12 sales soared, so did first-quarter profits at Hon Hai, as Foxconn is listed in Taiwan. Foxconn’s efforts to reduce its reliance on Apple will prove costly.
In the last quarter, net income rose to NT$28.2bn ($1bn) with sales up 45 per cent, mostly thanks to the consumer electronics business. Foxconn was able to skirt the continuing global components shortage by dipping into inventory. As a result, cash and equivalents have increased to NT$1.1tn, up almost a fifth on last year.
Liabilities, however, have grown at an even faster pace. Prices of raw materials and components are rising amid supply shortages. Foxconn’s aggressive expansion in low-end chipmaking and electric vehicle contract manufacturing requires heavy spending. Despite a strong quarter, negative free cash flow reached NT$152bn. Unlike traditional chipmakers and automakers, Foxconn’s single-digit margins do not give it room to cover big investments if profits fall.
For the time being, Foxconn is unlikely to change course. It has set up a joint venture with local peer Yageo to develop chips and has partnered with automakers including Fisker. Its deal with the latter includes plans to build a production plant in the US.
Shares are down more than a fifth from a January high, reflecting the short-term costs of transitioning from an electronics assembly business to a chips and electric car production company. The coming quarters will bring further challenges, including chip shortages and production problems in India due to the pandemic. But in the long term, the strategy is the right one.
An upbeat revenue forecast from Apple would once have been enough to send Foxconn shares on a rally. Now the rest of the business must pull its own weight. The question investors should ask is whether Foxconn’s components business, which accounts for 5 per cent of group sales, will one day become as big as the business that it does with Apple.
Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up