Apple iPhone assembler, Foxconn warns about waning smartphone demand and exacerbating supply constraints

Taiwanese electronics manufacturer, Foxconn is one of Apple’s biggest iPhone assemblers. Bogged down by uncertainties, Foxconn chairman Young Liu warned that the company will face revenue cuts in the current quarter because of the slow demand and growth of smartphones, rising inflation, and increasing supply constraints exacerbated by the COVID-19 lockdowns in China and war in Ukraine.

In March, China imposed a strict lockdown in major cities which shut down manufacturing hubs in  Shanghai, Shenzhen, Kunshan, and Zhengzhou‘s “iPhone City”. Although Foxconn was allowed to resume small-scale production under a closed-loop system at most of its iPhone assembling plants, the lockdowns have had a more severe impact on the company’s business in the current quarter.

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Ahead of iPhone 14 series launch, Apple partner Foxconn announced it wants to reduce reliance on smartphones and other electronics

According to Reuters, Chairman Liu said at the post-earnings call that this year the market is affected by “many uncertainties” due to the pandemic, geopolitical risks, and inflation which have created challenges to demand and supply. Therefore, the company expects a decline in revenue in the second-quarter ending in June.

The company, formally called Hon Hai Precision Industry Co Ltd, expects overall revenue to be flat for the current quarter and for the full year. It did not provide a numerical outlook, but projected strong growth for its other businesses such as components, computing products and cloud and networking products.

In the first quarter ended in March, Foxconn’s revenue rose 4%. Net profit grew 5% to T$29.45 billion ($985.48 million) and was largely in line with an average analyst estimate of T$29.76 billion, according to Refinitiv.

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More importantly, the company reinforced the need to explore other sources of revenue and reduce its reliance on smartphones and consumer electronics which accounts for 50% of its capital, ahead of the iPhone 14 series launch in September 2022.

The predictions reinforce the urgency for Foxconn to reduce its reliance on smartphones and consumer electronics, which make up slightly more than half of its total revenue, and diversify into areas such as electric vehicle (EV) manufacturing which it sees as a $34 billion business by 2025.

In March 2021, chairman Liu confirmed that Foxconn plans to manufacture electric vehicles (EV) in North America by 2023 and was in the process of evaluating locations in the United States and Mexico for EV production. Later that year, the company completed a $230 million deal to purchase a factory in Ohio from Lordstown. 

Liu said gross profit margins for assembling EVs are relatively low, similar to its smartphone assembly business. That is why Foxconn plans to develop more profitable EV components such as auto chips and batteries.

“Only in this way can we achieve double-digit gross profit margins.”

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