Foxconn Gives More to Apple

Apple’s (NASDAQ:AAPL) margins have broadened at the expense of its main supplier as Foxconn Technology Group reduces prices to hold on to orders for iPhones and iPads. Operating margins of Apple has surpassed 30 percent along with Hon Hai Precision Industry Co., which is Foxconn’s Taipei-listed flagship. Apple’s margin has increased double over the past five years, boosted by the sale of its smartphones and tablets, which now produce more than half of the company’s revenue.

Hon Hai’s profit margin narrowed after the iPhone debut in June 2007. It has lessened even more since April 2010 when the iPad tablet computer hit the shelves. Hon Hai has increased its workforce, raised wages and expanded factories to try to keep up.

“Hon Hai is willing to sacrifice margins so it can get volume and scale,” said Vincent Chen, an analyst at Yuanta Financial Holding Co. in Taipei. “Apple is also getting so large that it needs a supplier that can provide such scale.”

The iPad is “very difficult to make,” Hon Hai founder and Chairman Terry Gou told shareholders. Gou’s approach has earned him the nickname “Low-Cost Terry,” according to Chen. Foxconn Technology Group. Hon Hai’s operating margin decreased in the majority of the quarters in which Apple’s increased. Taipei-based Pegatron Corp. (4938), the only other supplier of iPhones, has also seen its operating margin narrow.

To contact the reporter on this story: Laurie Danas at staff.writers@wallstcheatsheet.com

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