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Business trends

'Made in China 2025' companies slump as subsidies taper

Surge in wages and excess capacity hurt Foxconn unit and display maker BOE

People visit the BOE Technology Group stand during the 1st Digital China Summit in Fuzhou, China. The panel maker used subsidies to expand production capacity. (Getty Images)

SHANGHAI/GUANGZHOU/TAIPEI -- Tech companies listed in China have slumped, unable to leverage Beijing's push to modernize its industrial sector as cheap labor and government subsidies in the targeted fields begin to dry up.

Foxconn Industrial Internet's net profit for the January-June half was nearly flat, while Contemporary Amperex Technology Ltd. and BOE Technology Group -- the world's largest producers of automotive batteries and liquid crystal displays -- reported sharply lower profit.

The "Made in China 2025" initiative under President Xi Jinping calls for developing 10 fields such as next-generation information technologies and clean energy vehicles through subsidies and other programs. The struggles of companies in these sectors suggest that industrial policy has yet to translate into profits.

FII, a subsidiary of Taiwan's Hon Hai Precision Industry, debuted on the Shanghai market in June as the largest publicly traded tech company in China by market capitalization. It posted sales growth of 16% on the year in the January-June half, but net profit rose just 2% to 5.4 billion yuan ($792 million) as labor costs for its smartphone assembly business soared.

The company is faced with raising wages roughly 30% over last summer for new high school graduates to recruit workers at its factory in Henan Province. A staffing agent said that the Hon Hai unit is offering monthly pay of around 3,000 yuan for the first year with a boost to 4,000 yuan the next.

A 'Made in China 2025' exhibition booth is seen at an expo in Ningbo, Zhejiang Province of China. (Getty Images)

FII's initial public offering in June received unusually swift approval as part of Beijing's strategy to lure Taiwanese companies. The company, known as an assembler of Apple's iPhone, has yet to compensate fully for the challenges from rising labor costs and a maturing smartphone market, despite diversifying into assembly of Chinese handsets and servers.

First-half sales for battery producer CATL climbed 49% on the year thanks to strong demand from electric vehicles, but net profit fell nearly 50%. The Chinese company surpassed Panasonic as the world's largest car battery maker last year and went public in June.

Although the end of one-time gains from stock sales was the main culprit for CATL's profit decline, changes to Beijing's subsidy program for electric vehicles have taken their toll. Aid to electric bus makers, for instance, fell to 130,000 yuan per vehicle this year from 200,000 yuan in 2017 and 460,000 yuan in 2016.

The burden has become apparent at components makers like CATL, whose gross margin for the April-June quarter fell 5 percentage points to just over 30% from the annual 2017 figure, Zhongtai Securities said. Creating a profit structure that does not rely on subsidies has become an urgent task for the battery maker.

BOE Technology Group, which has depended on hefty subsidies to continue expanding production, also has reached a crossroad as sales for the half ended in June slid 3% while net profit dipped 31%. The largest producer of LCD displays opened a factory for cutting-edge 10.5-generation substrates at the end of last year, but the resulting excess capacity cooled the market.

Meanwhile, some high-tech fields have performed well. Surveillance camera maker Hangzhou Hikvision Digital Technology -- which controls 30% of global market share -- booked double-digit profit growth, as did Dahua Technology, which holds 10%.

Hikvision is working on surveillance video analysis using artificial intelligence, while Dahua focuses on installing cameras in rural areas. These companies have benefited not only from subsidies, but also public policy, as Beijing develops a nationwide network of security cameras.

The 3,461 nonfinancial companies listed in Shanghai and Shenzhen lifted aggregate net profit 22% on the year in the January-June half to 994 billion yuan, compared with a 31% increase for all of 2017. Profit fell 1% for the electronics sector that includes FII and BOE, and 7% for electrical equipment makers like CATL.

China's resource and chemical industries logged a 41% increase in profit thanks to a recovery in the oil market, while iron, steel and nonferrous metals grew 86%. Traditional sectors underpinned overall earnings as profit in fields like real estate and construction jumped over 30%.

Nikkei staff writer Issaku Harada in Beijing contributed to this report.

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