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Foxconn profit falls for 3rd straight quarter as trade war lifts costs

Production diversification squeezes iPhone supplier's earnings

A logo of Foxconn is seen at its headquarters in Taiwan. (Photo by Ken Kobayashi)

TAIPEI -- Top iPhone assembler Foxconn, the world's largest contract electronics manufacturer, on Aug. 12 reported another quarterly profit decline as a slowing global economy and the expense of coping with a trade war eroded earnings.

The Taiwan-listed company, which trades as Hon Hai Precision Industry, said April-June net profit fell 2.5% on the year to 17.05 billion New Taiwan dollars ($541 million), the lowest three-month figure since the third quarter of 2013. It marked the third straight quarterly decline

The results are the first reported under new Chairman Young Liu, who took over from billionaire founder Terry Gou after his departure in June. The new leadership will be closely watched for how it navigates the rising trade tensions between the U.S. and China.

Though quarterly revenue grew 7.44% from a year ago, thanks partly to higher smartphone orders from Huawei Technologies, Foxconn's gross margin and operating margin both declined, to 5.31% and 1.34%, respectively.

Net profit beat analysts' forecasts, but operating profit came in below the market consensus.

"Foxconn's soft earnings performance suggested that the ongoing production diversification amid the trade war has weighed on the company's profitability due to higher expenses," Chiu Shih-fang, a veteran smartphone and supply chain analyst at Taiwan Institute of Economic Research, told the Nikkei Asian Review.

"So even though we could see its revenue increase on the year, Foxconn's bottom line is squeezed by a tougher industry environment amid the trade war and slowing global economy," Chiu added. Foxconn's operating expenses climbed 2.46% on the year to NT$46.05 billion. On a quarterly basis, costs rose 9.16%, its results showed.

Foxconn did enjoy some tailwind. Its Android-smartphone assembling arm, FIH Mobile, has received increasing handset orders from Huawei since Singapore-based electronics manufacturer Flex temporarily suspended shipments to the Chinese company following its placement on a U.S. export blacklist, multiple supply chain sources said.

Apple's price cuts and trade-in program for iPhones also helped Foxconn, which relies on the U.S. company for about half of its revenue, market watchers said.

But the protracted trade war still clouds the market outlook as the Trump administration has threatened a 10% punitive tariff on Chinese imports worth $300 billion. The Office of the U.S. Trade Representative said on Aug. 13 that the tariff would be delayed until Dec. 15 from Sept. 1 for certain goods, including mobile phones and notebook computers.

In Foxconn's first-ever investors conference in mid-June, new Chairman and CEO Liu said the Taiwanese manufacturing group is already prepared if customers want to diversify production outside China to avoid repercussions from the trade war.

"Foxconn has 25% of its total production capacity outside China and production sites in 16 countries," Liu said. "If Apple has any supply chain diversification plans outside China, we have sufficient capacity to help it cope with its need for the U.S. market."

The company shifted some production capacity for its servers and telecom equipment back to Taiwan as early as last year when the products were hit by U.S. tariffs. Foxconn increased the investment into its Vietnamese facility by $40 million in June and approved another $25 million investment plan there on Aug. 12, as part of the diversification efforts.

While Gou remains on the board as the largest individual investor in Foxconn and many consider him still the most influential person in the company, the founder has said repeatedly that he would not return to Foxconn's daily operations. The 69-year-old Gou lost his bid in a Taiwanese presidential primary to Kaohsiung Mayor Han Kuo-yu in July, and it is unclear whether he will continue his campaign as an independent candidate.

Nikkei staff writer Cheng Ting-fang contributed to this report.

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