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Key Apple suppliers suffer big profit drop as iPhone woes bite

Foxconn and Pegatron see major drop as tariff challenge looms

Apple's decision to cut prices is hitting manufacturers. (Photo by Kosaku Mimura)

TAIPEI -- Major iPhone assemblers Foxconn and Pegatron suffered significant profit declines in the quarter ended in March, as Apple's decision to cut retail prices amid slowing demand hurt manufacturers.

Foxconn, which formally trades as Hon Hai Precision Industry, released it quarterly earnings on Tuesday evening, revealing that its operating profit plunged nearly 35% on the year and net income fell nearly 18% annually. Rival Pegatron's profitability was squeezed even further. Its operating profit plummeted 80.5% on the year and net profit dropped by 36%.

Foxconn's gross margin of 5.5% was its lowest since the first quarter of 2012, while Pegatron's 2.3% was its worst since the fourth quarter of 2012, according to their filings with the stock exchange.

"Hon Hai and its peer's weak Q1 earnings performances speak to Apple's price reduction program, which has eroded its suppliers' profitability," Chiu Shih-fang, a smartphone and supply chain analyst at Taiwan Institute of Economic Research, told the Nikkei Asian Review.

Apple -- the biggest client of both Foxconn and Pegatron -- recorded the first-ever shipment decline for its iconic iPhones in 2018. It once again lost its position as the second-biggest smartphone in the world to Chinese rival Huawei Technologies in the January-to-March quarter, according to Counterpoint Research. While iPhone shipments dropped 20% on the year, shipments of Huawei phones rose by 50%, the statistics showed.

The Cupertino-based company on April 30 said revenue from the iPhone fell 17% compared with the same period a year ago. But CEO Tim Cook said sales picked up toward the end of March, including in China. Apple has lowered prices for the iPhone XS series and the iPhone XR, and introduced trade-in program since at beginning of this year in an effort to revive sales. The move, however, pressured its suppliers.

Jeff Pu, a veteran tech analyst at GF Securities, told Nikkei that iPhone shipment momentum did pick up around the end of March, based on his check of supply chains, but said it is not likely to last very long.

"Even though the demand recovered a bit, the April-to-June quarter is still toward the end of this generation of iPhone's life cycle. It is expected iPhone suppliers' profit will be even more squeezed this quarter," Pu said.

The announcement on Monday that the Office of the U.S. Trade Representative is seeking public comment on the final round of tariffs on the remaining Chinese imports -- which covers consumers electronics like smartphones, laptops and wearable products -- will enforce the headwinds facing the tech industry, analysts said.

TIER's Chiu said if it becomes a full-blown trade war, it would further slow the global economy and hit demand for all electronics devices. "Those will all make suppliers' lives even more difficult."

"The overall smartphone demand is already very weak. It's not very possible for Apple and other smartphone makers to increase their price tags," Chiu said. "It's very likely that both smartphone makers as well as the supply chain need to absorb and digest that cost, as shifting away from China is not going to happen overnight."

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