TAIPEI -- Earnings at Taiwan's contract electronics manufacturers are sinking under the weight of surging costs, production problems with the iPhone, and trade tensions between the U.S. and mainland China.
Four of the largest such companies -- Hon Hai Precision Industry, Pegatron, Quanta Computer and Compal Electronics -- all reported higher revenues for 2017, but profits looked far worse. Earnings released Friday by Hon Hai, also known as Foxconn, showed net profit down 7% to 138.73 billion New Taiwan dollars ($4.76 billion), the first decline since 2008 and the global financial crisis. Operating profit tumbled 36%.
A strong global economy spurred brisk demand for personal computer upgrades and more servers, but rising costs prevented this flurry of activity from translating into profit growth. These companies operate most of their production facilities in mainland China, leaving them vulnerable to soaring labor costs there. Growing demand for information technology equipment has sent parts prices skyrocketing as well.
Whether these increases can be passed on to customers depends on the terms of agreements with individual buyers. But contract electronics manufacturers often agree to unfavorable terms to secure business. Compal could not fully compensate for higher prices for such parts as printed circuit boards, President Ray Chen said.
Production issues with Apple's iPhone X, amid delays in the supply of parts for the phone's new facial recognition system, compounded the problem. Assemblers, including Foxconn, that had prepared facilities for iPhone production were forced to remain on standby while their costs mounted.
Apple aims to minimize the time between developing its latest gadgets and bringing them to market. Foxconn's status as a key link in the supply chain that makes this possible has driven the contract manufacturer's meteoric growth. Yet the recent downturn demonstrates the risks of counting on a single customer for more than half of sales. Fellow iPhone assembler Pegatron faces a similar problem.
The iPhone and its massive sales of more than 200 million handsets a year have brought great benefits to contract electronics makers. But Apple is an exacting customer, said to have among the world's strictest standards for price, turnaround time and quality.
The company demands fast production to ensure it can release its products when the time is right. But it can unilaterally cut back output targets when sales are sluggish, forcing suppliers to eat the cost of wasted labor and equipment. Some have taken to calling the tech behemoth "Poison Apple."
The Apple-Foxconn relationship is emblematic of Taiwanese contract manufacturers' role as a link between American tech companies and Chinese manufacturing. But recent friction between the world's two largest economies has left these companies caught in the middle.
Washington is weighing tariffs on Chinese goods including telecommunications equipment that, if implemented, could strike at the heart of their business model. The impact on the supply chain will depend in large part on what the customers want, said Sun Ming-te, director of the Macroeconomic Forecasting Center at the Taiwan Institute of Economic Research, noting that U.S. buyers will face tough decisions.
Since President Donald Trump took office, bringing his "America first" agenda with him, Apple and Foxconn have considered shifting production to the U.S. But Foxconn's American investment plans are limited to the manufacture of liquid-crystal-display panels, which is easily automated. Making iPhones in the U.S. would cost an estimated 50% to 100% more than the current arrangement. If Apple were forced to raise prices as a result, its competitiveness would suffer.
Meanwhile, Beijing hopes to have Taiwanese contract electronics makers play a key role in the "Made in China 2025" initiative to modernize its manufacturing sector. The government is making an effort to woo these companies, including by expediting Foxconn's application to list a core subsidiary on the Shanghai stock exchange.