June 19 (Bloomberg) -- Foxconn International Holdings Ltd., the world's largest contract maker of mobile phones, said it expects profitability to come under pressure this year because of rising competition and increased development costs.

``It's a tough operating environment,'' Chairman Samuel Chin said after a shareholders' meeting in Hong Kong today. ``We're not immune -- it definitely impacts us.''

Foxconn, the worst-performing stock in Hong Kong's benchmark Hang Seng Index this year, is seeking more business from customers including Nokia Oyj and Samsung Electronics Co., the world's two biggest handset companies, to compensate for lower sales to Motorola Inc. The Shenzhen, south China-based company is boosting spending to develop so-called smartphones, which allow users to edit documents and send e-mails.

Motorola, Foxconn's biggest customer in 2006, is still ``having difficulties'' and will ``continue to impact'' the Hong Kong-listed company, Chin said today. Foxconn got higher orders from ``all other customers'' to help offset lower sales to the U.S. company in 2007, Chin said.

Foxconn's second-half profit last year declined 4.5 percent to $397.4 million, after Schaumburg, Illinois-based Motorola's full-year handset sales fell 33 percent in 2007. The U.S. company accounted for 53 percent of Foxconn's sales in 2006, Morgan Stanley analyst Jasmine Lu wrote in a report in March.

Foxconn should have significant revenue growth this year as handset companies outsource more production, Chin said.

Extending Decline

The company's shares fell 1.9 percent to HK$9.70 at the close of trading in Hong Kong today, extending their decline to 45 percent this year. The Hang Seng Index dropped 2.3 percent.

The contract manufacturer plans to increase engineering spending 50 percent this year as it offers more smartphones, Chin said. Foxconn has hired about 800 engineers this year for its smartphones division, he said, adding to the company's total of 5,514 at the end of last year.

Foxconn's research and development spending rose 62 percent to $100.9 million last year, after the company added engineers, it said in April.

Foxconn, a unit of Taiwan's Hon Hai Precision Industry Co., plans to start production in Debrecen, Hungary, in August, its second site in the European country, Chin said. The Hong Kong- listed company, which at present manufactures mostly in Shenzhen, will also start volume production at Langfang and Taiyuan in northern China this year, he said.

Handset companies may outsource 80 percent of their production within five years, compared with about 30 percent at present, BNP Paribas SA analyst Frederick Wong wrote in March.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

Last Updated: June 19, 2008 06:03 EDT