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Hon Hai Net Income Misses Estimates After Raising China Wages

Hon Hai Net Income Misses Estimates
Hon Hai in June said it will double base-wages in Shenzhen and shift more production inland. Photographer: Qilai Shen/Bloomberg

Hon Hai Precision Industry Co., the world’s largest contract manufacturer of electronics, posted profit that missed estimates after it raised wages following a spate of suicides among workers in China.

Second-quarter net income rose 11 percent from a year earlier to NT$16.7 billion ($521 million), according to Bloomberg calculations based on first-half data filed to the stock exchange today. The company was projected to have profit of NT$19.4 billion, according to the average of 11 analyst estimates compiled by Bloomberg News.

Hon Hai, which makes Apple Inc. iPhones and iPads, Hewlett-Packard Co. computers and Sony Corp. game consoles, increased salaries at factories in China by 30 percent after a spate of suicides prompted clients to investigate working conditions. The effect on profit from wage increases may be offset by a move to lower-cost locations in the country’s interior.

“Margins are a key area for Hon Hai, as the company is working to implement higher wage rates in its large facilities in China, while shifting production over the next several quarters to lower-cost regions,” ISuppli Corp. analyst Thomas Dinges wrote in a July 27 report.

Consolidated sales climbed 51 percent to NT$654 billion, according to Bloomberg calculations.

First-half net income increased 22 percent to NT$34.7 billion, the Taipei-based company said in an exchange filing today. Sales totaled NT$1.2 trillion, 48 percent higher than a year earlier.

Gross Margins

The company’s consolidated gross margin, a measure of profitability that tracks parent-company sales less the cost of goods sold, fell to 8.1 percent for the quarter, compared with 8.7 percent in the prior period and 9.2 percent a year earlier, according to Bloomberg calculations.

Chairman Terry Gou in May hired counselors and opened its largest factory, in Shenzhen in southern China, to media as the suicides prompted criticism from human-rights groups and investigations from clients into working conditions.

The company in June said it will double base-wages in Shenzhen and shift more production inland, closer to the hometowns of its migrant workforce. Wages in Shenzhen were increased 30 percent from June, it said earlier.

Foxconn Technology Group, of which Hon Hai is the flagship, controls around half of the global electronic manufacturing services market with revenue almost three times that of closest rival Singapore-based Flextronics International Ltd., iSuppli said in a July 27 statement.

‘Challenging Industry’

“Despite the general uncertainty and a challenging industry, the company managed to gain further market share,” spokesman Edmund Ding wrote in an e-mailed statement today.

Hon Hai will increase investments in overseas units by more than $70 million, including $10.5 million into AnTec Automotive Electric System (Kunshan)Co., a maker of ignition and wiring systems used in cars and aircraft, it said in separate filings today.

Foxconn plans to increase its China workforce by as many as 400,000 employees, or more than 40 percent, by the end of next year as it builds factories closer to employees’ hometowns.

The number of workers in Shenzhen, which accounts for about half of its 900,000 China workers, will decline by around 170,000 within five years, Louis Woo, special assistant to the Chief Executive, said Aug. 18.

China’s Advantage Eroded

Five years of rising wages have cut China’s cost advantage over other manufacturing locations such as Mexico, Mike McNamara, Chief Executive Officer of Singapore-based Flextronics said in an Aug. 27 interview. Flextronics doesn’t plan any large-scale move toward inland China, he said.

Global computer shipments increased 22 percent during the quarter, driven by growth in Asia and companies replacing desktop models, Framingham, Massachusetts-based researcher IDC said in a July 14 statement.

Apple may ship 12.9 million iPads this year and 36.5 million next year, El Segundo, California-based researcher iSuppli Corp. said July 20. Hon Hai makes the Internet-touch-screen tablet computer.

Apple, which also contracts Hon Hai to make handsets, sold 3 million of the iPhone 4 from its June release through to July 16, Chief Executive Officer Steve Jobs said on July 16.

Hon Hai doesn’t hold investor conferences, provide outlook or give sales breakdowns.

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