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Hon Hai, Foxconn International Tumble After Earnings

Hon Hai, Foxconn International Shares Tumble
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. Photographer: Qilai Shen/Bloomberg

Hon Hai Precision Industry Co., the largest contract manufacturer of electronics, and unit Foxconn International Holdings Ltd. fell in Asian trading as earnings missed estimates after wage increases at their China factories.

Hon Hai, which manufactures Apple Inc.’s iPad, lost 6.6 percent to NT$113 as of 12:10 p.m. in Taipei, set for its biggest decline since May 2009. Foxconn International, the world’s biggest contract maker of mobile phones, dropped as much as 10 percent to HK$4.98 in Hong Kong, widening its lead as the worst performer on the benchmark Hang Seng Index this year.

Hon Hai, flagship of the Foxconn Technology Group and FIH’s largest shareholder, yesterday posted second-quarter net income that was 14 percent below the average of analysts’ estimates. Foxconn Group is increasing salaries after a spate of suicides prompted clients to investigate working conditions, and will expand in China’s interior to offset the higher costs.

“The earnings are terrible,” said Calvin Huang, who rates Hon Hai “underperform” at Daiwa Securities Group Inc. in Taipei. “The wage rises only just started and will continue into the next two quarters, so the impact will get even larger.”

Hon Hai’s second-quarter net income rose 11 percent from a year earlier to NT$16.7 billion ($521 million), missing the NT$19.4 billion average of 11 analyst estimates compiled by Bloomberg. Foxconn International, which makes handsets for Nokia Oyj and Motorola Inc., posted a first-half loss of $142.6 million, widening from $18.7 million a year earlier, after prices of the products it makes declined during the period.

Margins Shrink

Hon Hai’s consolidated gross margin, a key indicator of profitability which measures the percentage of sales less cost of goods sold, dropped to 8.1 percent in the second quarter, from 9.2 percent a year earlier. FIH’s first-half gross margin was 2.8 percent, compared with 6.6 percent a year earlier.

Foxconn International’s profit was also reduced by a 27 percent increase in research spending, and lower prices aimed at winning new handset orders as it seeks to reduce its dependence on its biggest client, Nokia. The Finnish company has lost users to rivals including Apple Inc., after falling behind in the market for high-end smartphones.

‘Outsourcing Remains Slow’

“We are unlikely to see a meaningful recovery from FIH as its key customers are losing shares in features phones,” Daniel Chang, an analyst at Macquarie Group Ltd. wrote today. “Nokia’s outsourcing remains slow given its sufficient in-house capacity.”

Foxconn Group, which also makes Apple’s iPhones, Hewlett-Packard Co. computers and Sony Corp. game consoles, said it will double base salaries in Shenzhen, where it employs half its 900,000 workers, by October. The first phase of the wage rises, a 30 percent increase, was implemented in June.

At least 10 workers have committed suicide this year, prompting clients including Apple and HP to investigate work practices. Foxconn Group hired counselors and opened its factories to media after being accused of running a sweatshop, claims Chairman Terry Gou denied.

Continued growth will spur Foxconn Group to add 400,000 workers in China by the end of 2011. Expansion will be mostly in inland provinces, closer to the hometowns of its migrant workers and where wages are lower. The company’s Shenzhen workforce may drop by about 170,000 in the next five years, Louis Woo, special assistant to the chief executive, said Aug. 18.

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