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Apple Profit Margins Rise at Foxconn’s Expense: Chart of the Day

Hon Hai Group's Foxconn Plant in Shenzhen
Employees work on the assembly line at Hon Hai Group's Foxconn plant in Shenzhen, Guangdong province, China. Photographer: Qilai Shen/Bloomberg

Apple Inc.’s margins have widened at the expense of its main supplier as Foxconn Technology Group cuts prices to retain orders for iPhones and iPads.

The CHART OF THE DAY compares the operating margins of Apple, which has surpassed 30 percent, and Hon Hai Precision Industry Co., Foxconn’s Taipei-listed flagship. Hon Hai’s profit spread narrowed after the iPhone debut in June 2007 and has tightened further since April 2010, when the iPad tablet computer went on sale, data compiled by Bloomberg show. Operating margin measures the profit a company makes from its core business, excluding one-time items and investment gains.

Apple’s margin has more than doubled the past five years, spurred by its smartphones and tablets, which now generate more than half of the Cupertino, California-based company’s revenue. Hon Hai has boosted its workforce, raised wages and expanded factories to keep up with demand during the same period, though not fully passing along its additional costs, the data show.

“Hon Hai is willing to sacrifice margins so it can get volume and scale,” said Vincent Chen, an analyst at Yuanta Financial Holding Co. in Taipei who has a “buy” rating on the stock. “Apple is also getting so large that it needs a supplier that can provide such scale.”

The iPad is “very difficult to make,” Hon Hai founder and Chairman Terry Gou told shareholders in June. Gou’s strategy has earned him the nickname “Low-Cost Terry,” according to Chen. Foxconn Technology Group, which employs more than 1.1 million people worldwide, also assembles Sony Corp. televisions, Hewlett-Packard Co. computers and Microsoft Corp. game consoles.

Hon Hai’s operating margin declined in most of the quarters in which Apple’s rose and widened when its main customer’s narrowed, the data show. Taipei-based Pegatron Corp., the only other supplier of iPhones, also has seen its operating margin decline since getting orders for the handsets, according to data compiled by Bloomberg.

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