Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Foxconn Technology Group's latest IPO is giving the world a clearer picture of just how tough the technology environment really is.

In 455 pages of pre-listing documents filed to the Hong Kong stock exchange, Foxconn affiliate FIT Hon Teng gives an array of data that, despite its sales pitch, actually shows how weak the industry looks.

FIT -- which stands for Foxconn Interconnect Technology -- is the connector unit of the world's biggest contract electronics manufacturer. Crucially, it got 35.7 percent of sales last year from Foxconn's Taipei-listed flagship Hon Hai, best known as the maker of iPhones.

While not sexy, connectors are at the heart of almost every electronics device. They include the USB cables and plugs that link your phone to your PC or wall charger, the HDMI cables that hook up your TV, and the myriad audio jacks used in everything from landline phones to music players. That makes the connector industry a good market to watch for signs on the state of the overall technology hardware industry.

FIT thinks it has an edge in the connector market.

"We believe our customers value our collaboration with Hon Hai Group which help shorten development and production lead times and provide cost advantages for brand companies in the end markets we serve."

That edge hasn't staved off a continued slide in revenue, margins and profit over the past couple of years, according to the filing. What's worse, revenue and gross margin both fell in the first four months of this year, FIT said.

Health Warning
Profit margins at Foxconn's connector unit, FIT, declined for the past three years
Source: FIT company filing
Note: FIT says sales and GM have also declined in the first four months of 2016.

By its own admission, FIT isn't the largest player in the market. According to Frost & Sullivan, which the company contracted to write an industry report for the IPO, FIT ranks fifth behind TE Connectivity. And even TE is facing tough times, with last year's revenue barely inching back up to 2010 levels.

Unfit for Growth
Sales and profit at FIT, Foxconn's connector unit, have declined in recent years
Source: Company filing
Note: FIT says sales and gross margin fell in the first four months of this year.

With the world's largest connector maker and the affiliate of the world's biggest electronics manufacturer both going through a challenging period, it's no surprise that industry growth has averaged 3.8 percent over the past five years.

Revenue Disconnect
Despite being the world's largest connector maker, TE Connectivity hasn't been immune to slowing revenue growth
Source: Bloomberg

Hopes for a revival in mobile devices and communications infrastructure inspire Frost & Sullivan to forecast stronger growth over the next five years to average a still-anemic 4.9 percent. What's interesting is that the consultant is betting on a sharp uptick in demand in 2019 and 2020 to drive the expansion.

Meanwhile, computers and consumer electronics are set to climb just 1.5 percent annually over the five years, it predicts.

Such troubles ought not be a surprise. Hon Hai itself has consistently missed Chairman Terry Gou's growth predictions, and what gains it has eked out have been driven overwhelmingly by one customer: Apple.

With the technology industry's bread and butter products of computers, consumer electronics and mobile phones set to remain weak for the next couple of years, investors may wonder whether this is a fit place to invest.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net