Small Fortune

Reading the iPhone Tea Leaves

Component orders may point to lackluster demand in the first quarter.
Photographer: ELIJAH NOUVELAGE/Getty Images
At Closing, April 23th
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Hon Hai Precision Industry Co. caused quite the stir late Wednesday when it reported December sales.

Not only did the iPhone assembler post 50.2 percent year-on-year growth for the month, it took the unusual step of commenting on operations, saying its

smartphone business delivered strong growth in December, compared to a year ago.

It's not much, but the flagship of Terry Gou's Foxconn Technology Group is remarkably unhelpful when it comes to sharing information with the investment community. It doesn't hold investor relations conferences, provide forecasts, or even offer revenue breakdowns. That's why being a Hon Hai analyst is one of the toughest, and weirdest, jobs in the business.

When Hon Hai references smartphones, what it means are iPhones, because Hon Hai doesn't make handsets for anyone else. In theory, its FIH Mobile Ltd. subsidiary, whose clients include Chinese brands Xiaomi and Huawei, could account for that surge because its figures are consolidated into Hon Hai at the top line. But FIH's revenue is less than 5 percent of its parent's, so that's unlikely.

It's tempting to take this growth as a sign that the clouds have cleared over iPhone land, given all the worry that's plagued the market over the past few months. A surge in revenue at Taiwan Semiconductor Manufacturing Co. -- which produces the iPhone's core processors -- during the same month would appear to back up the tale of renewed Apple Inc. vigor.

But I'd be cautious.

TSMC and Hon Hai are at the opposite ends of the supply chain, which means around a two to three month gap between chip making and product assembly. We didn't see much of a surge in TSMC's October or November sales, which would have fed into Hon Hai's strong December. It's quite possible that this year-end boost was for other clients in areas such as high-performance computing, AI, graphics or bitcoin mining.

Inside the Matrix

Standout December figures for iPhone assembler Hon Hai indicate a last minute surge in production, but tepid figures for upstream suppliers may indicate a lack of staying power

Source: Companies, Bloomberg, Analysis by Bloomberg Gadfly

If we go further upstream, the waters get a little muddy. Smartphone-camera maker Largan Precision Co., component supplier Kinsus Interconnect Technology Corp., as well as casing makers Catcher Technology Co. and Foxconn Technology Co. all saw a surge in October. That would imply a feed-in to later iPhone assembly, and I think this is what happened.

Foxconn Technology, a relatively small and insignificant member of the Foxconn family, supplies metal exteriors for iPhones. Yet its huge growth this year -- 250 percent in December! -- hasn't come from Cupertino, but from Kyoto. We don't even have to guess at this one: For the past seven months it's appended a note to its sales report saying that "the game console assembly business has continued to grow." What it means is Nintendo Co.'s Switch.

Sales Climbed...

Members of Apple's supply chain posted positive year-on-year figures

Source: Company filings, Bloomberg, analysis by Bloomberg Gadfly

So let's look at the rest of those names. But first, a caveat: I am only taking a small sample of the dozens of companies in the iPhone supply chain, and it's very likely that clients beyond Apple are also impacting the swings. Having said that, it does seem that this early fourth-quarter boost was merely inventory building amid those previously reported iPhone manufacturing constraints.

...But Some Missed Estimates

Analysts were happily surprised by some quarterly sales figures, disappointed in others

Source: Company filings, Bloomberg, analysis by Bloomberg Gadfly

A sharp cooldown in November and December indicates that Hon Hai's big December was more likely catch-up production. If Apple truly expected strong iPhone demand going into the first quarter, then component orders might have stayed robust. I see little indication this is happening, but then I'm just reading the tea leaves.

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

    To contact the editor responsible for this story:
    Katrina Nicholas at

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