By Lorraine Luk
Agence France-Presse/Getty Images Electronics giant Hon Hai's
headquarters in Tuchung in northern Taiwan.
For years, the fortunes of Foxconn, the world's biggest contract
electronics manufacturer by revenue, have been tied to those of
Apple Inc., whose iPhones and iPads account for roughly half of the
money it makes from assembling gadgets.
This year, however, Taiwan-based Foxconn is getting a boost from
another quarter: upstart Chinese smartphone makers such as Xiaomi
Inc.
Foxconn, officially known as Hon Hai Precision Industry Co.,
reported Thursday an 11% rise in third-quarter profit. Though
robust demand for Apple's new bigger-screen iPhones was a big
factor, another contributor was improving profitability at a unit
named FIH Mobile Ltd.
The 66%-owned unit assembles phones for handset brands other
than Apple. For the past several years that has been a money-losing
proposition, since Samsung Electronics Co., the world's biggest
smartphone maker, assembles its own phones, leaving FIH with
customers such as Nokia Corp. and Motorola Mobility, whose share of
the global market has been rapidly dwindling.
Starting last year, however, domestic demand surged for
low-price handsets from Chinese phone makers including Xiaomi,
Huawei Technologies Co. and Oppo Mobile Telecommunications
Corp.
Since FIH assembles the bulk of those phones, the boom in demand
pushed the unit back into the black last year after a loss in 2012.
According to Deutsche Bank estimates, the unit's profitability this
year is expected to jump more than twofold.
So strong is the Chinese smartphone makers' outlook next year
that FIH plans to invest in more production capacity, Chairman
Vincent Tong said in a recent interview. Customers such as Xiaomi
and Huawei have "aggressive growth plans," he said.
The turnaround at FIH has been a positive development for
Foxconn at a time when the 40-year-old manufacturing giant is
struggling to increase its US$130 billion in annual revenue.
Analysts said FIH's bet on Xiaomi and other upstart handset vendors
has been a good hedge at a time when there are concerns that Apple
orders at Foxconn might slow. Apple has been shifting orders for
some of its iPhones and iPads to smaller Taiwanese rivals including
Compal Electronics Inc. and Wistron Corp., according to people
familiar with the matter.
As Apple diversifies its assemblers amid strong demand for its
products, Foxconn's profit and revenue growth have slowed over the
past few years. The company said Thursday its third-quarter net
profit rose to 34.09 billion new Taiwan dollars (US$1.11 billion)
from NT$30.75 billion a year earlier, while revenue rose 3% to
NT$950.49 billion from NT$919.30 billion. But the rate of profit
growth slowed from 19% in the second quarter.
Deutsche Bank analyst Birdy Lu said he expects FIH's net profit
will likely double to US$160 million this year and will likely jump
to US$304 million next year, mainly driven by Xiaomi, its largest
customer.
Less than five years old, Xiaomi has challenged the dominance of
Apple and Samsung in the global smartphone market. In the third
quarter, Beijing-based Xiaomi rose to third place with a 5.6%
market share, up from 2.1% as its global handset shipments more
than tripled, according to researcher Strategy Analytics. Xiaomi's
net profit last year rose 84% to 3.46 billion yuan (US$566 million)
from 1.88 billion yuan in 2012, while its revenue more than doubled
to 27 billion yuan. According to estimates from Daiwa, Xiaomi
accounts for 35% to 40% of FIH's net profit, while Apple makes up
50% to 60% of parent Foxconn's earnings.
FIH has continued to sign up additional customers in emerging
markets, including China's popular photo-editing application
company Meitu Technology Co. and major Indian phone brands Micromax
Informatics Ltd. and Karbonn Mobiles, said Mr. Tong.
"We see big opportunities in China and other emerging markets
such as India and Indonesia. FIH is poised to return to its
sustainable healthy growth path next year," said Mr. Tong.
Mr. Tong said revenue from Chinese smartphone makers will likely
exceed 50% of FIH's total revenue for the first time in 2015.
FIH reported a net profit of US$77.7 million in 2013 compared
with a net loss of US$316.4 million in 2012. The unit doesn't
disclose quarterly earnings.
He said FIH has been striving to find new partners in India and
Indonesia to tap into millions of first-time smartphone users. In
an effort to integrate services with hardware, FIH is looking at
investment opportunities in mobile content and technology companies
in emerging markets, said Mr. Tong.
Write to Lorraine Luk at lorraine.luk@wsj.com
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