Manufacturer of Apple Inc's iPad faces higher costs as it expands

TAIPEI - Hon Hai Precision Industry Co, the world's largest contract manufacturer of electronics, posted second-quarter profit that missed analysts' estimates after costs increased.

Net income was NT$12.98 billion ($447 million), Hon Hai said in a statement on Monday. Profit was forecast to be NT$14.72 billion, according to the average of 13 analysts' estimates compiled by Bloomberg. Second-quarter profit last year was NT$16.7 billion, based on Bloomberg calculations.

Hon Hai, the Taipei-listed flagship of Foxconn Technology Group, which makes Apple Inc's iPad and Hewlett-Packard Co computers, is facing higher costs as it expands in western China and Brazil to be closer to workers. Efficiency gains in the manufacture of the iPad may be offset by higher wages and falling demand from clients such as Dell Inc and Sony Corp.

"It is virtually impossible for Hon Hai to be immune to the subdued consumer sentiment and the earnings guidance cut by its major OEM (original equipment manufacturing) clients," Arthur Hsieh, a Taipei-based analyst at UBS AG who recommends investors "sell" the stock, wrote in a note on Tuesday. "The macro uncertainty is increasing and could weigh on Hon Hai's potential recovery this year and next."

Second-quarter revenue rose to NT$785.94 billion from NT$654 billion, according to Bloomberg calculations. First-half profit fell 21 percent from a year earlier to NT$27.38 billion on consolidated sales of NT$1.52 trillion.

Hon Hai shares closed unchanged at NT$64.20 in Taipei trading on Tuesday, before the earnings announcement. The stock has lost 40 percent this year as the benchmark Taiex index declined 16 percent.

Apple's devices are very difficult to make, Hon Hai Chairman Terry Gou told shareholders on June 8, in response to a stockholder's question as to why making iPads didn't lead to profit gains. Efficiency improvements will boost the profitability of iPad-manufacturing, Gou said at the time.

Last year, Foxconn raised the base wage for production workers at its factory in Shenzhen, South China, and announced plans to move factories inland to be closer to workers' hometowns.

On July 28, Sony, which contracts Hon Hai to make its televisions, said shipments of its TVs will be "below expectations" and Dell on Aug 16 cut its outlook for sales growth because of weakness in consumer demand.

Bloomberg News