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Chinese Plants To Begin Operating Normally By The End Of March
March 08, 2020
Hon Hai Precision Industry Co.(Foxconn), Apple Inc.’s most important manufacturing partner, expects its Chinese plants to begin operating normally by the end of March after resolving severe labor shortages brought on by the coronavirus outbreak. Foxconn joins a growing number of corporations envisaging a return to normalcy in the world’s No. 2 economy and its factories are now operating at about 50% of seasonal capacity but they expect to ramp to full production by the end of the month as employees return to work. Chairman Liu during a teleconference said there have been no issues with new product development or certification, suggesting he sees a low risk of delays in the launch of iPhone 2020 models or volume production. Hon Hai did not disclose 4Q results. Specifically, sales in the mainstay consumer business (smartphones, TVs, game consoles), which generate 57% of group-wide sales, were “in line” on a Y/Y and sequential basis; in the enterprise business (servers, network equipment), which accounts for 20% of group-wide sales, sales were in line on a Y/Y and sequential basis; in the computing business (PCs, tablets), which accounts for 18% of group-wide sales, sales were in line on a Y/Y basis but outperformed on a sequential basis; in the components business (connectors, mechanical parts, servicing, etc.), which accounts for 5% of group-wide sales, sales underperformed on both a Y/Y and sequential basis. Hon Hai issued significantly negative (double-digit percentage declines) 1Q guidance for all four businesses on both a Y/Y and sequential basis, although it expects a comparatively smaller Y/Y decline in components.
Chairman Young Liu warned it remained difficult to quantify the full impact of a weeks-long disruption, or gauge the effect on final demand for the swathe of consumer electronics it makes from laptops to game consoles. Business across all of Hon Hai’s four major divisions should decline in the March quarter compared with the previous year, meaning sales in the first half could end up being flat, Liu told investors and reporters on a conference call.
“There’s not a huge hit on demand yet so far, but I dare not and don’t want to predict the outlook of the outbreak,” Liu said. “We don’t see a huge issue with our suppliers, and we are helping them to secure resources.”
Figure 1: Hon Hai Operational Status in China
March 08, 2020
Hon Hai Precision Industry Co.(Foxconn), Apple Inc.’s most important manufacturing partner, expects its Chinese plants to begin operating normally by the end of March after resolving severe labor shortages brought on by the coronavirus outbreak. Foxconn joins a growing number of corporations envisaging a return to normalcy in the world’s No. 2 economy and its factories are now operating at about 50% of seasonal capacity but they expect to ramp to full production by the end of the month as employees return to work. Chairman Liu during a teleconference said there have been no issues with new product development or certification, suggesting he sees a low risk of delays in the launch of iPhone 2020 models or volume production. Hon Hai did not disclose 4Q results. Specifically, sales in the mainstay consumer business (smartphones, TVs, game consoles), which generate 57% of group-wide sales, were “in line” on a Y/Y and sequential basis; in the enterprise business (servers, network equipment), which accounts for 20% of group-wide sales, sales were in line on a Y/Y and sequential basis; in the computing business (PCs, tablets), which accounts for 18% of group-wide sales, sales were in line on a Y/Y basis but outperformed on a sequential basis; in the components business (connectors, mechanical parts, servicing, etc.), which accounts for 5% of group-wide sales, sales underperformed on both a Y/Y and sequential basis. Hon Hai issued significantly negative (double-digit percentage declines) 1Q guidance for all four businesses on both a Y/Y and sequential basis, although it expects a comparatively smaller Y/Y decline in components.
- First, the company is focusing primarily on halting the spread of coronavirus infections and restoring production lines, and the company, customers, and regional governments are sharing the burden of related costs.
- Second, sales and profit were weak in 1Q, but management expects improvement from 2Q. The company guides for flat Y/Y sales in 1H, and +1%–3% revenue growth for the full year (previous guidance was +3%– 5%).
- Third, while the company says the supply chain has clearly been disrupted, with shortages of some parts and surging prices, this has not had a big impact on the company’s output.
- Fourth, the company communicates closely with customers via video and other methods, and there is little likelihood of slow development or approval causing delays in introduction of new products (we felt this question was in regard to the new iPhone model). Fifth, in the automobile business (joint venture with Luxgen), the company is first gaining expertise in designing completed automobiles, while also promoting modularization and standardization of chassis and parts, and fully understanding the supply chain. The company plans to introduce new products in 2021, first with a hybrid vehicle and later an EV. The company does not make the battery cells, but modularization is a possibility. The company is interested in power systems.
Chairman Young Liu warned it remained difficult to quantify the full impact of a weeks-long disruption, or gauge the effect on final demand for the swathe of consumer electronics it makes from laptops to game consoles. Business across all of Hon Hai’s four major divisions should decline in the March quarter compared with the previous year, meaning sales in the first half could end up being flat, Liu told investors and reporters on a conference call.
“There’s not a huge hit on demand yet so far, but I dare not and don’t want to predict the outlook of the outbreak,” Liu said. “We don’t see a huge issue with our suppliers, and we are helping them to secure resources.”
Figure 1: Hon Hai Operational Status in China
The first quarter is typically a lull for Apple and Foxconn, because most iPhone sales occur over the holiday season. But Foxconn’s supply chain turmoil coincided with the envisioned launch of Apple’s cheaper iPhone SE2, slated for launch as early as this month. Liu deflected questions about the SE2, saying only that Foxconn’s product research and development efforts were proceeding. Liu said they are considering reducing its annual revenue outlook. Hon Hai is projecting a sales increase of 1% to 3% this year, down from a Jan. 22 forecast for 3% to 5% before the epidemic spread around the globe.
Chinese companies have begun to return to work, heeding a call to safeguard economic growth -- though often not at full capacity. Hon Hai, which also makes products for HP Inc., Sony Corp. and others , saying it is restarting facilities throughout China in an orderly manner. Other key tech and Apple suppliers with major Chinese operations, such as Quanta Computer Inc., Inventec Corp. and LG Display Co., are also gradually bringing their factories back online. Research firms vary in their estimates of how big the shipments drop-off will be but agree it will hurt. Strategy Analytics forecasted a 32% decline in Chinese shipments in the first quarter, to 60 million from roughly 89 million shipments a year earlier. Canalys, starting from a similar estimate for 2019, pruned its expectations down to 42.5 million shipments.
Chinese companies have begun to return to work, heeding a call to safeguard economic growth -- though often not at full capacity. Hon Hai, which also makes products for HP Inc., Sony Corp. and others , saying it is restarting facilities throughout China in an orderly manner. Other key tech and Apple suppliers with major Chinese operations, such as Quanta Computer Inc., Inventec Corp. and LG Display Co., are also gradually bringing their factories back online. Research firms vary in their estimates of how big the shipments drop-off will be but agree it will hurt. Strategy Analytics forecasted a 32% decline in Chinese shipments in the first quarter, to 60 million from roughly 89 million shipments a year earlier. Canalys, starting from a similar estimate for 2019, pruned its expectations down to 42.5 million shipments.
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