Foxconn: electric car supply chain highlight risks to core Apple business

Foxconn probably made your iPhone. One day it can build your Tesla too. Hon Hai – the name Foxconn is called under in Taiwan – has just released two new electric cars. It plans to build electric cars for global brands. But as a Taiwanese company, it has little protection from the latest trade sanctions between the US and China.

Foxconn launched two new electric vehicles on Tuesday, prototypes of its Model B crossover SUV and the Model V pickup truck. These support the hope of attracting new outsourcing customers for the production of electric vehicles. It already makes electric cars for Taiwanese automaker Yulon Group.

For the time being, half of Foxconn’s profits remain dependent on consumer electronics. It is Apple’s main contract manufacturer of iPhones and also makes iPads and MacBooks. Cloud and computing products account for another 45 percent of sales.

Assembly and contract manufacturing yield wafer-thin profits. Foxconn’s operating margins of less than 2.5 percent last year are not far from the 10-year average.

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Foxconn is in an awkward position for other reasons. It acts as a key supplier to Apple and has also worked closely with other US technology groups including HP, Google and Amazon. Meanwhile, consumer electronics manufacturing is still mainly located in China. About 350,000 people work in Zhengzhou, the world’s largest iPhone manufacturing base.

The stock has fallen by almost a third in the past year. At 9 times future earnings, they are trading at half that of Chinese rival Luxshare. That gap reflects growing uncertainties in Foxconn’s core businesses.

Against this background, the move to electric cars and components makes sense. Despite its large presence in China, none of its electric car-related production takes place in China, with the bulk in Taiwan, Thailand and the US. That speaks volumes about the looming trade risks between the US and China.

Foxconn must navigate the winding road between retaining US tech customers and narrow profit margins depending on Chinese production. That effort will keep the valuation low.

Jacky

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