Foxconn hits record net profits in Q4 2016

Company seeks to increase focus on high-margin components

Foxconn Electronics, the world’s largest contract manufacturer and third-largest technology company by revenue, has reported net profits of NT$ 68.766 billion ($ 2.17 billion) for the fourth quarter of 2016, it highest-ever quarterly level since being founded in February 1974.

In Q4 2016, the company saw gross margins of 8.44 percent for the fourth quarter, its highest quarterly figure since Q1 2013. Consolidated revenues were up 30.5 percent over the previous quarter, and up 1.85 percent year-over-year. Shipments for new products from primary clients significantly increased, while production efficiency is on a continued rise due to an increase in automated tasks.

This is a surprising turn of direction from Q3 2016, when the company’s revenues fell 33 percent year-over-year in Greater China, while revenue in the region was down $ 4.1 billion from Q3 2015. During that quarter, Europe managed to regain its position as Apple’s second largest market after the United States, bringing in $ 9.6 billion in revenue during the same quarter.

But despite its profit success, the company revealed early last week that it is seeking new avenues to reignite its growth prospects, particularly as greater competition and surging labor costs in China have given it a much smaller sustainable path for future growth. The search has now brought the company in a more upstream direction as it changes focus onto high-margin components.

Foxconn is well aware that Chinese labor costs have nearly doubled over the last five years. With revenue clearly not on solid ground, the company’s executives arranged a series of meetings before the Lunar New Year holiday in February to discuss problem areas and offer more long-term solutions.

For the past few years, the company has relied on upgrading capacity at its older factories in mainland China while its newer lines such as the one in India will employ as many as 1 million workers by 2020. In May 2016, BBC reported that the company fired 60,000 employees because it had automated “many of the manufacturing tasks associated with [our] operations.”

But to increase its earnings, Foxconn needs to open up its wings to building more higher-margin components in order to dodge an increasing stack of new market competitors.

Apple, which is notorious for driving a hard bargain, is one company where Foxconn is able to land more high-margin component orders. However, a new report from Nikkei Asia shows that the company’s biggest competitor for 2017 is not some large name brand like Samsung, but Taiwanese smartphone lens maker Largan Precision. The camera lens company recently posted a margin well over 10 times Foxconn’s latest earnings report in the year ending December.

On the home front, Foxconn still faces customers like Apple migrating orders to cross-rival Pegatron, a company a quarter of its size. Back in 2013, Pegatron’s margins were still much lower than Foxconn’s because it was able to offer very competitive pricing, “and that’s how it wins orders,” says HSBC analyst Jenny Lai. “But [Foxconn’s] margins would improve, benefitting from getting more component orders.”

 “I think it’d be a misconception to label Foxconn as just an assembly line manufacturer,” group spokesman Louis Woo told Reuters in late 2012 during an interview. “From glass to cable connectors, we’re playing a critical part in components.”