Foxconn reports record profits thanks to Apple's expanding, harder to manufacture product lines

iPhone, iPad, and all-around Apple manufacturer Foxconn -- also known as Hon Hai -- has posted record profits for its fourth quarter amounting to NT$37 billion ($1.2 billion), a 5.6% increase. A majority of that increase can be contributed to Apple's expanding product lines and the cost involved in manufacturing, particularly when it comes to the iPhone 5. According to Bloomberg:

“As they scaled up production of the iPhone and solved production bottlenecks, Hon Hai’s profit margins improved and they may have had some room to push Apple for better pricing,” said Vincent Chen, who rates the stock buy at Yuanta Financial Holding Co. in Taipei.

Last quarter Apple released several new products including the iPhone 5, iPod touch 5th generation, and iPad mini. All have come with their own production and manufacturing challenges. The iPhone 5 specifically has not only had scuffing and scratching issues but has much higher costs associated with production.

The iPhone 5 and iPod touch 5th generation both contain a fused front panel assembly that was probably one bottleneck when it comes to production. Not only are these panels expensive themselves, they require a much more fine tuned production process which heightens the cost involved in producing them. Black (or slate in Apple's case), it also a harder color to anodize and the attention to detail and quality control was heightened by Apple after many users complained of the coating nicking and chipping away easier than it should.

Assembly issues, particularly with the iPhone 5 is most likely another reason that Foxconn is fetching a higher price tag from Apple to assemble them. For those that have pulled apart an iPhone 5 or an iPad mini, you'll notice that given its thin design, cables and components are enclosed in a much tighter space and leave much less room for error when it comes to quality control.

Hon Hai’s own gross margin, which measures the ratio of sales less cost of goods sold, climbed to a three-year high of 9.58 percent in the fourth quarter, from 8.89 percent a year earlier and 9.54 percent in the prior period.

That implies it is getting more from customers such as Apple to manufacture devices, continuing a trend of rising margins that began last year and which reversed almost a decade of thinning profit ratios.

More intricately put together products such as the iPhone 5, iPod touch 5th generation, retina MacBook Pro, and others most likely contribute greatly to the cost of manufacturing, explaining the increase on Foxconn's end. It will be interesting to see where profits go once demand is met within the current product cycle and new products start rolling out the door from Apple. Will they face the same manufacturing woes and will Foxconn be able to continuously obtain a premium to overcome them?

Source: Bloomberg