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Building Apple's IPhone Doesn't Pay Like It Used To

posted 13 May 2013, 03:08 by Mpelembe   [ updated 13 May 2013, 03:09 ]


Reuters Business  Report - Apple's design aesthetic: instantly recognizable, born in the Valley but built inChina.

Unlike Samsung, Apple does none of its own production - relying on Asia's contract makers instead.

The biggest of the bunch is Apple's old flame Hon Hai - known better by its trade name Foxconn.

Our best estimates suggest the firm draws between 60 to 70 percent of its revenues from work commissioned by Apple.

But it's not exactly been a fairy tale romance.

Over the past four years as Apple's shares rose six-fold to briefly make it the world's most valuable company, Hon Hai - after a little spurt - has basically stayed flat.

That's in part because of what you see here: Hon Hai's earnings have stayed relatively stable over the last few years versus this huge ramp-up for Apple - which has been very successful squeezing every single possible drop of cash out of its suppliers.

In fact, it commands an estimated 55% margin for the iPhone alone, according to Piper Jaffray.

And now there's talk Apple will turn to Hon Hai's rival Pegatron to assemble the long-rumored lower-end iPhone, with Pegatron increasing its China factory staffing by up to 40% in the second half of the year.

Keeping the squeeze on its supplier's margins will be key for Apple if it does indeed go ahead with emerging-market priced iPhone.

In the first quarter of 2013 Apple's overall gross margins were 37.5 percent - that's industry leading.

If you compare that with Hon Hai, analysts expect it to come in at about 8.3 percent.

Pegatron, with its more aggressive pricing, had even lower figures - just 3.1 percent.

Hon Hai is trying to move up the value chain, by doing more profitable activities for Apple - like manufacturing the components instead of just assembling the phones.


"But the kind of industry-topping margins enjoyed by Apple will remain a distant dream for its suppliers. That means more of the same: limited profits and cutthroat competition as they continue to compete for Apple's affections."