All the iPhones in the World Can't Save China's Foxconn From Fiscal Losses

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Foxconn, aka Hon Hai, is most famous for being Apple's biggest manufacturing partner in Taiwan. But despite Apple's soaring successes, Foxconn isn't doing so well--the company reported a huge loss for its most recent half year of trading.

The results from the first half of 2010 make for grim reading: Foxconn realized a net loss of $143 million dollars on revenues of $3.23 billion. While that revenue figure represents a 2.2% growth over last year's equivalent figure, the loss is worsening compared to $18.7 million in the first half of 2009. In short, Foxconn did manage to grow its business--which represents something of a success in the volatile electronics game--but it failed to convert its increased revenues into increased profits.

The sliding losses are indicative of failing business processes inside the company. Essentially, Foxconn's costs (both real, and due to the usual movements of cash to and from different financial processes) are too high, and are eating up its potential to realize profit. This is pretty shocking, given what we can assume to be the strong state of its order book--driven by Apple--and the fact that it's a product-driven business that isn't too much at the whim of raw materials prices.

Here's what's been going on: Foxconn has been spending to try to reverse some poor practices, and to try to recover from massively critical press attention about its "suicide problem." Granted, other parts of its huge business also come into play, but there is little doubt that its treatment of workers part of the cause here. The company has been in and out of the news for a year or so, but the media frenzy reached its biggest peak earlier this year when numerous Foxconn staff killed themselves. Foxconn was almost universally lambasted for treating its employees poorly, despite the fact that among a population of over 800,000 people (Foxconn's staff list) this frequency of suicides is normal. Nevertheless, with such a high-profile and (notionally) morally squeaky-clean customer as Apple, Foxconn has had to respond. It's been improving employee working conditions, bumping wages, employing counsellors, and has even planned a move of a huge factory to a more rural zone which is nearer the homes of many of its employees--this last maneuver Foxconn singled out as being a particularly irksome contributor to its losses. 

The company has noted it's going to concentrate on the cash-rich smartphone game, and we can assume Apple is a key part of this plan. But Apple will be watching Foxconn's performance carefully. While business practices are different in China, if Apple's biggest manufacturer suddenly had to cease trading, Apple's rocket-powered ride to the tech stratosphere would be at risk.

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