As demand slows, Apple iPhone supplier Foxconn plans deep cost cuts

Foxconn Technology Group, the biggest assembler of iPhones, has become the latest Apple Inc. supplier to warn of anemic demand, with an internal memo suggesting that expenses will be cut by almost a half next year.

The contract manufacturer aims to cut $2.9 billion from expenses in 2019 as it faces “a very difficult and competitive year,” according to an internal document obtained by Bloomberg.

The company’s spending in the past 12 months is about 206 billion New Taiwan dollars ($6.7 billion). Shares of Hon Hai Precision Industry Co., as Foxconn is known in Taiwan and Asia, rose less than 1 percent in early trade in Taipei on Thursday.

“The review being carried out by our team this year is no different than similar exercises carried out in past years to ensure that we enter into each new year with teams and budgets that are aligned with the current and anticipated needs of our customers, our global operations and the market and economic challenges of the next year or two,” Foxconn said in an emailed statement in response to queries.

Foxconn’s iPhone business will need to reduce expenses by 6 billion yuan next year and the company plans to eliminate about 10 percent of non-technical staff, according to the memo. The moves are likely to add to the gloom enveloping Apple and suppliers for the iPhone, its most important product. Just last week, four suppliers on three continents cut their revenue estimates because of weak demand. That set off a rout in technology stocks that has spread to the broader market in recent days.

Goldman Sachs cut its price target for Apple for the third time this month because of weak iPhone demand in China and other emerging markets. Analyst Rod Hall warned of “material risk” to guidance if the current trends continue.

Apple dropped into bear market territory this week, closing 24 percent below its October peak by Wednesday. On a single day last week, Lumentum Holdings Inc., one of the suppliers that warned of soft demand, plunged 33 percent, while AMS AG tumbled 22 percent. This week, as concern spread, the SP 500 erased its gain for 2018.

Taipei-based Foxconn assembles everything from iPhones and laptop computers to Sony Corp. PlayStations at factories in China and around the world. Foxconn has been hit by a slowing smartphone market, while trade tensions with the U.S. add to global uncertainty. Earlier this month its flagship Hon Hai posted earnings that were about 12 percent below expectations.

The company will conduct an in-depth review of managers with an annual compensation of more than $150,000, according to the memo. Other cuts include a planned 3 billion yuan reduction in expenses at Foxconn Industrial Internet Co., its Shanghai-listed offshoot.

Apple has adjusted its strategy as growth in the number of smartphones sold each year has slowed. It can charge higher prices for each handset and pull in more money from services, including digital videos, streaming music and data storage.

But most of its suppliers rely on increased unit volumes to grow their businesses, and have no profitable back-up plan as the industry growth slows. That has led to the financial warnings at companies such as Lumentum and Japan Display Inc. “Suppliers are more dependent on volume than Apple,” said Woo Jin Ho, an analyst at Bloomberg Intelligence.

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