Foxconn: electric car supply chain highlight risks to core Apple business

Foxconn probably made your iPhone. One day it may build your Tesla too. Hon Hai — the name under which Foxconn is listed in Taiwan — has just released two new electric cars. It plans to build electric cars for global brands. But being a Taiwanese company does little to shield it from the latest US-China trade sanctions.

Foxconn launched two new electric vehicles on Tuesday, prototypes of its Model B crossover SUV and the Model V pick-up truck. These back up its hopes to attract new outsourcing clients for electric vehicle production. It already makes electric cars for Taiwanese automaker Yulon Group.

For now, Foxconn’s profits remain dependent on its consumer electronics business for half of its sales. It is Apple’s main contract manufacturer of iPhones and also makes iPads and MacBooks. Cloud and computing products make up another 45 per cent of revenue.

Assembly and contract manufacturing earn razor thin profits. Foxconn’s operating margins of less than 2.5 per cent last year is not far from its 10-year average.

Foxconn is in a tricky position for other reasons. It acts as a key supplier for Apple and has also worked closely with other US tech groups including HP, Google and Amazon. Meanwhile, its consumer electronics manufacturing is still mainly based in China. At Zhengzhou, the world’s largest manufacturing base for iPhone production, it employs about 350,000 people.

Shares have fallen nearly a third in the past year. At 9 times forward earnings they trade at half that of Chinese rival Luxshare. That gap reflects the growing uncertainties in Foxconn’s core business.

Given this backdrop, its move into electric cars and components makes some sense. Despite its large presence in China, none of its electric car-related production is in China — with most of that in Taiwan, Thailand and the US. That speaks volumes about looming US-China trade risks.

Foxconn must navigate the twisty road between retaining US tech clients and narrow profit margins, dependent on Chinese manufacturing. That effort will keep its valuation depressed.