Razor-thin margins have strained Foxconn's relationship with Apple

AppleInsider

In the midst of a changing relationship with Apple, Foxconn has sometimes resorted to methods like exaggerating hiring counts to cut costs and boost margins.

Credit: Apple

When Foxconn was undergoing production trials for the 2018 iPad Pro, for example, the company told Apple it needed more workers than it actually did. According to The Information, that tactic to eke out more profit has become routine.

The relationship between the two companies stretches back decades, and has allowed both to flourish. But, over the years, the two companies have diverged in terms of profit. Foxconn's gross profit margins are in the single-digit percentage points, while Apple's are about 40%.

Along with over-reporting how many workers it needs, Foxconn has tried out strategies to boost those margins. That includes using Apple-owned equipment for other clients and taking shortcuts on component and product testing, The Information reported.

As a result, Apple has stepped up its monitoring and tracking of Foxconn employees and its own equipment at Foxconn facilities. Since Tim Cook replaced Steve Jobs as Apple's CEO, the Cupertino tech giant's audits and manufacturing demands for cost-cutting has increased aggressively.

In 2015, Foxconn used idle Apple-owned equipment to produce devices for Huawei. The equipment was then shipped back before Apple carried out an audit of Foxconn's production lines. According to former Apple and Foxconn staffers, the practice became harder when Apple started attaching tracking tags to its equipment.

As another example, bits of metal or loose screws can be detected within a iPhone on the production line. Foxconn employees are supposed to scrap these units and build new ones from scratch using the components. Instead, Foxconn workers simply opened them up and removed the bits themselves.

The Taiwanese contract manufacturer has other ways of bolstering its profits, too. Over time, Foxconn has acquired many suppliers that also created components for Apple. It's also worked to create first-party components and resources to replace previously imported ones -- and it pockets the savings.

This image of a changing and strained relationship between Apple and Foxconn has manifested in other ways.

Before the 12-inch MacBook was released, Apple accused Foxconn of giving Google a tour of a factory that produced the metal frames for the device. When Apple asked Foxconn for visitor logs and security feeds, it refused.

All of these incidents also come in the midst of Apple and other companies looking to diversify their supply chains. Foxconn once had a monopoly on producing Apple products, but has since lost some of its business to rivals like Pegatron, Wistron, and China-based firms.

Apple has also benefited from Foxconn's success. While its ability to rally large numbers of workers remains top-notch, Apple has reportedly applied some of the manufacturing lessons it has learned to guide rival companies -- including many in China.

In 2020, amid the coronavirus pandemic, Foxconn's revenue fell 2.7% as Apple's rose 11% year-over-year.

Seamus Grimes, a professor at National University of Ireland and an Apple supply chain watcher, says that Foxconn is "too dependent" on Apple.

"They've had a very good run for a long period, but I think Foxconn is now going to face a lot of competition from Chinese companies," Grimes said.



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welshdog

It's not hard to look at that fat Apple profit margin and then see Foxcon's and think there is some exploitation going on.

red oak

Apple gross margins have been 40% since 2015

There is value in being more precise 

80s_Apple_Guy

Shortsighted on Apple’s part. They need these companies. They have the experience and expertise in making their products. If they do away Apple has a big problem. Have to treat your vendors right. 

Beats

I would LOVE to have a company that makes 1% profit of Apple's products.

anonconformist

80s_Apple_Guy said:

Shortsighted on Apple’s part. They need these companies. They have the experience and expertise in making their products. If they do away Apple has a big problem. Have to treat your vendors right. 

If Apple is doing their part correctly, they’ve got all the hardware, software, procedures fully documented so they can move manufacturing to anyone, anywhere and set it up efficiently.

Don’t let Tim’s claims that humans are better able to assemble iPhones than robots be considered as anything more than marketing. The truth of the matter is that (for now) it’s cheaper for Chinese workers to assemble them than to automate it. That won’t be true indefinitely.

what Foxconn gives Apple (and other companies) the power of in the market is to not deal with hiring and laying off workers if demand changes radically. This used to be a huge issue for Apple in the 80’s when they were far smaller.

avon b7

Some more information on handset manufacturing automation.

https://amp.scmp.com/tech/article/3021125/how-120-metre-walk-down-huaweis-production-line-provides-lesson-global-supply

cloudguy

anonconformist said:

80s_Apple_Guy said:

Shortsighted on Apple’s part. They need these companies. They have the experience and expertise in making their products. If they do away Apple has a big problem. Have to treat your vendors right. 

If Apple is doing their part correctly, they’ve got all the hardware, software, procedures fully documented so they can move manufacturing to anyone, anywhere and set it up efficiently.

But no other supplier is going to bite if that supplier isn't making enough money to justify the effort.

cloudguy

Beats said:

I would LOVE to have a company that makes 1% profit of Apple's products.

Excellent. Then you realize the position of the many companies that makes Android phones and tablets that you deride as failures for selling only - say - 25 million units a year.

But specific to this issue, you are not considering FoxConn's plight here. 1% of Apple's profits is fine if you are a small outfit like the aforementioned Android manufacturer whose expenses are only 0.75% of Apple's. But if you are a massive company with huge intrinsic expenses like FoxConn, you are skating on thin ice. Any number of things beyond your control - exchange rates, political decisions, natural disasters, issues with your own suppliers, economic downturns etc. - can erase your profit margin. Low profit margin over a period of time means you will lose your best talent, be unable to make the sort of R&D/equipment/facilities investments necessary to stay ahead of the competition, etc. 

Seriously, stuff like this results in Apple suppliers going out of business more often than people realize. When it happens, Apple just moves on to the next supplier and end users buy the products just the same. Because of this, suppliers need to look out for themselves because no one else - including Apple - is going to. 

chadbag

This is the difference between a company that invents it's own unique products and a commodity company. The "commodity" that Foxconn makes is contract manufacturing.  There is nothing unique about what they do -- they may be better at it than others but their "product" in and of itself is not unique.  So does not command the high profit margin that inventing your own unique product does.  

goodbyeranch

Foxcon can take on higher margin customers and say no to Apple next time they negotiate. 

JWSC

80s_Apple_Guy said:

Shortsighted on Apple’s part. They need these companies. They have the experience and expertise in making their products. If they do away Apple has a big problem. Have to treat your vendors right. 

I generally agree.  However, Foxconn’s use of Apple owned and furnished manufacturing equipment was, I would guess, highly disturbing to Apple.

If the electronics manufacturing and test equipment is, in part, Apple designed or the automated factory floor system is Apple designed, Foxconn would be showing Apple competitors how to efficiently and cost effectively build its electronic hardware.  That’s giving competitive advantage to Apple’s competition.  That’s not what a good supplier does to a client.  And I’m sure that language was in the terms and conditions of the contract both companies signed.

That said, I do believe it is to Apple’s advantage to work with a close partner and help them get back on track.

em_te

Beats said:

I would LOVE to have a company that makes 1% profit of Apple's products.

Does Apple send the components to Foxconn for assembly or does Foxconn buy all the components themselves? If Apple sends everything to Foxconn, then the 1% profit margin may only be 1% of the workers salaries and other variable costs and not necessarily 1% of the sum of all the phone components. 

bloggerblog

Apple could pay the costs of auditing and tracking to the manufacturer instead. 

Every time Apple is accused of something people start pointing at Apple’s cash pile. That pile is shrinking due to continuous lawsuits and patent trolls. 

fastasleep

Beats said:

I would LOVE to have a company that makes 1% profit of Apple's products.

That's not what that this means. Foxconn's single-digit profit margins are calculated on their gross income minus operating expenses, in the simplest terms. This has nothing to do with "profit of Apple's products". Any business with a 1% profit margin as you'd "LOVE to have" is in a precarious situation.

rcfa

Kind of stupid to “diversify” to Chinese companies, amidst rising geopolitical tensions in that region, and an increasingly closed political climate under the current leadership there.

It would be better to diversify to China’s rivals in the area: Vietnam, India, Thailand, Philippines, or then away from that part of the world.

Obviously, these are non-trivial decisions and processes, but replacing reliance on a Taiwanese company with factories in China with Chinese companies with factories in China allows a little bit more pressure to squeeze Foxconn, which is already very cheap and frankly might deserve a bigger share of the profits, gives ever more rather than less power to the Chinese government over Apple.

What’s next? Moving Apple HQ to China? Would fit the AppStore policies...

CheeseFreeze

Beats said:

I would LOVE to have a company that makes 1% profit of Apple's products.

Then you clearly never ran a business. I think you’re misinterpreting how this article refers to profit margins. 

red oak

“Apple gross margins have been 40% since 2015”
——————

Meant to say “...have NOT been...”

SpamSandwich

80s_Apple_Guy said:

Shortsighted on Apple’s part. They need these companies. They have the experience and expertise in making their products. If they do away Apple has a big problem. Have to treat your vendors right. 

Don’t treat rumors as fact.

Beats

cloudguy said:

Beats said:

I would LOVE to have a company that makes 1% profit of Apple's products.

Excellent. Then you realize the position of the many companies that makes Android phones and tablets that you deride as failures for selling only - say - 25 million units a year.

But specific to this issue, you are not considering FoxConn's plight here. 1% of Apple's profits is fine if you are a small outfit like the aforementioned Android manufacturer whose expenses are only 0.75% of Apple's. But if you are a massive company with huge intrinsic expenses like FoxConn, you are skating on thin ice. Any number of things beyond your control - exchange rates, political decisions, natural disasters, issues with your own suppliers, economic downturns etc. - can erase your profit margin. Low profit margin over a period of time means you will lose your best talent, be unable to make the sort of R&D/equipment/facilities investments necessary to stay ahead of the competition, etc. 

Seriously, stuff like this results in Apple suppliers going out of business more often than people realize. When it happens, Apple just moves on to the next supplier and end users buy the products just the same. Because of this, suppliers need to look out for themselves because no one else - including Apple - is going to. 

Knockoff iPhones hardly make a profit if any.

I wouldn't want to make any Android money when Apple exists.

Beats

CheeseFreeze said:

Beats said:

I would LOVE to have a company that makes 1% profit of Apple's products.

Then you clearly never ran a business. I think you’re misinterpreting how this article refers to profit margins. 

I run a business right now. We malke 30% profit. I'd throw 30% away for .1% of Apple product profit.