Hon Hai Q2 Net Income Declines

Bloomberg reports that Hon Hai has posted its first quarterly earnings drop in seven years. According to Bloomberg Q2 net income dropped 24% from NT$15.6 billion in Q2 2007 to NT$11.9 billion Q2 2008.The net income declined despite an 18% increase in sales to NT313.6 billion. However, Bloomberg notes this is the slowest growth for Hon Hai in three years. Bloomberg notes the causes of the slowing growth and income decline to be:

• Slowing shipments

• Decreased profit at Foxconn

• New labor laws and minimum wage in China

Bloomberg notes:

Sales rose about 18 percent to NT$313.6 billion, the slowest growth in more than three years, as shipments to some clients eased and profit at Hon Hai's Foxconn International Holdings Ltd. unit slumped. New rules introduced this year increased labor expenses, curbing profit.

Bloomberg continued saying:

Hon Hai faces higher costs this year as staff expenses at its Chinese factories rise following the Jan. 1 introduction of new labor laws, which mandate minimum wages and severance pay. New accounting rules in Taiwan that require expensing of employee share bonuses also added to costs.

Bloomberg also notes that Foxconn International was also exposed to increasing costs. Bloomberg wrote:

Higher tax expenses, spending on research, and increased production costs led Hong Kong-listed Foxconn International, which is 72 percent owned by Hon Hai, to post a 56 percent decline in first-half profit to $142.2 million.

The increased costs are unavoidable for Hon Hai and Foxconn. Hon Hai's massive factory in Shenzhen employs a couple of hundred thousand people and a required increase in wages would certainly increase the labor costs significantly. Hon Hai have been actively investing in manufacturing facilities elsewhere e.g. Vietnam but even there they are being exposed to labor unrest and a very high inflation rate.

Bloomberg: Hon Hai Reports First Profit Decline in Seven Years