June sales at Hon Hai set a record

Hon Hai Precision Industries Co (鴻海精密), the largest contract manufacturer of electronics and PCs in Taiwan, said yesterday that sales in June hit a fourth consecutive monthly high, despite an industry downturn that has sent the stock market plunging more than 18 percent since its April 22 peak this year.

Hon Hai said June sales reached NT$26.7 billion (US$800 million), soaring 97 percent from a year ago and up 17.5 percent over last month's figures. For the first half of the year, its sales reached NT$100.3 billion (US$3 billion), 63 percent higher than last year.

Analysts credited Hon Hai's record performance to more orders for game console assemblies for Sony Corp's PlayStation 2 (PS2), as well as higher PC sales. According to Yuanta Core Pacific Securities Co (元大京華證券), PS2 game consoles accounted for around 66 percent of Hon Hai's June sales.

Terry Gou (郭台銘), chairman of Hon Hai, said last week at a speech that his company would team up with Sony to design the next generation of PlayStation game machines, the PS3. To do so, the company had already begun construction on a R&D house in Japan for design and component work on the consoles, he said.

The new R&D investment comes in addition to the NT$10 billion Hon Hai plans to invest in a new Taiwan-based global research center to focus on nanotechnology and a planned design center to be opened in the US.

PC sales at Hon Hai also increased despite an overall June lull in the computer market. Analysts said Hon Hai is grabbing a bigger share of the market, as it continues to cut costs at its factories in China and increasingly designs new systems.

Last year, Hon Hai became Taiwan's largest private sector company in terms of sales, beating out Taiwan Semiconductor Manufacturing Co (台積電) and Formosa Plastic Group (台塑集團). Revenues grew 55 percent to US$4.5 billion and profits also increased by 26 percent.

One key difference between Hon Hai's business plan and its competitors is that instead of simply assembling gadgets, Hon Hai produces a lot of its own components and makes its own molds. By doing so, it has cut costs to the bone while gaining expertise in creating components in-house rather than ordering from others.

Going forward, the company "can set new record highs in the coming months if they can handle the orders," said an analyst at Yuanta Core Pacific Securities.

The analyst said Hon Hai stands to win major orders from Hewlett-Packard Co for printers, and a handset deal with Nokia Oyj is also in the making. Hon Hai has already hired more than 100 research and design engineers to develop its mobile phone business.

The greatest risk for Hon Hai is continuing to grow low-margin businesses. The profit margin on assembling PS2 game machines, for example, is between 5 percent and 10 percent. In its component making business, profits can reach as high as 20 percent of the cost of a product, but this business is shrinking as the downturn drags on.

By contrast, companies more heavily involved in R&D, such as MediaTek Inc (聯發科技), maintain profit margins as high as 50 percent.