Foxconn headquarters WSJ 001

iPhone manufacturer Foxconn Technology Group posted its first ever sales decline since it went public back in 1991, Japanese outlet Nikkei reported Tuesday. The outlet expectedly blames “lukewarm demand” from Foxconn’s biggest client Apple and the “saturated smartphone market” for the 2.81 percent drop in annual sales.

For context, Foxconn earns more than half of its revenue from doing business with Apple. The Taiwanese company is also known as Hon Hai Precision Industry and assembles iPhones and other gadgets like PlayStation consoles, notebooks, wearable devices and so forth on a mass scale.

It isn’t all bad news for Foxconn. For instance, “robust demand for iPhone 7 Plus” along with orders for the approaching Chinese New Year holidays have helped Foxconn report a 9.76 percent rise in December 2016 revenue.

Foxconn’s total revenue in 2016 was 4.356 trillion New Taiwan dollars, or about $136 billion. Given Foxconn’s reliance on orders from Apple, it’s not surprising the manufacturer was unable to increase revenue and profits from 2015.

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Location of Foxconn’s “iPhone City” in Zhengzhou, a province in northern China.

Apple, too, is experiencing a revenue decline of its own amid iPhone’s first-ever annual drop in sales since its inception ten years ago. Analyst Vincent Chen estimates that 207 million iPhones shipped this year versus 236 million shipments in 2015.

Foxconn’s 2017 revenue should grow 5-10 percent due to the next iPhone.

Dubbed by the media Tenth Anniversary iPhone, the device is widely expected to pack in a buck of slick technologies and provide a seamless edge-to-edge appearance, curved OLED screen, all-new industrial design with glass front and back, wireless charging and more.

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Apple’s patent calls for hiding components behind iPhone’s display assembly.

One of Apple’s OLED suppliers for the device should be Sharp. Acquired by Foxconn earlier this year, Sharp is reportedly gearing up to set up an OLED production line at Foxconn’s massive iPhone manufacturing facility.

Foxconn also continues to replace assembly line workers with sophisticated industrial robots in order to reduce manufacturing costs and increase efficiency. Plus, it’s been attempting to diversify its businesses for quite some time now to countering the evident downturn in the global smartphone market.

On top of all this, it is no secret that iPhone 6s wasn’t as successful as Apple hoped it would be. Taking it all in, it’s understandable that Foxconn’s bottom line is now affected. Pegatron, another contract manufacturer which mainly assembles 4.7-inch iPhone 7 models, saw its December revenue dip 27.43 percent from a year ago.

Should iPhone 8 prove a hit, I’m expecting its manufacturers Foxconn, Pegatron and Wistron to report a rise in 2017 earnings. On the other hand, any revenue boost for these guys stemming from iPhone 8 launch may not be huge, at least not initially.

That’s because Foxconn will cope with increased costs associated with major factory retooling and production processes stemming from iPhone 8’s all-new glass design, OLED screen and adoption of other new technologies. Which is to say, yield issues are to be expected as Foxconn most likely won’t be able to ramp up iPhone 8 production quickly enough to meet the expected pent-up demand for a brand new iPhone design.

Source: Nikkei