iPhone supplier Foxconn is said to plan deep cost cuts

Taiwan’s Hon Hai Precision Industry Co. Ltd., better known as Foxconn, apparently is planning to cut operational costs by about 20 billion yuan ($2.9 billion) following what it said was a “very difficult and competitive year.”

The company is intending to slash about 10 percent of its “nontechnical staff” from its roster over the next year, according to an internal memo reported today by Bloomberg.

The cuts are said to impact Foxconn’s iPhone manufacturing business segment, which will see spending reduced by 6 billion yuan. Foxconn is Apple Inc.’s most important iPhone manufacturer, but sales of those devices are widely predicted to fall in the next year on falling demand. The proposed cuts to the iPhone business account for about a third of its current expenditures, Bloomberg added.

Another recent report from the Wall Street Journal claimed that Apple may cut production orders for one of its newer iPhones, the iPhone XR, by up to a third. Apple had originally planned to build 70 million of those units, the Journal noted.

Moreover, Nikkei recently said that Apple has told Foxconn and Pegatron, another key iPhone component supplier, to cancel plans to increase iPhone XR production capacity.

Foxconn needs to maintain big investments in its employees, facilities and tools to cater to such large orders, so whenever demand weakens, it must take action to lessen the impact on its profits. In any case, the expected slowdown in demand for iPhones will likely be felt on Foxconn’s balance sheet even with the planned cuts. A clear indication of that came during Apple’s most recent quarterly financial report when it announced it would no longer provide sales unit data for iPhones, iPads and Mac computers.

The move could actually be interpreted as an encouraging one because cost-cutting is a key task for any supplier that’s exposed to a large customer, as Foxconn is, analyst Holger Mueller of Constellation Research Inc. told in a report.

“As long as the supplier remains viable and ready to ramp up production as needed when things get better, there is little concern about this activity,” Mueller said. “If Foxconn delivers on these savings, it will be a leaner and meaner supplier to anybody, not just Apple.”

Foxconn refused to confirm or deny the reports of its planned cost-cutting exercise, though a spokesperson told media that the company does undertake regular reviews of its global operations to ensure its resources are applied in the right way.

Foxconn’s spokesperson revealed in a blog post that “These reviews will help us to enable us to meet our long-term responsibilities and commitments to our customers and users, our employees and business partners, and to all our shareholders as well,” post. “The review which is being carried out by our team this year is no different which is having the much more similar exercises carried out in past years to ensure that we enter into each level of new year with teams and different set of budgets that are aligned with the current and anticipated needs of our customers, one of our global operations and the economic market challenges of the next year or two.”