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The Mistake Of Tracking Apple's Decline Via Foxconn

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The market sent Apple (NASDAQ: AAPL) shares lower on news that Foxconn, a key supplier of the company's products, had stopped hiring. While Apple has some notable problems to address, this may not be as big a deal as the market has suggested.

Apple's Big Problem

The issue that Apple is facing is market saturation. Indeed, in the developed world, Apple may have grown as large as it can with its existing product lineup. Sure, the iPhone and iPad are incredible offerings, but so, too, is the Samsung Galaxy line of products. There are fewer and fewer people still left to convert from “older” technology to the cutting edge.

Since Apple is basically a device maker, that means it either needs to find new markets into which it can expand or create yet another hot new device. Both are getting harder and harder to accomplish.

Based on Apple's size and market penetration, the only new market of any scale that could move the needle would be Asia, most notably China. So far, it hasn't been able to break into that market in a meaningful way. New devices are even more vexing, with the iWatch rumor showing just how uninspiring the potential here may be.

Is Foxconn A Canary?

That begs the question of how bad is it? That's a rough one to answer and investors are looking for any clue since Apple's shares have traded down sharply. There's no question that Apple is a great company that a lot of people would like to own, but no one wants to buy a falling knife. If things are set to get worse, buying now would be a pretty bad call.

So, when an important partner announced that it was going to stop hiring, the quick reaction was that Apple, which represents about a third of Foxconn's business, was struggling. However, that may or may not be true, it's kind of hard to tell.

For starters, Foxconn attributes the hiring freeze to the fact that more workers than expected have returned after the Lunar New Year celebration. While it is hard to imagine not returning to work after a holiday break in this country, China is a whole different world and at a vastly different point in its development. Industrialization is a hard process, involving poor workers from rural areas moving to the cities to find work. For some, that change, in the end, may not be worth it.

Other Partners

In addition, Foxconn has other customers, including struggling Hewlett-Packard (NYSE: HPQ). HP just reported numbers that pleased much of Wall Street, sending its shares notably higher. But its sales were still down, just not down as much as people expected. So HP isn't out of the woods by any stretch of the imagination—a fact that new CEO Meg Whitman admitted, “...there's still a lot of work to do to generate the kind of growth we want to see...”

So, combining the increased employee return rate with the potential that HP orders slowed, could mean that Apple wasn't the reason for the hiring freeze at all. Note, too, that Apple has begun to broaden its supplier network.

For example, Foxconn makes the iPad, but doesn't have an exclusive lock on the iPad mini. That new product is reported to be taking market share from the full-sized iPad. So, Apple may not be seeing a slowdown at all, it might just be a sales mix issue that is shifting business away from Foxconn.

Productivity

Tech Crunch, meanwhile, has suggested that the hiring freeze may be related to Foxconn preparing to install robots on its assembly lines. That may seem far-fetched in country with so many cheap laborers, but perhaps not. For example, Bloomberg notes that, “Foxconn has more than doubled wages and cut hours for workers...” With costs heading higher, saving money through technological innovation is key.

As an example, take a look at Amazon's (NASDAQ: AMZN) automation efforts in its warehouses. Warehouse fulfillment was traditionally a low-skilled manual effort. However, Amazon began using a robotic system made by Kiva Systems.

The technology was so good, that Amazon eventually bought Kiva for nearly $800 million. While this could be a way for Amazon to get into competitors' fulfillment centers, there is no doubt that the company has improved the mundane task of filling boxes with robots. Imagine what automation could do for Foxconn's high-tech business.

Don't Read Too Much Into this

At the end of the day, there are just too many moving parts to use Foxconn as a reason to dump on Apple. If you are watching for a turn at Apple, watch the top and bottom lines. There's no reason to try to time the turning point, there will be plenty of upside if you wait for a more defined entry point.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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