Foxconn cutting costs for ‘difficult’ year is a warning sign for Apple

Visitors inspecting the new iPhone XR during an Apple event at the Steve Jobs Theatre on September 12 in Cupertino, California.Justin Sullivan/Getty Images

• Foxconn, Apple‘s top manufacturing partner, has said that the coming year could be “very difficult and competitive” and that it is planning to slash expenses, according to Bloomberg.
• A Foxconn executive told Business Insider the Bloomberg report was describing a regular business planning process that it does every year.
• This news, however, comes as many different Apple suppliers have been slashing forecasts, suggesting that iPhone demand is soft and that the iPhone giant is cutting orders.
• Apple’s share price has declined over 20% from its October peak, costing the company over $265 billion in market value.

Foxconn makes the majority of iPhones — it’s Apple’s top manufacturing partner.

So if the Chinese company is slashing 20 billion yuan, or $2.9 billion, in expenses ahead of what an internal memo says could be a “very difficult and competitive year,” as Bloomberg reported on Wednesday, that could be another bad sign for iPhone demand.

In an email to Business Insider, Foxconn’s Louis Woo told Business Insider that Bloomberg’s report reflected a regular business planning process the company undergoes every year.

“We regularly review our global operations to ensure that we are always applying our resources in a way that supports our operations, our customers’ demands and critical research and development priorities while also meeting the needs of all areas of our company,” Foxconn Technology Group said in a statement. “These reviews enable us to meet our long-term responsibilities and commitments to our customers, our employees and business partners, and to our shareholders.

“The review being carried out by our team this year is no different than similar exercises carried out in past years to ensure that we enter into each new year with teams and budgets that are aligned with the current and anticipated needs of our customers, our global operations and the market and economic challenges of the next year or two.”

Foxconn isn’t the only supplier to slash forecasts

President Donald Trump taking part in a groundbreaking with Gov. Scott Walker of Wisconsin and Foxconn’s chairman, Terry Gou, during a visit to Foxconn’s new site in Mount Pleasant, Wisconsin.Reuters/Kevin LamarqueRegardless of whether Foxconn is simply going through a regular belt-tightening period, the disclosure is sure to spark speculation after recent reports have pointed to a major slowdown in iPhone demand.

Before Foxconn’s warning and earnings shortfall, several suppliers of iPhone components had warned about orders being cut. Lumentum, Skyworks, and Qorvo, which count Apple as a top customer, all have slashed future estimates, with each blaming the shortfall on order cuts from an unnamed major customer. The Wall Street Journal reported on Monday that Apple had cut production orders for all iPhone models, blaming weak demand.

Wall Street analysts are also worried iPhone unit sales will start shrinking in the short term. Those concerns are believed to be why Apple decided to stop reporting unit sales, which analysts relied on as a key metric. Apple said it preferred to focus on its transition to a services company, with regular recurring revenue.

Apple’s share price has declined over 20% since its October peak, costing the company over $265 billion in market value.

Of course, Foxconn doesn’t just manufacture Apple products. It’s also the manufacturer for other computer and phone brands as well as gadgets like Sony’s PlayStation and Nintendo’s Switch. Foxconn’s latest announcement may reflect a cooling global market for premium electronics rather than weakness specific to Apple.

Foxconn is also spending billions on the construction of a factory in Wisconsin. It’s unclear whether Foxconn’s cost cuts may affect that plant, which President Donald Trump called an “incredible investment.”

But regardless, all signs from companies that count Apple as a customer are now pointing to an impending slow period for sales and growth.