By Clare Jim
TAIPEI (Reuters) – Shares of electronics company Hon Hai Precision Industry Co Ltd <2317.TW> fell as much as 5 percent on Monday on fears major client Apple Inc <AAPL.O> may shift orders to other producers following a blast at one of the company’s plants in China.
Foxconn Technology Group, of which Hon Hai is the flagship unit and Apple’s biggest manufacturing partner, said three people had died following a large explosion at its plant in the south western city of Chengdu on Friday.
Analysts said investors were concerned that a potential loss of orders from Apple for its iPads and iPhones could impact Hon Hai, the world’s largest electronics component maker, adding to pressure on margins from rising costs.
“Foxconn Group makes 70-80 percent of Apple’s parts, and Apple may reconsider concentrating production with one contract maker,” said Hua Nan Securities Chairman David Chu. “This could hurt Hon Hai in the long run.”
Hon Hai’s Chengdu plant makes mainly casings for iPad 2, while final assembly is still done in Hon Hai’s main plant in Shenzhen, Southern China, according to a report by Citi.
The brokerage said the explosion happened in a machinery room for cutting metal and, given that no assembly line or inventory was involved, the blast was unlikely to lead to any meaningful production disruption.
Last month Apple reported results that smashed expectations after booming sales of its iPhone and Mac computers and as demand for its iPad tablet computers outstripped supply.
Supplies of the hot-selling iPad were also slightly affected by the Japan earthquake in March, industry sources have said, and brokers including Bank of America-Merrill Lynch and JP Morgan have cut shipment forecasts.
Taipei-based Hon Hai said on Monday the company was assessing the damage to the plant and the local authorities were investigating the explosion. The plant would resume operation once the investigation finishes, it added in a statement to the stock exchange.
Hon Hai shares slumped as much as 5.2 percent after the news to the its lowest since late August. At 0454 GMT, Hon Hai shares were down 2.4 percent, versus broader marker’s <.TWII> 0.9 percent decline.
“UBS analysts believe that a majority of iPad2 production is still done in Shenzhen, and that even if the whole Chengdu iPad2 production line is damaged, the impact should be less than 20 percent of iPad total production,” according to a UBS research report.
Foxconn International Holdings <2038.HK>, the group’s Hong Kong-listed unit, fell 3.1 percent in a Hang Seng <.HSI> down 1.73 percent.
“The explosion has hit investor confidence hard,” said Prudential Financial fund manager Bevan Yeh. “But we think the impact on Hon Hai will be limited, since it has many production facilities available for use.”
The Chengdu facility is the new location set up late last year in an effort to lower labor costs which are cheaper in the inland areas.
Chengdu city government has said last October that Foxconn Technology Group would invest $2 billion on a new plant in Chengdu.
Many manufacturers including PC contract maker Quanta Computer Inc <2382.TW> and Compal Electronics Inc <2324.TW>, have also been moving operations in China away from coastal regions such as Guangdong and Fujian to inland areas.
(Additional reporting by Faith Hung and Argin Chang; Editing by Chris Lewis and Lincoln Feast)
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