Hon Hai falls on plan to double wages at China plants

Hon Hai Precision Industry Co, the maker of Apple iPhones, dropped the most in a year in Taipei trading after the company agreed to more than double wages at its Shenzhen factories following a spate of suicides.

The flagship of the Foxconn Technology Group, the world’s largest contract manufacturer of electronics, fell 5.6 per cent to close at NT$117.50 in Taipei, the biggest drop since May 12, 2009, while the benchmark Taiex index fell 2.5 per cent. Foxconn International Holdings, a Hong Kong-listed affiliate, tumbled 5.5 per cent before trading was halted.

Base salaries at Hon Hai’s Shenzhen factories will rise to $293 a month in October from $132 in May, prompting Citigroup to cut its 2011 earnings-per-share estimate by 36 per cent. At least 10 workers have killed themselves this year, prompting labour-rights groups to call the Taiwanese company a ‘sweatshop’ that doesn’t pay employees enough to avoid overtime.

“The question is whether they can pass it on,” said Allen Pu, who rates the stock ‘add’ at Fubon Financial in Taipei. “We don’t know if clients like Apple will accept” Foxconn raising prices, he said.

The median of 17 analyst estimates compiled by Bloomberg is for Hon Hai to post earnings of NT$12 a share. The salary increase could cut that value by 36 per cent, Citigroup wrote in a report today. Deutsche Bank estimates the raise will cut 2011 earnings per share by 8.6 per cent to 26 per cent, Taipei-based analyst K C Kao wrote in a report today.

“We’re very surprised by Mr. Gou’s decision,” said Jonathan Chang, deputy spokesman for Taipei-based contract electronics manufacturer Pegatron Corp which has about 60,000 workers in Shanghai and Suzhou and none in Shenzhen. The company has yet to decide if it will raise wages further or assess whether it will win orders after the Hon Hai pay hike, he said.