Profit Margin Tensions Souring Relationship Between Apple and Foxconn

The relationship between longtime partners Apple and Foxconn is eroding due to a battle over profit margins, according to a new report from The Information. While Apple's gross profit margins are close to 40 percent, Foxconn's profit margins are in the single-digit percentage points, leading Foxconn to employ questionable tactics in an effort to grow its profits.

For manufacturing projects, Foxconn routinely tells Apple that it hired more workers than it actually did. Foxconn has also used Apple-owned equipment when making devices for Apple's rivals, and has taken shortcuts on component and product testing. As a result, Apple has increased monitoring and tracking of Foxconn employees and its equipment that's in Foxconn facilities.

More than two dozen former Foxconn and Apple employees told The Information that the relationship between the companies is changing as Apple seeks to diversify its supply chain. Apple originally spoke to Foxconn about manufacturing the AirPods Pro, for example, with Foxconn expecting to win the contract and retrofitting a facility for production purposes only to see the contract go to Foxconn's competitors.

Foxconn manufactures between 60 and 70 percent of the iPhones sold each year, and Apple is by far Foxconn's largest customer, so supply chain diversification is a major threat. Under Tim Cook, Apple has sought cost reductions and implemented aggressive audits of manufacturing lines.

To generate more profit, Foxconn has tried selling its own equipment for manufacturing and component testing with limited success, as well as moving some manufacturing products in-house. Foxconn developed its own chemicals for polishing the iPhone's screen rather than relying on chemicals from a Japanese company, for example.

Foxconn has disregarded some of Apple's policies, using Apple equipment for non-Apple products as mentioned above and providing Google employees with a tour of a Foxconn factory manufacturing the 12-inch MacBook ahead of its release. Foxconn also reportedly cuts corners with manufacturing. With the iPhone 7, some reject phones had loose screws or tiny bits of metal that were supposed to be disassembled, but Foxconn instead opened the flawed phones, removed debris, and resealed them to avoid wasting materials, a process hidden from Apple.

More detail on the souring relationship between Foxconn and Apple and additional examples of tension between the two companies can be found in The Information's full report, which is well worth reading.