Shares in Hon Hai Precision Industry <2317.TW> tumbled on Monday on concerns about earnings after the electronics maker offered workers in southern China a second pay rise that could double wages from a month ago.
Taiwan's Hon Hai, the world's biggest contract electronics manufacturer with a list of clients including Apple Inc , Dell Inc and Hewlett-Packard Co , has been wrestling with the fallout from a series of suicides at its Foxconn International Holdings <2038.HK> unit.
Hon Hai said late on Sunday that production line workers at Foxconn's Shenzhen hub would be able to earn 2,000 yuan ($293) a month from October if they passed a three-month performance review.
This pushed Hon Hai shares down by as much as 6.8 percent, the maximum amount permitted, before ending down 5.6 percent at a near 10-month closing low. The broader market <.TWII> fell 2.5 percent.
The valuation here is not expensive, but the problem is people may feel uncertainty about earnings, and if people feel uncertainty then it's hard to make it a buying case, said Steven Tseng, an analyst at RBS in Taipei.
Tseng added that while he was still seeking details on the planned wage rise, it could cut 2011 net profit by 10-20 percent.
Some workers' wages could double from the 900 yuan Foxconn was paying just a month ago before the spate of suicides drew attention on the labor practices at the company, which churns out millions of iPhones, computers and other gadgets 24 hours a day.
The company had hiked salaries across the board by 30 percent last month.
One problem in assessing the impact of the rise on Hon Hai was the lack of detail in the Foxconn statement over how the appraisal process would work and how many of the roughly 400,000 workers at Shenzhen would actually earn the 2,000 yuan.
Its statement said only that details of the performance evaluation would be announced internally later.
A company official said workers will still continue to receive free accommodation, food and other benefits that used to make up their compensation package.
He declined to be named because he was not authorized to speak to the media and could not offer further details on the number of workers who would receive the increase.
He said that when the workers were paid 900 yuan per month, the company was actually spending about 2,100 yuan per month on them. It is still working out what the actual cost to it would be if workers earned 2,000 per month.
Hon Hai and Foxconn are due to hold their annual shareholder meetings in Taipei and Hong Kong on Tuesday.
Although the company has responded to a series of suicides -- 10 in the last five months -- it is not clear that salaries were the main concern of the workers who took their own lives.
Salaries made up about 3.5 percent of the company's overall costs, according to Arthur Hsieh, an analyst at UBS.
It's not a huge part of the company's overall costs, but margins in the sector are extremely thin and any increase in costs can have some effect. However, this is only going to take effect from October, so I don't think it'll have much impact on this year's earnings.
Citi noted in a research report that if Hon Hai did not increase staff, did not raise salaries in 2011 and average salaries for all workers in China doubled, then 2011 EPS could fall 36 percent from the T$12 consensus figure as a result of the latest wage plan.
In Hong Kong, Foxconn shares were suspended from trading, Hong Kong Exchanges and Clearing said in a statement, without giving a reason. They had opened down 5 percent.
Other analysts noted however that the company might be able to offset some of the additional costs by charging Apple more.
Foxconn can pass the ball over to Apple and demand a increase in product prices when Apple is still maintaining a relatively high margin, said William Lo, an analyst at Ample Capital in Hong Kong.
Apple, which recently became the world's largest technology company by market value on booming sales of its iPhone and iPad products, has voiced concern at the suicides at Foxconn and is investigating, but has said the plants are not sweatshops.
All the suicide victims were young migrant workers, among the millions of people who leave the poor hinterlands of China for the boom towns of the southern and eastern coastal areas.
Another worker died late in May from what his family said was overwork, a claim the company denied.
(Additional reporting by Donny Kwok in Hong Kong; Editing by Chris Lewis and Lincoln Feast)