Foxconn International Holdings Ltd, the world's largest contract maker of mobile phones, said it expects its profitability to be pressured this year amid rising competition and increased development costs.

"It's a tough operating environment," Chairman Samuel Chin said after a shareholders' meeting yesterday. "We're not immune - it definitely impacts us."

Foxconn, the worst-performing bluechip in Hong Kong's benchmark Hang Seng Index this year, is seeking more business from customers such as Nokia Oyi and Samsung Electronics Co - the world's two biggest handset companies - to compensate for lower sales to Motorola Inc.

The Shenzhen-based company is boosting spending to develop so-called smartphones that allow users to edit documents and send e-mails.

Motorola, Foxconn's biggest customer in 2006, is still "having difficulties" and will "continue to impact" the Hong Kong-listed company, Chin said. Foxconn got higher orders from "all other customers" to help offset lower sales to the US company in 2007, Chin added.

Foxconn's second-half profits last year declined 4.5 percent to $397.4 million, after Schaumburg, Illinois-based Motorola's full-year handset sales fell 33 percent in 2007. The US company accounted for 53 percent of Foxconn's sales in 2006, Morgan Stanley analyst Jasmine Lu wrote in a report in March.

Foxconn should have significant revenue growth this year as handset companies outsource more production, Chin said.

The company's shares fell 1.92 percent to close at HK$9.7, extending their decline to about 45 percent this year.

The contract manufacturer plans to increase engineering spending 50 percent this year as it offers more smartphones, Chin said.

Foxconn has hired about 800 engineers this year for its smartphones division, he said.

That is in addition to the company's total of 5,514 at the end of last year.

The Hong Kong-listed company, which currently manufactures mostly in Shenzhen, will also start volume production at Langfang, Hebei province, and Taiyuan, Shanxi province, in North China this year, he said.

Bloomberg

(HK Edition 06/20/2008 page2)