This story seems to have got a little garbled as it has bounced in an out of various translation machines. The point at issue is how much it has cost Foxconn to deal with iPhones that
Foxconn has apparently botched a batch of iPhones, which Apple returned to the contract manufacturer because they were not fit for sale.
Details of just what went wrong are sketchy, as the source for this tale is an anonymous Foxconn staffer chatting to China Business. That report, after being forced through a couple of translation engines, suggests Apple sent back at least five million iPhones, and maybe as many as eight million, “due to appearance of substandard or dysfunctional problems.”
With a cost to manufacture of $US200 apiece, Foxconn is apparently preparing to take a hit of up to $1.6bn to cover the cost of making replacement handsets. China Business suggests the cost of making new iPhones represents further bad news, not a reason for Foxconn's recently-revealed financial woes.
Another report, derived from the same Chinese language source, gives a slightly different picture:
Apple has returned over 800 million iPhone units as faulty, and this could be a huge loss for Foxconn that can amount up to US$ 256.8 million.
That 800 million there is obviously a typo as there haven't been 800 million iPhones manufactured. Well, not yet at least there hasn't been.
Foxconn would now have to re-manufacture the returned phones incurring further labour expenses that can add up the production prices. The company would be required to replace the faulty parts with working ones. This has not been the first time that such a major production problem has happened with Apple iPhones. Foxconn has been one of the top manufacturers for Apple iPhones and other top mobiles. The total estimated cost for replacing over 8 million faulty phones could be around 1.6 billion Yuan that is about US$256.8 million.
Piecing it together I think what we're really got it the following. The "up to 8 million phones" are not all junk. They're mismanufactured, yes, but some to all of them will be repairable. Thus the cost is that 1.6 billion yuan rather than the entire manufacturing cost of $200 each and thus $1.6 billion.
There is one important thing we don't know as yet and that's whether this will have any effect on availability of phones for Apple to sell. This question revolves around whether it is in fact a batch of iPhones that have been rejected or whether this is a symptom of the general failure rate over the production run. If it's a batch of phones that have all been returned then that is a few weeks' supply for Apple and could conceivably lead to product shortages. However, we also know that the iPhone 5 has been reported as difficult to manufacture and there are reports, as in the Chinese piece, that the satisfactory completion rate is still only 95%. Given that number, the 6 - 8 million returns could be the number of returns over the last two quarters: that number just about adds up.
As a personal opinion I would think that it's the general run of failures: I don't believe that quality control at either Foxconn or Apple is sufficiently bad to allow a batch of 8 million faulty phones to be shipped. If it is that bad then there's some very serious problems there: which is why I think it's not that at all. We know the iPhone 5 is difficult to manufacture and that it has had a high failure rate and high (compared to other electronics devices) return rate. I would therefore venture that this is the total returns rather than one single batch that went sour.
