The Chinese media is ramping up speculation that Apple has returned 5 million defective iPhones to Foxconn because they were reportedly unfit for sale. The phones apparently did not meet Apple's standards or were non-functioning units.
With repair costs estimated at approximately $200 RMB ($32) per phone, this would have a substantial impact on Foxconn's bottom line. With Foxconn's profits from manufacturing the iPhone running at 1.5 to 2 Billion RMB ($242M-325M), total repair costs of $1 Billion RMB ($162M) would cut their profits by approximately sixty percent. If it the rumour turns out to be true, it is expected that such a loss would have a negative impact on the tech industry as a whole as Foxconn struggles to recover.
While this sounds serious, keep in mind that none of this has been verified, and if it were true, the actual costs of repair are only speculative at best. It's also unsure as to whether this refers to just the iPhone 5, or the total amount of iPhones returned over the years. Chinese media is not known for the veracity of their information and it's quite possible they suffering a slow news day and made it up. With the iPhone 5's shelf-life limited, it's not sure if Apple would even need 5 million iPhone 5s.
Source: Tech Sina