Much like it does with component suppliers, Apple is thought to be easing into a new diversification strategy with the companies that assemble its products, granting lower build costs and increased resilience to changing market conditions. According to a “think piece” from J.P. Morgan’s Asian Technology research team, Apple’s recent movements in the region appear to foreshadow a multi-vendor strategy for assemblers in 2014, with diversification coming to the company’s most important product lines.
The Cupertino California company has already implemented a multi-vendor model with a number of component suppliers but the strategy has been somewhat limited when it comes to assemblers according to analyst Alvin Kwock. Shades of manufacturer diversification can be seen in Apple’s arrangements with Pegatron, a Taiwan-based firm that is thought to be a major contributor in assembling the upcoming iPhone lineup.
As of right now, Foxconn takes care of the majority of Apple’s product assembly with Pegatron coming in second. Kwock noted that Apple has a number of issues with existing partners, an example being reportedly high return rates of defective Foxconn-assembled iPhone 5 units. The returns have supposedly led to tension between the two companies over reworking fees. Kwock estimates that Apple will bear around 60% to 70% of that cost. The analyst also said that Apple had to send hundreds of production engineers to support Pegatron’s efforts in building out iPad capacity, an indication that the manufacturer didn’t allocate the appropriate resources to the project.
Apple is said to be taking steps to fill the gaps and stretch its supply chain with at least two other companies. Recent media reports suggest that Apple has qualified Compal Comm and Wistron on “corporate level,” which means they can bid on future projects. It was pointed out that Compal’s Nanjing, China plant is likely eligible for iPad and iPhone assembly, while Wistron’s Kunshan and Taizhou factories can handle Apple’s iPad, iPhone, MacBook and iMac lines. Also in Apple’s EMS stable is Quanta, a longtime supplier of Macs an d other devices, The firm could potentially take over Pegatron’s number two status despite missing iPad qualification as the company is thought to be involved in the manufacture of Apple’s rumored iWatch.
Due to the annual ramp up for Apple’s fall product launches, it’s unclear how Apple will end up distributing the upcoming projects. Kwock expects more clarity on the matter come October or November.
Although Apple is one of the largest electronic dealers in terms of revenue, being a manufacturer for the company is sometimes a rapidly changing position. Margins could be small, especially when bidding for projects, and profitability is not always seen immediately either. That being said, Compal Comm and Wistron will likely turn a profit if both are able to successfully integrate and ramp up Apple’s manufacturing methods.
We’ll see how things turn out in the future for Apple and its current manufacturers as well as its potential ones.
Source: J.P. Morgan