Pegatron ramps up Apple supply competition against Foxconn

Pegatron ramps up Apple supply competition against Foxconn

Summary: Is Foxconn rival manufacturer Pegatron gearing up to compete for a larger slice of Apple's business?

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TOPICS: Apple
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Credit: Apple

Hon Hai Precision Industry, better known as Foxconn, is facing growing competition from rival Pegatron in its bid to snag additional business from Apple.

Foxconn is the world's largest electronics contract manufacturer, and secures approximately 60 to 70 percent of its revenue solely from iPad and iPhone maker Apple, which uses the firm to assemble a number of parts used in smartphones and tablets. However, as reported by Reuters, Foxconn is under growing pressure from rival Pegatron -- only a fifth of the size -- due to competition which has resulted in a contract pricing war.

At the expense of lower profit margins, Pegatron is offering a better deal for Apple, according to analysts. While this may mean lower numbers on the balance sheet, the smaller rival appears to be successful in attracting more orders from the Cupertino-based firm, which bodes well for long-term contract prospects.

"Pegatron posts a long-term risk to Hon Hai because as it catches up on margins by supplying more components, it can provide more aggressive pricing," Daiwa Capital analyst Birdy Lu told the publication. "Hon Hai's margin uptrend is not a guarantee."

Pegatron announced last week that the manufacturer planned to increase its Chinese workforce by up to 40 percent this year, which has further fueled speculation that the company is fast catching up to rival Foxconn. In addition, the announcement led credence to rumors that Apple is planning to launch a lower-cost iPhone, and potentially Pegatron is gearing up its factories to take on some of the production.

Apple's CEO Tim Cook has said that the tech giant will be launching new products in the fall, and some "really great stuff" is coming this year.

Several years ago, a similar kind of turf war between Pegatron and Foxconn broke out. Pitted against each other for the contracts to build the iPad 3 and iPhone 5, by diversify manufacturing and assembly, good business sense dictates that the supply chain will compete -- resulting in a better deal for Apple.

HSBC analyst Jenny Lai commented:

"Pegatron's margins are still a lot lower than Hon Hai's. This is because Pegatron's offering very competitive pricing and that's how it wins orders."

After facing scrutiny over worker conditions and payment, Foxconn has been required to improve standards and increase basic wage packets. This in turn will have eroded profit margins for the manufacturer, which is expected to post net profits of approximately $638.24 million in Q1 this week despite sliding revenue reports in the January-March period. In addition, potentally being forced to pay up to $256.8 million to replace up to eight million faulty iPhone units that Apple has recently returned to the manufacturer may have an eventual financial impact.

Topic: Apple

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