Apple cuts supply risk, pits Pegatron vs. Foxconn

Reliance on Foxconn is beginning to wane as other manufacturers muscle in on the lucrative Apple supply chain.


Apple relied on Foxconn in the past for its mobile device part production, but that era may be on the decline.

Hon Hai Precision Industry, better known as Foxconn, is facing a challenge to its dominant place in the Apple supply chain from little-known manufacturer Pegatron, according to Bloomberg. The smaller, local rival began producing iPad Minis last year and produces some iPhones, whereas Foxconn is responsible for the production of larger models.

The increase in orders from Apple to Pegatron has been placed at the feet of risk management, according to the publication's sources. Expanding product lines, faulty iPhones produced last year by Foxconn, and growing competition from Samsung may have all contributed to Apple's desire to keep its supply chain financially competitive and to lower risks associated with relying too heavily on one producer.

Pegatron has been sizing up to the world's largest electronics contract manufacturer, which secures over 60 percent of its annual revenue from the iPad and iPhone maker. Following a different business model, Pegatron offers a better deal for Apple at the expense of its profit margins (taking less than one percent), but this in turn can result in better long-term prospects and larger contracts.

"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 commented. "Hon Hai's margin uptrend is not a guarantee."

The result? Potentially a pricing war which does not only benefit Apple's line of profit, but can force the manufacturers to offer more for Apple's lucrative business.

Foxconn's labor costs have skyrocketed after being required to improve working conditions and raise wages. Anonymous sources told the publication that Foxconn is becoming more "difficult" to work with, as the firm has changed component sourcing without notifying Apple, and produced a number of faulty iPhone 5s after getting into difficulties trying to supply the amount Apple required.

Pegatron announced plans earlier this month to expand its Chinese workforce by up to 40 percent. In light of rumors that Apple is soon to release a cheaper iPhone model to appeal to a fresh wave of consumers (as well as the $239 iPod Touch released today), it may be that Pegatron plans to ramp up production and therefore enjoy better financial results as well as assist Apple in coping with new consumer demand.

In addition to Apple, Pegatron produces components for Microsoft, Hewlett-Packard and Dell.

Foxconn made $27.3 billion in Q1, whereas Pegatron in comparison made only $7.4 billion in revenue. This result is nothing in comparison to the large firm, but it remains to be seen if Pegatron can catch up as Apple products remain in high demand.