(Bloomberg) – Apple Inc. will soon invite a company from mainland China to the exclusive global iPhone assemblers club, marking the biggest change to a production model of a decade just as tensions between Washington and Beijing escalate.
Luxshare Precision Industry Co. has reached an agreement to acquire the iPhone unit from Wistron Corp. and become the first continental company to assemble Apple’s marquee device. It is yet another victory for a company that went from making cables and antennas to AirPods, sending its shares up as much as 7% on Monday, while Wistron fell as much as 10%.
The introduction of a homegrown Chinese star helps Apple score points with Beijing, at a time when Washington officials accused it of repenting to the Chinese government. It also shakes up Apple’s supply chain by threatening to take business away from longtime partners Hon Hai Precision Industry Co. and Pegatron Corp. Pegatron fell nearly 4%, while Hon Hai, also known as Foxconn, closed 1 , 4% lower.
“Apple is introducing Luxshare into the iPhone assembly business to further reduce its costs, while this reflects that Taiwanese companies are beginning to get rid of low-margin Apple businesses,” said Tsai Ming-fang, economist. Tamkang industrial plant, based in Taipei. College. “This change may further drive Taiwanese companies to withdraw from China as margins continue to decline as contract manufacturing becomes more standardized.”
Read more: Apple will get a new Chinese iPhone manufacturer during a trade war
Exercising enormous influence over major changes among its major suppliers, Apple has sought a Chinese mainland partner in part to expand its production sources during a forceful trade war between the United States and China.
From Foxconn to Pegatron and Quanta Corp., mainly Taiwanese contracted manufacturers to the world’s largest electronics brands are exploring ways to move production away from China, avoiding increased tariffs, and moving up the value chain. Assembling iPhones requires hundreds of thousands of workers, often selected from a volatile and ever-changing pool of migrant labor, which feeds on the margins.
What Bloomberg’s Intelligence Says
Luxshare’s announced acquisition of two Wistron factories in China may give you a chance to win iPhone assembly orders starting in 2023, based on our scenario analysis. This would greatly affect Pegatron and possibly reduce 3-4% of its sales, while Hon Hai’s diversity will better isolate it from the blow, we believe.
– Matthew Kanterman and Nathan Naidu, analysts.
Click here for research.
Read more: iPhone makers look beyond China to rethink supply chain
Wistron may have been struggling to compete. Its Kunshan plant, which mainly makes iPhones, achieved a net profit margin of just 0.2% in 2019, Nomura analysts noted in a July 17 note. The Taiwanese company accounted for only about 5% of total iPhone assembly orders, they said.
Luxshare, by contrast, is among the largest rapidly growing harvests of Chinese electronic products, increasingly getting orders from established firms like Hon Hai. It has become the world’s largest manufacturer of AirPods, one of the best-selling consumer accessories on the market, helping it record one of the best Asian stock results in 2019.
The company agreed to pay about 3.3 billion yuan ($ 470 million) for two Wistron subsidiaries in eastern China. One such unit, based in Kunshan City, is Wistron’s only iPhone manufacturing site, according to people familiar with the company’s business. The deal is slated to be completed by year-end, pending regulatory approval. On Monday, CICC raised its target price on Luxshare by approximately 16%.
The Luxshare deal “can now give you a chance to move forward to gain a stake in the iPhone assembly,” wrote Kanterman and Naidu of BI. “Apple is likely to endorse its partner and provide allocations over time, as the iPhone maker is likely to want to further diversify its supply chain beyond just two major partners.”
Read more: Apple AirPods ignites one of the main actions of Asia in 2019
For more items like this, visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted source of business news.
© 2020 Bloomberg LP
