Getting its slice

Still Apple’s main partner

The Malus spectabilis, or Chinese flowering apple, is a tree that grows in a number of provinces in China. Each spring it produces spectacular blossoms. However, the apples that ripen later each summer are far too bitter for most people’s tastes.

Some of the supply chain companies serving the Malus spectabilis namesake, Apple Inc, know that feeling too. Peeled-back profits have been leaving a sour taste, with Taiwan’s Compal the latest company to step back from accepting orders to make Apple Watches and iPads on the grounds that they offer “limited growth and profits”.

The news was first reported by Taipei-based tech publication DigiTimes. It added that Apple was splitting Compal’s former contracts between China’s Luxshare Precision and Taiwan’s Foxconn (also known as Hon Hai).

Compal’s retreat follows that of Taiwan’s Quanta Computer, which withdrew for similar reasons in 2019. Both complained about their limited pricing power with such a high-profile client. And it’s not hard to see why: data from S&P Global Market Intelligence suggests that Compal recorded a wafer-thin 1% net profit margin in the 2021 financial year, compared to Apple’s 25.9%.

Over the last few weeks the Chinese media has been looking at just how fruitful it is to sign up as one of Apple’s suppliers. “In the past, supply chain companies enjoyed the full dividends of working with Apple. But the profits windfall seems to be getting smaller and smaller,” reports 36Kr. “These companies are finding it increasingly difficult to earn excess returns, while having to take ever-greater risks.”

iNews agrees. “Many Chinese enterprises have grown from small factories to large companies by relying on the towering Apple tree. Yet, while it may look beautiful, Apple can leave them feeling helpless on a number of fronts.”

That doesn’t stop new suppliers from trying to win business from the Californian giant. The latest company vying for its attention is Shanghai-listed Wingtech, which has just announced the completion of a verification programme to support an international client’s notebook project. Shipments – although initially small – are beginning soon.

The domestic media says that the client in question is Apple and that the product is the new generation of MacBook, unveiled recently at Apple’s Worldwide Developer Conference. If that’s correct, Wingtech will break the grip of Taiwanese manufacturers over the laptop range, the last of the Apple products where there is still a Taiwanese monopoly in place.

In recent years, the Chinese group has been cultivating its ability to service the Cupertino-based giant. This has included: buying a 45% stake in casing manufacturer Casetek from Taiwan’s Pegatron; establishing a 45% stake in Apple camera module manufacturer Cowell; taking over an iPhone assembly plant from Wistron, another Taiwanese company; and acquiring NXP’s UK-based semiconductor manufacturer, Nexperia.

This expansion has helped to fuel revenue growth from Rmb17.35 billion ($2.6 billion) in 2018 to Rmb52.73 billion in 2021. Net profit margins have widened too: from 0.4% to 5% over the same time period, according to S&P data.

Haitong Securities analyst Zheng Hongda says that Wingtech has made progress in “forming an integrated strategy from chip design, wafer manufacturing, packaging and testing, semiconductor equipment to components (optics/display), communication terminals, notebook computers and automotive electronic product R&D and manufacturing.”

It’s much the same business model that Luxshare has deployed too. It continues to scale up capacity in a bid to grab a larger slice of the Apple pie. Last October, for example, it broke ground on an Rmb11 billion manufacturing plant in Jiangsu province to assemble more iPhones.

36Kr notes that Apple accounted for just over 74% of the Shenzhen-listed company’s revenues in 2021 compared to 37% five years earlier. Luxshare’s net income margins have not been able to keep pace, however, dropping from the 7% range to 4.6% in 2021.

Earlier this year, China Central Broadcasting Corp reported that of the 30 Chinese companies in Apple’s supply chain, only 10 have been increasing their profitability. Yet Haitong analyst Jeff Pu is optimistic about Luxshare’s prospects, thanks to its “platform provider position”. “We expect Luxshare to quickly move forward to capture new product cycles such as Watch in 2021-2023, iPhone assembly/mechanical in 2022-24, MR/VR in 2023-24 as well as the transformation into an automotive Tier-1,” he predicts in a report published this month.

Of course, part of Apple’s success in driving down prices with its suppliers is by avoiding situations in which it becomes too reliant on a single partner. Whether it will want to deal with the same parent company across a full complement of different products and contracts is also open to question.

The suppliers won’t want to devote all their resources to the same client for the same reason. One way of spreading some of the risk is looking for completely new sources of business. One of the alternative avenues for Luxshare is the electric vehicle (EV) sector, where it has signed a strategic deal with Chery Group in a bid to diversify into automotive components. Lens Technology, another major supplier to Apple, has inked cooperation agreements with Tesla, Bentley and Porsche.

Apple is also in the process of shifting as much of 30% of its production contracts out of China to meet diversification targets in its supply chain. The recent Covid-19 lockdowns in Shanghai and its environs have speeded some of that process up. A number of the group’s supply chain companies in Kunshun on Shanghai’s western boundaries have suffered from disruptions. In May, Apple responded by announcing that it will transfer some of its iPad production into neighbouring Vietnam, although many of the suppliers there are still Chinese-owned, including Luxshare and BYD Electronics.

A year ago, WiC noted how serving as an Apple supplier was no longer seen as quite as prestigious by some of its Chinese partners as previously. Nevertheless, the Global Times and Jiemian both proclaimed at the time (see WiC544) that Chinese companies would expand their presence in the Apple supply chain, because China had been less affected by the pandemic than competing countries such as India and Vietnam. Some of that perception has changed over the last year, perhaps.

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