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Apple to diversify device assemblers in 2014, move from 'partnership' to 'transaction' model

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.

iPhones


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.

Apple 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, analyst Alvin Kwock writes in the report. 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.

Currently, Hon Hai, better known as Foxconn, takes care of the bulk of Apple's product assembly, with Pegatron coming in second. However, Kwock notes 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 has reportedly led to tension between the two companies over reworking fees. Kwock estimates Apple will bear around 60 to 70 percent of that cost.

In addition, the analyst says Apple had to send hundreds of production engineers to support Pegatron's efforts in building out iPad capacity, an indication that the manufacturer did not allocate the appropriate resources to the project.

Apple is supposedly taking steps to fill the gaps and stretch its supply chain with at least two other companies. Recent media reports suggest Apple has qualified Compal Comm and Wistron on "corporate level," meaning they can bid on future projects. Kwock points 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, longtime supplier of Macs and other devices. The firm could take over Pegatron's No. 2 source 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 is unclear how Apple will divvy up forthcoming projects. Kwock expects more clarity on the matter come October or November.

Labor Margin

Source: J.P. Morgan


While Apple is one of the largest electronics dealers on earth in terms of revenue, being a manufacturer for the company is a sometimes volatile proposition. As seen above, margins can be small, especially when bidding for projects, and profitability is not always seen immediately. However, Compal Comm and Wistron will most likely turn a profit if both are able to successfully integrate and ramp up to Apple's manufacturing methods.

J.P. Morgan's Apple analyst Mark Moskowitz believes the company's supply chain changes suggest an intent to create buffers for its yearly gross margins. He points to the financial effects from Apple's new smartphone trade-in program, a possible shift away from high-end iPhones, and increasing mix of relatively low-margin iPad minis in the company's tablet sales.

In a report from July, KGI analyst Ming-Chi Kuo also predicted that Apple would look at companies beyond Foxconn to fulfill its assembly needs. At the time, Kuo saw Compal, Wistron and Inventec as becoming larger players in Apple's supply chain.