With the U.S. tech giant ready to launch three iPhone models this year, Taiwanese suppliers and transporters expect a big boost in business.
The Taiwan technology sector is often criticized for lacking viable brands. In the consumer electronics category, the number of big names can be counted on one hand, and these companies have generally been struggling ever since the PC era began to wane.
Pundits – analysts, bureaucrats, academics, and especially journalists – often urge Taiwanese tech firms to invest more in brand building. It’s costly, they concede, but it’s the best way to develop higher value products.
The alternative is acquiescing to permanent razor-thin margins as a contract electronics manufacturer. For the many Taiwanese manufacturers in Apple’s supply chain, however, that option is working out just fine. It can be a tumultuous ride at times – Apple negotiates fiercely on price – but the payoff is big. In July, ahead of the much-hyped iPhone 8 release, nine Apple suppliers in Taiwan on Nikkei Asian Review’s watchlist posted a 9.7% increase in revenue compared to a year earlier.
Five of the companies recorded double-digit annual growth: TPK Holding, which makes the iPhone’s 3-D touch function (with 29% growth); Apple casing maker Catcher Technology (24%); iPad assembler Compal (23.8%); MacBook and Apple Watch manufacturer Quanta (19%); and iPhone assembler Pegatron (13.8%).
Hon Hai Precision Electronics Co. (better known as Foxconn), the primary iPhone assembler, posted a 7.5% annual increase in revenue in July. Foxconn is responsible for 70% of iPhone assembly, while Pegatron handles 25% and the final 5% is the responsibility of Wistron, according to research firm International Data Corp. (IDC).
“The reason Taiwanese contract manufacturers continue to dominate Apple’s supply chain is that they provide 100% EMS [electronics manufacturing services] to Apple and they are equipped with international-grade production and logistics capabilities,” says Aaron Lin, a senior analyst at the Market Intelligence & Consulting Institute (MIC), a semi-governmental research house.
Apple and its Taiwanese partners have also found a common rival in South Korea’s Samsung, resulting in deepening cooperation in everything from integrated circuits to flash memory and display panels. Apple competes directly with Samsung in consumer electronics, which is reason enough for it to look for alternative component suppliers. Unlike Samsung, “Taiwanese ODMs and OEMs have no conflicts of interest with Apple,” explains Sean Kao, a smartphone analyst in IDC’s Taiwan office.
Samsung is a key supplier of OLED [organic light-emitting diode] panels for the iPhone X, but Apple is moving to reduce reliance on Samsung for future handset models. In July, Korea’s ET News reported that Apple had purchased chemical vapor deposition (CVD) machines from Korea-based Sunic System to build a 2.5G OLED panel line as part of a plan to develop related technology and products in Taiwan.
“Apple might be building a trial production line here but not the capacity to churn out OLED panels in significant volumes,” says Boyce Fan, research director of Witsview, a division of research firm TrendForce. “If Apple intends to establish a trial OLED line in Taiwan, the company probably wants to draw on resources from the complete display supply chain in East Asia. Another possible reason is that Apple could be expanding its existing laboratory facility located here.”
Apple currently does not have a Taiwan-based supply partner for the production of displays used in its devices, he adds.
Chips off the old block
For their part, the Taiwanese vie fiercely with Samsung as contract electronics makers. As the South Korean chaebol has made inroads into their core businesses, the Taiwanese have accused it of trying to undermine the island’s technology industry. A 2013 cover story about Samsung in the Chinese-language Business Next magazine was entitled “Kill Taiwan.”
Among Taiwanese contract electronics makers, Taiwan Semiconductor Manufacturing Co. (TSMC) competes most aggressively with Samsung. “When it comes to selecting a processor supplier, Apple always picks those that have the most state-of-the-art manufacturing process. So it’s not at all surprising that TSMC and Samsung are on its list,” says Huang Shi-zong, an industry analyst at MIC.
In recent years, TSMC has edged out Samsung for Apple’s processor orders. The reason can be traced back to an incident that occurred when Apple outsourced its A9 chip orders for the iPhone 6S to both Samsung and TSMC. The efficiency and performance of TSMC’s A9 chips made with 16-nanometer process technology was somewhat better than Samsung-made A9 chips using the 14-nm process, Huang notes.
Since then, Apple has decided to outsource all of its A10 (iPhone 7 and iPhone 7 Plus) and A11 (iPhone 8, 8 Plus and X) chip orders to TSMC. TSMC’s fan-out packaging (INFO) process – it boosts performance and reduces chip thickness – used on the A10 and A11 processors is one to two years ahead of Samsung’s, observes Andrew Lu, a Taipei-based independent semiconductor analyst.
“Samsung is trying very hard to win back some orders” [from Apple] for the A12 processor to be used in future-generation iPhones, Lu says. He says that the South Korean firm may be able to offer Apple a package of components including processors, OLED panels, and memory chips.
While ties between Apple and TSMC appear to be solid, financial considerations weigh heaviest on the relationship. “Apple always wants a second source so that it can ask the first source to lower prices. Nothing will last forever if TSMC cannot keep Apple happy,” Lu says.
At the same time, earning 20% of its revenue from Apple makes TSMC “a bit too dependent” on the Cupertino, California-based company, he observes. Disappointing iPhone sales caused TSMC’s sales to fall on a seasonal basis in both the first and second quarters of the year. Sales in the quarter that ended March 2017 fell 14.9% to NT$56.9 billion (US$1.9 billion), the lowest in three years.
Still, having lost several Qualcomm chip orders to Samsung (although not the recent 7nm chip), “TSMC will try its best to secure Apple’s future orders,” Lu says.
Steady as she goes
Analysts say that Taiwan’s participation in the new iPhone should bolster the bottom lines of a slew of manufacturers in the second half of the year. A total of 36 Taiwanese manufacturers are involved in Apple’s newest handset, a figure similar to years past. Since Apple will launch three iPhone models this year, including the US$999 iPhone X (its priciest smartphone to date), the shipments of the firm’s Taiwanese suppliers should receive “a meaningful boost,” says MIC’s Huang.
TrendForce reckons that the global production volume of iPhone devices (including all previous models) for 2017 will total around 227.5 million units, representing an annual increase of 5.6%.
Transportation companies also stand to benefit. In an August report, Bloomberg noted that ahead of the new iPhone’s release, China Airlines stock gained more than US$4 billion in market value over an eight-day period, beating most other members of MSCI Inc.’s Asian benchmark. The stocks of Eva Airways and Evergreen Marine Corp. also performed unusually well.
A few variables could have a major impact on the future participation of Taiwanese manufacturers in the Apple supply chain. One is the push by U.S. President Donald Trump to encourage more domestic manufacturing. On the campaign trail last year at Liberty University, Trump attacked Apple for outsourcing its production. “We’re going to get Apple to build their damn computers and things in this country instead of other countries,” he said. In July, Trump said that Apple CEO Tim Cook had agreed to build “three big, beautiful plants” in the United States.
If Apple moves some production back to the United States, “of course, the three major Taiwanese assembly service providers [Foxconn, Pegatron, and Wistron] would be affected the most as they would face enormous pressure to relocate production lines to the U.S.,” says MIC’s Huang. But if they can boost automation to reduce production costs, that may prevent margins from further contracting.
Under Trump’s new “Buy American, Hire American” executive order, components are most likely to be shipped to the United States in SKD (semi-knocked down) condition. In order to induce high-end component production lines to move to the United States, the U.S. government would likely have to offer additional manufacturing tax breaks for utilities such as water and electricity that are used directly and exclusively to produce components. “Though the chance is there, moving the entire downstream industry supply chain to the U.S. is still very difficult and unlikely,” Huang says.
Foxconn recently announced it would build a multibillion-dollar plant in Wisconsin, which would be the first outside of Asia to produce liquid-crystal display (LCD) panels. Under a bill proposed by the state senate, Foxconn would receive US$2.85 billion in cash subsidies over 15 years on the condition that the company invests US$10 billion in Wisconsin and employs 13,000 workers.
It is not yet known whether Foxconn would manufacture display panels for Apple devices at the plant.
Meanwhile, Foxconn recently tried to acquire the memory-chip business of Japan’s struggling Toshiba Corp., which supplies flash memory for Apple’s mobile devices, for US$19.5 billion. If Apple did not source flash memory from Toshiba, it would probably have to turn to Samsung. Foxconn reasoned correctly that Apple would prefer to avoid depending on its arch-rival for flash memory.
In early September, Foxconn proposed a deal in which it would take a 25% stake to become the largest shareholder in Toshiba, while the Japanese chipmaker would maintain 10%. Other prospective shareholders included Apple (20%), Kingston Technology (20%), Sharp (15%), and SoftBank (10%).
Later in the month, Toshiba announced it would sell its semiconductor business for US$18 billion to a consortium led by Bain Capital – to which Apple is contributing US$3 billion. Other investors believed to be in the consortium include Dell, Seagate, Kingston Technology, and South Korean chipmaker SK Hynix.
Ultimately, Foxconn’s deep ties to China – where intellectual-property protection is inconsistent – likely nixed its chances of acquiring the Japanese chipmaker. The Japanese government reportedly was concerned that permitting the Taiwanese firm to acquire Toshiba could result in leaks of sensitive semiconductor technology, according to MIC.