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TECHNOLOGY May 29, 2013, 3:26 p.m. ET
Reuters
Pegatron began making iPad Mini tablets, left,
last year. Foxconn continues to assemble the
larger iPads, right, as seen here in a store in
China.
Earlier
As Apple Feels Bite, Hon Hai Looks to
Diversify (3/27/2013)
By EVA DOU
TAIPEIFor years, nearly all of the world's iPhones and iPads rolled off the assembly
lines of a single company: Foxconn.
It was a famous partnership between two
outsize personalities Steve Jobs, Apple
Inc.'s intense and mercurial co-founder, and
Terry Gou, the Taiwanese manufacturer's
equally demanding chairman.
But under current Chief Executive Tim Cook,
Apple is dividing its weight more equally with
a relatively unknown supplier, giving the
technology giant a greater supply-chain
balance.
Pegatron Corp., named after the flying horse
Pegasus, will be the primary assembler of a
low-cost iPhone expected to be offered later
this year. Foxconn's smaller rival across town
became a minor producer of iPhones in 2011
and began making iPad Mini tablet
computers last year.
Pegatron's rise means an end to the monopoly that Foxconn Technology Group the
trade name for Hon Hai Precision Industry Co., the world's largest electronics contract
manufacturerhas held over the production of Apple's mobile products.
People familiar with the matter point to strategic reasons for the shift: risk
diversification after Foxconn's manufacturing glitches last year with the iPhone 5 that
resulted in scratches on the metal casings, and Apple's decision to expand its product
lines amid growing competition from Samsung Electronics Co. and others.
Pegatron also has been willing to accept
thinner profits as it courts Apple's business, analysts said. The company declined to
comment about its pricing.
Apple declined to comment.
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Apple Shifts Supply Chain Away From
Foxconn to Pegatron
Apple Shifts Supply Chain Away From Foxconn to Pegatron - WSJ.com http://online.wsj.com/article/SB1000142412788732385580457851112...
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Foxconn's cost advantages from scale have waned as it works to improve factory
conditions after a spate of high-profile worker suicides and accidents in recent years.
Although Pegatron briefly caught the public eye in 2011 due to a factory explosion that
injured dozens of workers, the smaller company has largely escaped the laserlike
spotlight that has forced Foxconn to increase wages and make changes to its labor
practices.
Foxconn, in its growing heft as the world's largest electronics contract company, was
also getting more difficult for Apple to control, with incidents such as changing
component sourcing without notifying Apple, people familiar with the matter said. At
the same time, Foxconn became frustrated with the growing complexity of Apple
products, such as the iPhone 5, which is difficult to make in the volumes Apple needed.
Executive changes at Apple have also made a difference. Mr. Jobs had been easier at
forgiving his favorite manufacturing partner, according to several people familiar with
the relationship. Now, instead of relying on the uniquely close partnership between "two
leaders with a hero complex"as one of the people saidMr. Cook is putting a greater
premium on risk diversification, they said. Still, Mr. Cook and Mr. Gou have a strong
relationship and have known each other even before Mr. Cook joined Apple in 1998, one
of the people said.
But with its growing importance as an Apple supplier, Pegatron will likely also face
growing scrutiny. The company declined to comment on whether it has made any
changes to its labor practices after the 2011 factory explosion.
As with other contract manufacturers, Pegatron's success is based largely on secrecy and
tact as it juggles production of competing products from companies such as Apple,
Microsoft Corp., Hewlett-Packard Co. as well as Dell Inc.
At its sleek headquarters on the outskirts of Taipei, engineers serving different clients
eat lunch together in the same cafeteria and gather after hours in the gym, but they
rarely know the details of each others' work. Sensitive projects are cordoned off by
keycard access, or even face recognition software.
While Pegatron migh seem to be a newcomer on the surface, the Taipei-based
company's Apple ties run deep, with its earlier incarnation packaging Apple computers
by candlelight more than a decade ago.
Pegatron Senior Vice President Andy Tsai said that in 1999, the company he founded,
Alpha-Top Technology Corp., landed the contract for Apple's first-generation iBooks. It
wasn't the best first collaboration: a massive earthquake in Taiwan knocked out power
and paralyzed production.
"At that time, there were a lot of Apple people in my factory, telling us to find a
solution," said Mr. Tsai. "I bought a lot of power generators, and we even used candles
on the packing line."
Alpha-Top managed to keep its Apple business, although orders tapered off after it was
acquired by Asustek Computer Inc., which juggled its own competing brand and
contract work. Asustek spun off its contract manufacturing business in 2010 into
Pegatron under pressure from clients.
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Pegatron's revenue in the first quarter219.1 billion New Taiwan dollars (US$7.4
billion)is dwarfed by Foxconn's NT$809.1 billion ($27.3 billion). The smaller
company also has thinner operating margins: 0.8% compared with Foxconn's 1.7%.
Pegatron, which has about 100,000 employees in Taiwan and China, expects to increase
its China workforce in the second half of the year by around 40%, Chief Financial Officer
Charles Lin said. Analysts attribute the staffing increase largely to expected production
of low-cost iPhones.
Pegatron began making iPad Minis last year, but some people familiar with the situation
said low yield rates meant volume was lower than originally planned and Foxconn
ended up taking on the bulk of the production.
"There's a learning curve for any new products, so our yield rates are increasing," said
Mr. Lin, although he declined to comment on any Apple products.
More than half of Pegatron's revenue in its consumer-electronics and communications
businesses this year will be from Apple, said KGI Securities analyst Angela Hsiang. She
expects Pegatron to make the majority of iPad Minis sold this year, as well as the
majority of the coming less-costly iPhone.
Foxconn spokesman Simon Hsing conceded the company is in the midst of a
challenging period.
"We are transforming the business and expanding in areas like e-commerce, " Mr. Hsing
said, without providing more specific details.
Jessica E. Lessin contributed to this article.
Write to Eva Dou at eva.dou@dowjones.com
A version of this article appeared May 30, 2013, on page B5 in the U.S. edition of The
Wall Street Journal, with the headline: Apple Shifts From Foxconn to Pegatron.
Apple Shifts Supply Chain Away From Foxconn to Pegatron - WSJ.com http://online.wsj.com/article/SB1000142412788732385580457851112...
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