While several PC original design manufacturers (ODM) have profited from assembling Apple Inc’s products over the past few years, the “Apple pie” may become more difficult for new suppliers to share, JPMorgan Securities (Asia-Pacific) Ltd said in its latest report.
Apple has sent invitations for a special event scheduled for tomorrow in Cupertino, California. The company is expected to introduce its new generation products running on the company’s latest iOS 7 operating system.
Taiwan’s Compal Communications Inc (華寶通訊) and Wistron Corp (緯創), the world’s second and third-largest contract laptop makers, are widely rumored to be new assemblers of Apple’s new products, taking some share from existing assemblers, such as Hon Hai Precision Industry Co Ltd (鴻海精密) and Quanta Computer Inc (廣達).
JPMorgan said the move was in line with Apple’s strategy to diversify its electronics manufacturing service (EMS) providers in a bid to reduce supply risks for new products. However, the brokerage said Apple’s new supply-chain partners would likely undergo a “tough learning curve” before making profits.
In a report released on Wednesday last week, JPMorgan analyst Alvin Kwock (郭彥麟) said Compal and Wistron would have to confront at least three challenges once they become suppliers for new iPhone, iPad or MacBook products: securing high-margin orders from Apple; making any needed additional investments in labor and equipment; and shortening their learning curves to quickly upgrade their technology.
Kwock said Pegatron Corp (和碩), an assembler of Apple’s iPhone and iPad products, suffered from poor margins earlier this year due to extra labor needed to make the iPhone 5.
“Like what happened to Dell Inc and Hewlett-Packard Co’s [HP] multi-vendor strategy in the late 1990s, over time this [Apple’s multi-assembler strategy] may shrink the profit pie or market capitalization of the ODM and EMS space,” he wrote.
Citing data compiled by JPMorgan, Kwock said Quanta saw declines as large as 12.5 percent in its operating margin after Dell, HP and Acer Inc (宏碁) implemented a multi-assembler strategy from 1998 to 2004, while Compal, Wistron and Inventec Corp (英業達) reported margin declines by 8 percent, 0.6 percent and 5 percent respectively.
During the same period, Quanta saw its return on equity (ROE) shrink by about 10 percent, while Compal’s dropped about 7 percent, Wistron’s ROE fell by about 10 percent and Inventec’s ROE decreased by about 6 percent, the report said.
“As the new Apple assemblers would need to add equipment, it could present opportunities for some equipment names,” Kwock said.
Among all equipment makers, Hiwin Technologies Corp (上銀), the nation’s top machinery component manufacturer, and Delta Electronics Inc (台達電), the nation’s top supplier of power supply units, are likely to be beneficiaries of Apple’s multi-assembler strategy in the long term, he said.
As Apple’s new product suppliers need to expand or upgrade their equipment to complete orders, manufacturers of equipment such as computer numerical control (CNC) machines, as well as mechanical components used in automation lines, may see their shipments grow thanks to Apple’s new product design, he added.
Meanwhile, battery suppliers in the supply chain are expected to see their sales growth accelerate from this month on the back of the launch of new iPhone and iPad models, analysts said.
They said Simplo Technology Co (新普) is likely to post a 20 percent month-on-month increase in its consolidated sales this month after a 4.5 percent rise last month, when its consolidated sales hit NT$4.7 billion (US$157 million), a new high for this year. Simplo could enjoy 40 percent quarter-on-quarter growth in sales for the third quarter, they added.
Dynapack International Technology Corp (順達), another local battery supplier to Apple, is expected to see its sales pick up this month from last month’s NT$2.1 billion, reversing a month-on-month decline in sales, analysts said. It could post a 40 percent increase this quarter.
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