Chinese companies move into supply chain for Apple components; Threat to Taiwanese, Japanese and South Korean suppliers

September 29, 2013 12:40 pm

Chinese companies move into supply chain for Apple components

By Sarah Mishkin in Hong Kong

Chinese companies are increasingly designing sophisticated components for Apple’s iPhones and iPads instead of just supplying low-cost labour for assembling the high-tech devices. The shift is an indication of how Chinese companies’ rising technological capabilities are threatening the Taiwanese, Japanese and South Korean companies that now dominate the global electronics supply chain.The number of Chinese companies supplying Apple with components such as batteries has more than doubled from eight in 2011 to 16 this year, according to Apple’s published lists of suppliers and research from the brokerage CLSA.

“There are very, very serious companies emerging in China” that are beginning to see the pay-off of many years of rapid growth in their spending on research, said Nicolas Baratte, regional head of technology research for CLSA.

The addition of more Chinese groups to its supply chain also comes as Apple has been trying to diversify the suppliers it works with, in order to lower costs and prevent over-dependency on any one company, according to analysts. Most notably, rather than turning just to Taiwan’s Foxconn – its largest manufacturing partner – to assemble the new iPhone 5c, it gave a large portion of the order to rival Taiwanese assembler Pegatron. While many technology suppliers have always had factories in mainland China, the companies themselves that developed the technology were often from overseas. The work they did in China was largely labour-intensive manufacturing.

One Chinese company moving up the value chain is GoerTek, an acoustic component company based in the eastern Shandong province.

The group, which is listed on Apple’s suppliers list for 2013 but not 2011, had already been supplying to Samsung when it was tapped to make speakers for the iPad and new iPhone, as well as the new iPhone’s earphones.

GoerTek’s manufacturing capabilities – including designing its own machines for automating its assembly line – gives it faster turnround time on production than competitors such as Knowles, a US group, according to Morgan Stanley analyst Jasmine Lu.

Other such companies believed to have joined Apple’s supply chain are Desay Battery and Sunwoda Electronics, both battery companies based in Shenzhen.

Apple does not name either group on its list of suppliers published this year, but market watchers say they are supplying battery systems to the iPhone 5.

That addition is cutting into the market share and pricing power of Taiwanese groups Simplo and Dynapack, said Dennis Chan, an analyst with Yuanta Securities in Taipei. In part, he said, that new competition is because some once cutting-edge electronic components are now becoming less technically challenging to make.

In particular, the move from laptops to smartphones means “battery structures are simplified, so that lowers the entry barriers drastically, allowing the Chinese players to get in”, said Mr Chan.