Foxconn and Pegatron: changing fortunes – but for how long?

Just a few weeks ago, Foxconn was apologising profusely for poor performance as rival contract manufacturer Pegatron was riding high on reports that it had won out over Foxconn, Apple’s main manufacturer, for a contract to make Apple’s upcoming cheaper version of its iPhone.

Things have changed. Now it’s Pegatron’s shares that are falling, battered by local reports that it is will not get as many orders as initially forecast, with Foxconn getting them instead.

Pegatron’s shares have fallen nearly 14 per cent during the last month, while Foxconn’s are up 8 per cent.

That’s a reversal from the past few months. Foxconn’s shares had been slumping on concerns Apple was diversifying orders away from it. Pegatron’s had been rising on the promise that it was the beneficiary of that diversification.

Optimism about Pegatron began when Apple began looking to reduce its dependence on Foxconn, for a while its sole assembler for its iPhone and iPad.

Pegatron —formerly the manufacturing arm of PC company Asus (their names together make “Pegasus”, the mythological flying horse) — late last year began assembling Apple’s iPad mini, which had sent its revenues soaring. It also was reported to have begun production of the cheaper iPhone Apple is expected to launch late this year. In May, it said it would expand its workforce by up to 40 per cent as customer orders rose.

Its shares’ wings have since started melting on heat from reports in Taiwanese media and from analysts suggest the new orders are not as vast as initially thought. Beginning in the fourth quarter, Foxconn could start making the cheaper iPhone as well, and the bigger company, known alternatively as Hon Hai Precision Industries, is also said to be Apple’s choice to make the next generation of its iPad mini.

None of the companies involved comment on specific clients.

But although Pegatron’s shares have started falling, analysts say the rumoured reduced shipments from Pegatron might not actually be an entirely bad thing for the company in the long run.

Part of the reason Pegatron does not have a greater share of making the low-cost iPhone is that it seems to have pushed back against some of Apple’s demands for capacity expansion, say analysts. Pegatron is a tenth of the size of Foxconn, even after its round of hiring this year.

Reports that Apple has been looking to certify alternate suppliers on its new products “was a sign that they’re [Apple] also worried that Pegatron might not be running up to speed to meet their huge demand,” said one analyst.

Stepping up to meet Apple’s demand for capacity, analysts point out, is not always a good idea. The investment required is expensive, and the return not always guaranteed. Overcapacity in the contract assembly industry, the analyst pointed out, is in Apple’s interest, not the assemblers’.

“It happened for too many Apple suppliers. Once you give in to Apple’s demand for capex, Apple will screw you later” by switching suppliers and reducing orders, said Vincent Chen of Yuanta Securities in Taipei. Companies making casings and circuit boards have seen that happen in recent years, he said.

For Foxconn, reports of new orders have clearly helped boost its shares, even as they underscore its own continued dependence on the mood of Apple, which already accounts for an estimated 40 per cent of its earnings.

Related reading:
Taiwan tech: time to make the switch, beyondbrics
Hon Hai (Foxconn): outfoxed, Lex
Apple suppliers: already moving on, beyondbrics