Apple Giving Pegatron Orders to Reduce Supply Risk

Apple Inc. is giving orders for its new lower-priced iPhone to Pegatron Corp. as part of a strategy to reduce risk and diversify its supply chain, said Vincent Chen, an analyst at Yuanta Financial Holdings Co.

Its new handset will have a plastic casing and lower-cost components and may be released next quarter, said Fubon Financial Holding Co. analyst Arthur Liao. Taipei-based Pegatron assembles some iPhone 4 and 4S models while Hon Hai Precision Industry Co. makes the iPhone 5.

Apple’s newest smartphone, with a retail price of about $300 to $350, is part of its strategy to regain share from Samsung Electronics Co., said Liao. By contracting Pegatron, the Cupertino, California-based company is trying to diversify its supply chain after production problems limited availability of the iPhone 5.

“Apple is a very risk-averse company, so they don’t want to be putting all their orders with one supplier,” said Yuanta’s Chen, who recommends buying shares of both Pegatron and Hon Hai. Apple may introduce other assemblers beyond Hon Hai and Pegatron into its supply chain for upcoming products, he said.

Apple’s move to Pegatron is more about its need to diversify than dissatisfaction with Hon Hai as a supplier, both analysts said.

Steve Dowling, a spokesman for Cupertino, California-based Apple declined to comment on supplier relationships. Simon Hsing, a spokesman for Taipei-based Hon Hai, didn’t answer two calls to his mobile phone yesterday.

China, Brazil

Hon Hai and Pegatron make iPhones and iPads at facilities in China and Brazil, Apple said in its supplier report released in January. Taoyuan, Taiwan-based Quanta Computer Inc. makes iMacs and iPods in China and the U.S., according to the report.

“Pegatron hasn’t really passed the test of doubling output of iPhone and doesn’t yet know the pain of relocating its capacity,” Chen said. The company may also lose money in the first six months of the new order as it bears the cost of expansion and development before volumes pick up, he said.

“Every new project or product has a learning curve,” Pegatron Chief Financial Officer Charles Lin told Bloomberg News. He declined to comment on customers, products, or profitability.

The new iPhone will have less memory, Apple’s older A5X processor and a lower resolution front-side camera with total cost of parts being about $30 less than the iPhone 5, said Fubon’s Liao, who rates Hon Hai reduce and Pegatron add.

iPhone Demand

Suppliers of the plastic casing include Hon Hai and Jabil Circuit Inc., Liao said. The iPhone 5 uses Apple’s A6 processor while A5X is used in its third-generation iPad released in March last year.

Pegatron may struggle to boost capacity to make the new iPhone and has the ability to produce around 3 million per month, said Liao. Still, getting the order helps elevate the company’s position in the Apple supply chain after securing the contract to manufacture the iPad Mini, he said. Apple sold 23 million iPhones last quarter, according to company data.

Apple’s share of the global smartphone market fell to 17.3 percent last quarter, from 21 percent three months earlier and 23 percent a year prior, according to IDC Corp. data compiled by Bloomberg Industries. Samsung’s share climbed to 31.7 percent, keeping it in top spot.

While Apple’s market share has slipped, it still maintains its top spot in smartphone sales revenue-per-device, with its average selling price of $689 putting it more than $280 ahead of Samsung, which ranks fourth by ASP, according to IDC data.

Scratching on the case of the iPhone 5, released in September, forced Apple and Hon Hai to tighten quality-control standards, crimping output, Bloomberg News reported in October.

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