Doing Business | IT & Technologies

July 24, 2014

Apple iPhone Rollout Boosts Asia's Component Makers

Preparations for the rollout of Apple's latest iPhones are rippling through Asian economies, boosting revenues at component makers and helping underpin electronics exports from some nations.

The Cupertino, Calif., company is asking suppliers to manufacture up to 80 million units, about a third higher than initial orders last year for the iPhone 5S and 5C, according to people familiar with the matter. Apple is expected to launch two larger iPhone models in the fall and has been sourcing parts from across Asia ahead of the start of production in August, they say.

Apple hasn't publicly named the suppliers and didn't respond to requests for comment. But analysts expect companies from Taiwan, Japan and South Korea that supplied earlier versions of the iPhone to produce key components like displays, camera lenses and microprocessors. Already, some of those companies are announcing increased earnings or forecasts, and economists and analysts are talking about an Apple effect on whole sectors and economies.

Asian suppliers have other smartphone customers, so they are benefiting from general growth in the smartphone market. But for a number of the companies, Apple is the biggest customer.

In Japan, one government official estimated the new iPhone could raise quarterly demand for the country's electronics exports by 5%.

Taiwan's export orders, an early indicator of actual exports, were at their strongest in 17 months in June. Industrial production in June, released Wednesday, was up 8.6% on year, above expectations, led by double-digit gains in semiconductor output, which some analysts put down to increased Taiwanese supply to Apple.

"The jump of the output of semiconductors is 100% related to the iPhone launch," said Masterlink Investment Advisory economist Anita Hsu.

The region's iPhone bonanza shows why Apple is such an important presence in Asia. Few single tech manufacturers control such production volume.

Japan Display and LG Display Co. of South Korea have been the largest suppliers of displays, the most costly part of an iPhone. Catcher Technology Co. of Taiwan has produced the phone's metal casing, another expensive component. Largan Precision Co., also of Taiwan, made camera lenses. South Korea's Samsung Electronics Co. has furnished memory chips and microprocessors, the phone's computing brains.

Hon Hai Precision Industry Co. and Pegatron Corp., both Taiwanese-headquartered companies, previously have assembled iPhones in their Chinese factories. Apple also is leaning on some new suppliers, including Taiwan Semiconductor Manufacturing Co. The company began shipping microprocessors to Apple in the second quarter, say people familiar with the matter. None of the suppliers would comment on their relationship with Apple.

Catcher reported record-high revenue in June, and Largan posted its second-highest monthly revenue on record in the month.Taiwan Semiconductor Manufacturing Co. in July forecast a strong third quarter after reporting record second-quarter earnings due to strong demand for its microprocessors.

"Apple is becoming a more major contributor to Taiwan's economy," said Arthur Liao, a tech analyst with Fubon, a Taiwan-based brokerage.

Previous launches of the iPhone have boosted large swaths of Asia's electronics supply chain. The 5S cost Apple around $200 in materials per phone. The most expensive components are the display and casing, both over $40 each. The phone retails for over $600 without a contract.

Credit Suisse analyst Randy Abrams estimates iPhone production will bring Taiwan's companies $17.9 billion to $26.9 billion in revenue this year. The bank estimates Apple will pay Taiwanese firms around $100 to $150 per iPhone for components and assembly.

To be sure, the Apple effect can't turn around an economy. Taiwan's growth remains sluggish due to its ailing personal computer business. Many analysts point out the impact of a big Apple order often wears out after a quarter. Still, Tim Condon, an economist with ING in Singapore, believes Taiwan's exports, which have remained flat since 2011, are finally getting a boost due to the iPhone.

Japan's exports of electronic components rose 4.4% on year in May, while total exports slumped 2.7%.

Tom Kang, an analyst at Counterpoint Research in Seoul, said Japanese parts providers like Japan Display and Sony would be among the biggest beneficiaries in the Apple supply chain. Sony on Wednesday said it would spend $345 million to expand its production capacity for camera sensors. Sony has increased its share of this part in the iPhone and the firm's latest move is likely to meet increased demand from Apple, Mr. Kang said.

Apple's suppliers will post second-quarter profits by mid-August. Earlier releases of iPhones have had a big impact on suppliers' earnings.

Japan Display saw its quarterly profit almost quadruple from a year earlier to 6.3 billion yen in the April-June quarter last year, just before the iPhone 5S launch. The company is forecasting annual sales to rise a fifth in the current fiscal year through the end of March.

Pegatron, the Taiwanese iPhone assembler, reported monthly revenue of $3.9 billion in September, the month of the iPhone 5C's launch, almost double the same month a year earlier. Liao of Fubon estimates Apple orders make up about a half of the company's revenue.

Other companies, though, are losing their share of Apple's business. Samsung until this year was the sole supplier of microprocessors for the iPhone. But Apple has moved to diversify its supply base, in part due to a legal dispute with Samsung, which is the world's largest smartphone producer.

 

Text by Wall Street Journal
 

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