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Apple supplier Pegatron mulls India facility amid trade tensions

Taiwan company considers expansion outside China, warns of market uncertainty

Workers outside Pegatron's Changshuo factory, for the assembly of Apple's iPhone and other products, in Huojian village, Shanghai, in September 2017.    © AP

TAIPEI -- Key iPhone assembler Pegatron on Thursday said the ongoing trade spats between Washington and Beijing could affect market demand for consumer electronics devices if negotiations aimed at resolving the tensions do not go well.

"The tariff imposition under Section 301 [of the U.S. Trade Act] is the biggest uncertainty for the remainder of this year," Pegatron Chief Executive Officer S.J. Liao said in a teleconference. "We are closely monitoring the development of the situation."

Liao said the company is planning to increase production outside China for some of its products, in a bid to reduce the impact from the trade war as much as possible. "We have drafted plans for our existing facilities in Taiwan, Mexico and the Czech Republic. We also have a detailed plan for a new facility in India."

Pegatron Chief Financial Officer Charles Lin said it will take time and effort to build supply chains and infrastructure in a new location, but it is a necessary measure for the company to take for the long term. "We don't know how long this trade friction would last, and we don't know if there will be another round of tariff imposition after September."

Pegatron is the second Apple supplier this week to say it is considering overseas expansion outside China. MacBook and Apple Watch supplier Quanta Computer on Wednesday said it was mulling whether to increase output in the U.S. and Europe to counter the effects of the trade war. Delta Electronics, which supplies power components to MacBooks and iPhones, on July 31 announced the acquisition of a stake in associate company Delta Electronics (Thailand) to access its manufacturing facilities in Thailand, India and Slovakia in response to Washington's tariffs on Chinese imports.

Taiwanese electronics manufacturers' recent moves indicate the mounting pressure they face from the rising tensions between the world's two largest economies, following Washington's imposition of 25% tariffs on $34 billion of Chinese goods that took effect in early July, and on a further $16 billion of goods that will begin on Aug. 23. The U.S. is proposing another round of tariffs of up to 25% on $200 billion of Chinese goods. The newest tariffs include a wider range of products, such as smart speakers, wearable gadgets, desktop computers and cloud-computing equipment.

Pegatron is the second-largest iPhone assembler after Foxconnn Technology Group, formally known as Hon Hai Precision Industry. Pegatron's communication products, mainly iPhones, account for about 70% of the company's total sales. It also makes cloud-computing equipment, desktop computers, notebooks and wearable gadgets.

In addition to the uncertainty brought about by the trade issue, Lin said the initial costs for mass production of new communication products, plus labor recruitment costs in China and component supplies will also weigh on Pegatron's operations in the second half of this year. It is understood that Lin was referring to new iPhones.

"The length of peak season this year will also determine the performance of Pegatron's production utilization," Lin said. The company last year was hit by a shorter-than-expected peak manufacturing season for the iPhone 8 range, as it encountered disrupted component supplies at the beginning of mass production.

Pegatron's revenues climbed just over 15% to 552.15 billion New Taiwan dollars ($18.02 billion) in the first half of this year from the same period last year, but its net income plunged 31% to NT$5.01 billion. Pegatron attributed the profitability decline to low production utilization rates in the slow season, and the losses from its component subsidiary as it faces increased costs for new product preparation.


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