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Asia300

Apple supplier TPK squeezed by China price war on touch devices

Taiwanese company warns on margins as quarterly profit streak ends

TPK supplies 3-D touch modules for the Apple Watch and iPhones.   © Reuters

TAIPEI -- Taiwan's TPK Holding, which supplies a key component for Apple devices' touch screens, said on Thursday its profit margins are thinning as Chinese and Taiwanese rivals undercut it on prices.

"We expect revenue to pick up this quarter on the traditional peak season effect, but profitability will be pressured because of the fierce pricing competition from compatriots," Freddie Liu, the company's chief strategy officer, said in an earnings conference call.

Liu's comments came after TPK reported a net loss of 227 million New Taiwan dollars ($7.4 million) for the quarter ended on June 30, ending a streak of seven straight profitable quarters. Its gross margin dropped 4.9 percentage points to 1% from the previous, and its operating margin swung to minus 5% from the 1%.

Liu attributed the poor performance to a major client's inventory correction, which led to lower factory utilization at TPK, as well as the customer's decision to phase out some handset models.

TPK supplies 3-D touch modules for the iPhone's and Apple Watch's Force Touch function, which can distinguish between different levels of touch pressure. General Interface Solution, an affiliate of Hon Hai Precision Industry, and China's O-film Tech are rivals for Apple orders.

Touch module technology used in Apple devices has been around for more than a decade since the launch of the first-generation iPhone and has seen few major breakthroughs. TPK's advantage lies in its better production efficiency and quality compared with competitors, Liu said.

But TPK's rivals are able to offer lower prices to attract customers. "They either have government subsidies or the group resources to support the pricing," he added.

Upcoming new products may have higher average selling prices than the existing products, but margins will be thinner owing to rising competition, according to Liu.

Liu said TPK hopes to negotiate better prices with clients ahead of mass production schedule for new products, although room for negotiation will be limited. Liu did not name the client and the products, but it is generally understood that he referred to Apple and iPhones.

TPK will continue to improve its production quality and efficiency through such steps as increasing automation to lower its operating costs and offset the pressure on margins, the executive said.

The competition landscape is not the only concern that TPK is facing. There has been a market speculation that Apple may remove Force Touch from new iPhones coming out next year because of a less-than-enthusiastic consumer response to the feature. Among this year's three new iPhones, the lower-priced 5.5-inch liquid crystal display model will not be equipped with the 3-D touch module for Force Touch, analysts said.

"The removal of Force Touch for the new LCD model this year is the beginning. It will have a big impact on TPK if Apple decides to remove the function from all of the new iPhones next year," Yuanta Investment Consulting analyst George Chang said by phone.

In response to analysts' concern, Liu said the pressure-sensitive touch technology is a useful function for consumers, but perhaps it has not been well publicized. For this year, this function is still a standard feature for the new high-end models, he added.

The shipment of smartphones dropped as much as 58% from the January-to-March quarter with sales falling 43% on the quarter. "The production utilization rate was way much lower than TPK's break-even level." he said.

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