March 14, 2017 11:50 pm JST

Apple contractor Pegatron shifts from Chinese labor to automation

Taiwanese manufacturer keen on India but keeps mum on US

DEBBY WU, Nikkei staff writer

TAIPEI -- iPhone assembler Pegatron, a smaller rival to Hon Hai Precision Industry, will more than double its capital spending on making products for other companies this year to boost automated production and save on labor costs in China.

"We will increase our capex for contract manufacturing from $200 million to the range of $400 million to $450 million this year," Pegatron Chief Financial Officer Charles Lin said during an earnings conference on Tuesday.

Lin said a small portion of that fund will be allocated to the expansion of existing facilities while most will be used to purchase equipment.

Pegatron assembles iPhones in Shanghai, and Kunshan and Suzhou in the southern Chinese province of Jiangsu. The company is planning to grow its Kunshan and Suzhou campuses this year. Apple accounts for more than half of the Taiwanese company's revenue.

Pegatron Chief Executive S.J. Liao added that the Taiwanese manufacturer is buying new equipment and replacing some old machines to improve automated production in China.

"China is no longer a land of cheap labor," Liao said. "It is important for us to save on labor costs and replace workers with highly automated production to enhance our quality."

But company officials did not provide details on how much Pegatron will be able to save with their new automation efforts, though they said that the company would see growth in all major product lines, including notebooks and smartphones, this year.

According to data compiled by New York-based labor rights group China Labor Watch, minimum wage in the first-tier regions in Jiangsu Province, where Pegatron has two major facilities, rose from 1,320 yuan per month ($191 in current exchange rate) in 2012 to 1,770 yuan in 2016, rising 34%.

Arthur Liao, an analyst with Taipei-based Fubon Securities, said the surge in Pegatron's spending is a necessary cost.

"The upcoming iPhone is more difficult to assemble, and also there is higher demand for automation, and these factors would push up capex," he said.

Yet Pegatron underwent a declining year in 2016, partly due to weak demand for the 4.7-inch iPhone 7, its main assembly product.

In the fourth quarter of last year, its revenue dropped 12.5% year-over-year to 360.48 billion New Taiwan dollars ($11.84 billion), and its net profit fell 13.9% from the year-ago period to NT$5.86 billion.

For all of 2016, its revenue dipped 4.6% from the year before to NT$1.15 trillion. Net profit fell 18.8% year-over-year to NT$19.34 billion. Earnings per share dropped from NT$9.23 to NT$7.5.

Pegatron closed up 0.73% to NT$82.8 in Taipei on Tuesday ahead of the earnings report.

India craze

Since Donald Trump's election as U.S. president last November, Pegatron has avoided making any commitment to moving any manufacturing to America, a contrast to the more aggressive approach adopted by Hon Hai, or Foxconn Technology Group.

Pegatron's Liao again showed caution when talking about U.S. production on Tuesday, saying it may happen if customers make such a demand and if American policies can satisfy the company's economic requirements. One of Trump's key economic policies is to bring manufacturing back to America.

Liao expressed much more enthusiasm about exploring opportunities in India. "We will not miss out," the executive told the Nikkei Asian Review after the earnings conference, referring to the purchasing power of India's 1.25 billion population.

Local and international media has reported extensively this year that Apple will begin making the entry-level iPhone SE that costs $500 each in India.

In early February, Priyank Kharge, IT minister for the Indian state of Karnataka, also tweeted:

"Apple's intentions to make iPhones in Bengaluru will foster [a] cutting-edge technology ecosystem & supply chain development in the state."

Industry sources said that Wistron, a smaller Taiwanese rival to Foxconn and Pegatron, is the contract maker that has set up shop in Bengaluru for Apple.

Foxconn has also begun again to scout for suitable sites in India for new facilities, according to people familiar with the matter, though the efforts have not led to concrete plans so far due to the challenges of navigating the Indian bureaucracy.

Another source told NAR that Pegatron has also been discussing the feasibility of manufacturing in India, although there is no firm investment plan yet.

When approached by NAR, Apple referred to a statement it issued in January.

"We've been working hard to develop our operations in India and are proud to deliver the best products and services in the world to our customers here. We appreciate the constructive and open dialogue we've had with government about further expanding our local operations," the statement read.

Nikkei staff writers Kiran Sharma in New Delhi and Rosemary Marandi in Mumbai contributed to this report.

Asia300

Pegatron Corp.

Taiwan

Market(Ticker): TAI(4938)
Sector:
Industry:
Electronic Technology
Computer Processing Hardware
Market cap(USD): 7,871.64M
Shares: 2,612.54M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 65,693.25M
Shares: 17,328.73M

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