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Inventec to expand AirPods production with an eye on rival Luxshare

Taiwanese supplier said competition squeezed margins in March quarter

Inventec is a Taiwanese contract assembler that supplies AirPods to Apple.

TAIPEI -- Key AirPods assembler Inventec said on Tuesday it will expand production capacity and focus on cost efficiency to secure orders from its top client and face down competition from Chinese peers.

"The industry competition is more severe in the first quarter of this year compared with the same period of time last year," Inventec Chief Financial Officer Yu Chin-pao said in an earnings call. "We've felt stronger pressure coming from the new joiner for the smart devices business."

Yu did not specify the competitor, but it is thought he was referring to China's Luxshare-ICT, which entered the AirPods supply chain in the October-to-December quarter, ending Inventec's dominance as the sole assembler of Apple's wireless earpieces.

Yu said Inventec's gross margin, which lost 0.47 percentage point to 5.1% in the quarter ended March from a year ago, partly reflected price competition in the industry.

The Taiwanese supplier shipped more than 20 million AirPods last year. Total AirPods shipments this year is estimated to be between 26 million and 28 million units, analysts forecast.

Inventec's smart devices unit, Inventec Appliance, plans to set up "one or two more" new manufacturing facilities in an inner Chinese city later this year to increase production capacity while lowering land and labor costs, CEO David Ho said.

In addition to AirPods, Inventec Appliance makes Apple's HomePod, Fitbit's smart wristbands and Xiaomi's handsets. Inventec's plant in Shanghai mainly produces Apple products, while the manufacturing of Xiaomi's handsets is based in Inventec's facility in Nanjing.

"Our yield rate and production efficiency is still the best in the industry. But our wage rate is higher [than rivals'] given that our factory is located in Shanghai," Ho said.

The Shanghai plant will still be the home for research and development, and make small quantities of new smart devices, while older models that need to be produced on a bigger scale will be allocated to the new facilities, Ho said. He added that the plan has gained support from its biggest client, Apple, and is pending Inventec board's approval.

Inventec said it plans to spend 6 billion New Taiwan dollar ($201.07 million) this year, some of which will be for rental of new manufacturing facilities and some on equipment purchases.

The number of Apple's Chinese suppliers has risen to a record of 27, up from only 19 in 2017, the Nikkei Asian Review reported. Among the Chinese suppliers, Luxshare is the most aggressive. It started supplying components, such as connectors, to Apple in 2013, and began assembling AirPods last year. 

Luxshare acquired a 51% stake in a plant owned by acoustic component supplier Merry Electronics in Suzhou in 2016. This was followed by a purchase of the camera module business of component supplier Lite-On Technology in February, a transaction that is expected to complete next month. Luxshare's moves to expand its market share in the downstream supply chain is proving a challenge to existing Apple suppliers, such as Hon Hai Precision IndustryPegatron and Inventec.

"Luxshare is indeed rising rapidly via M&As in the past few years ... As a supplier, we are closely monitoring its component integration efforts and its moves in the industry," said an executive of an Apple supplier who did not want to be named.

Inventec's net profit ballooned 87.19% to NT$1.27 billion year-on-year in the quarter ended March, benefiting from a lower comparison base as it suffered a NT$1.2 billion foreign exchange loss last year. Its smart devices and PC businesses also supported the growth in earnings, it said.

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