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Pegatron looks to cure its Apple smartphone dependency

Taiwan contract maker explores AR and robots as US-China trade war takes toll

Pegatron Chairman Tung Tzu-hsien models new AR glasses to journalists in May as he looks forward to a future less dependent on the whims of the smartphone market.

TAIPEI -- Hit by slumping iPhone sales and a festering trade war, Pegatron, the world's second-biggest contract electronics manufacturer, is looking to diversify away from its core business of making Apple's gadgets.

In a show of its own ability to innovate, the Taiwanese company in May unveiled a range of products, including augmented reality glasses, a robot, a tough PC able to withstand falls from about 180 cm, and a dual-screen notebook PC with detachable keyboard.

Chairman Tung Tzu-hsien modeled the AR glasses, called AiR, for journalists, saying they were the world's lightest at only 136 grams. AR glasses display a layer of digital information over the normal view. The company says they have numerous uses, such as for medical operations and factory work.

Many Taiwanese contract manufacturers started as original equipment manufacturers or original design manufacturers before evolving into their current form. OEMs simply produce equipment to spec for well-known manufacturers while ODMs can also design equipment.

Today, Taiwan's contract manufacturers can handle all aspects of the production process, from conceptualization and design to parts procurement and manufacturing. "They can make completely new products, to which customers need only slap on a logo and call it their own," said an executive at a major Taiwanese contract manufacturer.

Pegatron was established in 2007 after Asustek Computer, commonly known as Asus, spun off its manufacturing division. Although the last major entrant to the island's contract manufacturing sector, the new company rose rapidly thanks to its excellent design capabilities and superior tech know-how.

Apple asked Pegatron for help in manufacturing smartphones to lessen reliance on Foxconn, Pegatron's Taiwanese peer that trades as Hon Hai Precision Industry. As a result, Pegatron has become Apple's second-largest contract maker.

When the iPhone 6s hit the market in 2015, Pegatron's sales surged 19% from a year earlier to 1.2 trillion New Taiwan dollars ($39 billion), while net profit soared 60% year on year to a high of NT$23.8 billion.

Since then, however, the company's performance has been less spectacular, reflecting slower iPhone sales and rising labor costs in China, the company's main production base. The U.S.-China trade war is further complicating Pegatron's operations on the mainland, from which it is trying to shift production.

Pegatron shows off its dual-screen notebook PC.

Taiwan's contract manufacturers have largely relied on PC production in China as their mainstay. But they are now exploring other opportunities on their home turf, with Quanta Computer and Compal Electronics making servers and wearable devices, respectively.

Meanwhile, like Foxconn, Pegatron is still tied at the hip to the iPhone, with net profit plunging 24% from a year earlier.

And although Pegatron is developing new products, this might not be enough. According to an official at another Taiwanese contract manufacturer, "Products that benefit the whole industry like PCs and smartphones will probably not appear in the near future."

Hence, Pegatron has to rely on some of its subsidiaries like Casetek Holdings, which makes smartphone cases and electronic devices, to pick up the slack. It is also likely to complement new product development with a strengthening of its electronic parts business, which is more profitable than contract manufacturing.

The U.S.-China trade war is also weighing on the company, which has most of its production facilities on the mainland. As U.S. import tariffs begin to bite, Pegatron -- like many other China-based companies -- is trying to move production to Southeast Asia and Taiwan. Speaking at the May product roll out, Chairman Tung mentioned that the company was facing unexpected changes.

Since trade tensions began escalating last year, Pegatron has been preparing to produce telecoms equipment such as routers in India and Indonesia. Most recently, it emerged that it is planning to invest NT$14.9 billion in new manufacturing facilities outside of China, including construction of a production line in northern Taiwan.

Referring to the shift, Tung said in an interview with the Nikkei in 2018 that aside from cheap labor and land, a local market with strong growth potential is also important when considering a move.

As such, Pegatron is thinking about countries like India, Indonesia and Vietnam -- all of which fit the criteria. But products being considered are still limited to telecom gear. Consumer goods such as smartphones require more complicated supply chains, making it difficult to shift production out of China.

Due to its sheer size, if Pegatron actually makes the move, parts suppliers around the world will undoubtedly feel the shift.

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