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Taiwan's Pegatron expands smartphone capacity for 2H

iPhone assembler's casing subsidiary vies to win business from Apple

Pegatron Chairman Tung Tzu-hsien, middle, said his company will increase the use of automation to cut costs. He was speaking with Vice Chairman Jason Cheng, left, and Chief Executive S.J. Liao. (Photo by Cheng Ting-Fang)

TAIPEI -- Key iPhone assembler Pegatron on Tuesday said it was gearing up for higher smartphone production in the second half of 2017, as it sees stronger demand than last year.

"We are preparing and planning for more capacity this year than the past year," Pegatron Vice Chairman Jason Cheng told reporters after the company's annual general meeting, without mentioning Apple or iPhone outright.

According to analyst Arthur Liao at Fubon Securities, Pegatron will be responsible for assembling the new 4.7-inch flat-screen iPhones.

Pegatron Chief Executive S.J. Liao said his company would hire more factory employees this year to meet the expected high orders. The Taiwanese company plans to add 40,000-50,000 workers in the second half of the year.

Pegatron expects sales to bounce back after suffering a 4.6% year-on-year decline in revenue at 1.15 trillion New Taiwan dollars ($38.1 billion) in 2016. Apple is Pegatron's No.1 customer and accounts for more than 60% of the company's total revenue.

Most Apple suppliers and investors are optimistic about iPhone's 10th anniversary range that is expected to launch in September.

Pegatron shares jumped 3.68% to a record high of NT$98.5 on Tuesday. The stock has gained nearly 28% so far this year. Likewise, shares in Pegatron's bigger rival Hon Hai Precision Industry surged 4.57% to close at NT$114.5, a five-year high.

It is widely expected that Apple will launch three models of the new iPhone. The premium model will bear curved organic light-emitting diode screens, and a 5.5-inch and 4.7-inch model with the flat displays used in iPhone 7.

Yuanta Investment Consulting said that some 91 million units of the new iPhones would be shipped in the second half of 2017, compared with 80 million iPhone 7 and 7 Plus models last year. Yuanta said that it expected demand for the premium OLED model to be robust and forecast that some 47 million units would be sold.

But Fubon's Liao is less upbeat. He said that the production of fingerprint sensors and 3-D sensors for the latest model was facing some delay and quality issues. As such, he expects only 40 million for the high-end OLED iPhones to be shipped in the second half, and 52 million of the other models in the range this year.

Foxconn will absorb nearly 67% of the new iPhone orders, while Pegatron and Wistron will account for around 28% and 6%, according to Liao.

Meanwhile, Pegatron's subsidiary CaseTek Holding, a metal casing supplier for iPads, Macbooks and some Chinese smartphone makers, is eager to win iPhone business as well.

"We are doing our best to boost our technology, capacity and experience in making more high-quality casings .... To provide casing components [for iPhone] is the direction that we aim to do and we want to make that happen as soon as possible," said Pegatron's Cheng. "The move and the integration would really help our margin."

Metal casing and frames enjoy a better profit margin than the assembly business. Pegatron now uses casings and frames from Catcher Technology to assemble Apple handsets. Hon Hai, better known as Foxconn Technology Group, relies on its own subsidiary for metal casings and frames.

Pegatron's gross margin in 2016 was 5.4% while Hon Hai was more than 7%.

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