TAIPEI -- Key iPhone assembler Pegatron plans to set up its first manufacturing facility in India this year to address the local telecommunications market, as part of its effort to extend the company's production base beyond China, company Chairman Tung Tzu-hsien said.
"We will kick off a small-scale pilot project in India [this year]," Tung said in a recent interview with the Nikkei Asian Review. The plant "will not necessarily be for smartphones," he said. "We plan to start from producing telecom equipment to address the domestic market demand there."
Tung said Pegatron has spent more than one year evaluating its investment in India, and the preliminary review on the conditions of land and labor in some states in the country are satisfactory. But the company has not yet finalized the location for its first plant in the country, nor has it decided on the amount of its investment.
"We don't only consider the condition of land and labor costs there," Tung said. "What Pegatron is eyeing is the domestic demand brought on by the growing Indian economy."
The move will make Pegatron the third iPhone assembler to build a manufacturing facility in the South Asian country, following its bigger rival Hon Hai Precision Industry, better known as Foxconn Technology Group, and its smaller competitor Wistron.
Apple is Pegatron's top customer and accounts for roughly 60% of the company's revenue. Pegatron also manufactures Microsoft's Surface notebooks, tablets and computers, and the Xbox, as well as many other telecom-related devices, such as routers, modems and setup boxes. Tung did not specify whether his company aims to later manufacture iPhones in India.
While Pegatron's revenue rose more than 3% to 1.19 trillion New Taiwan dollars ($40.1 billion) in 2017 compared with a year earlier, it suffered a 24% decline in net profit to NT$14.68 billion due to a supply shortage of key components and rising labor costs. Meanwhile, the company is facing a slowdown in the mobile market.
"We did enjoy rapid growth for the past seven to eight years in the smartphone segment," Tung said, adding that "the era of such speedy growth in mobile has passed."
But Tung said there are various new growth drivers, including connected devices, voice-activated smart speakers, automation and electric cars. "Artificial intelligence is still in a nascent stage of development, while the market for the 'internet of things' is still young," he said. "We have many engineers working on these booming areas to catch growing opportunities for later."
Pegatron's decision to diversify its manufacturing base also addresses the woes that almost all manufacturers in China could face: increasing land and labor costs and the tightening environmental controls.
Pegatron's manufacturing bases are still mainly in China -- in the eastern cities of Suzhou and Kunshan -- and the company is more careful compared with its peers in evaluating new production locations.
Foxconn was among the first Apple suppliers to respond to Indian Prime Minister Narendra Modi's "Make in India" initiative, launched in September 2014, which aims to transform the country into a manufacturing powerhouse. Foxconn entered the Indian market in 2015 and has plants in Chennai and Andhra Pradesh state's Sri City. Foxconn produces gadgets in India for Xiaomi, Asus and Nokia.
Wistron in 2016 renovated its after-sales center in Bangalore into a manufacturing factory for Apple's lower-end iPhone SE model for the Indian market. It currently is Apple's sole iPhone partner in India.
Meanwhile, Pegatron has ambitions to close the gap with Foxconn and has been investing in various key components, including metal materials, optical parts and print circuit boards over the past few years. Those efforts seek to put Pegatron in a better position to secure more orders from Apple and to boost its profits. Analysts expect that its metal casing materials business is one of the company's most notable investments and is likely to bear fruit soon.
Tung confirmed in the interview that Pegatron's metal casing arm Casetek Holdings has been expanding its production capacity for more than a year. Casetek has said it will lay out a record NT$18 billion in capital expenditures this year to build a new plant and purchase new equipment in the eastern Chinese city of Jiashan to meet new orders.
"We've been investing in a new plant to strengthen our capability in handling metals. We think this investment will benefit our [design and manufacturing service] business and provide the best synergy at this stage," Tung said.
Among all the key electronic components, Tung said he thinks metals is the most crucial and can bring the company's role in the supply chain into full play -- the reason why Pegatron founded Casetek in 2010.
Casetek only manufactures metal casings, mainly for Apple's iPads and MacBooks -- the two product lines that Pegatron does not assemble. Casetek has eyed making materials for iPhones that could provide better returns and generate synergies for the group.
Pegatron mainly takes iPhone metal casings or frames from Casetek's bigger rival, Catcher Technology of Taiwan, for final assembly, while Foxconn already has an in-house casing unit that allows the company to have better integration capabilities within the supply chain.
Industry watchers say that Pegatron and Casetek are together likely to supply to iPhones for the first time in fall of this year.
As a major assembler for the iPhone 7 and iPhone 8 models, Pegatron is expected to be the main supplier for the upcoming 6.1-inch iPhone with liquid crystal display, or LCD, screens and begin to get some orders to assemble an additional new model that would come with 6.5-inch organic light-emitting diode, or OLED, screens, according to Jeff Pu, an analyst at Yuanta Investment Consulting. Apple first introduced OLED screens last year in its upmarket iPhone X model, of which Foxconn is the sole assembler.
Nikkei reported in December that there will be three new iPhone models in 2018. Two will have OLED screens, and one will have the less-expensive LCD screens.
Pegatron is expected to begin shipping Apple's wireless charging board AirPower by the third quarter, according to Credit Suisse analyst Thompson Wu, adding that it could become one of the new catalysts for the company. Pegatron assembled roughly 24% of the total 215 million iPhones shipped in 2017, while Foxconn assembled around 69%, Credit Suisse has estimated.
"We do expect Pegatron could secure more iPhone orders this year compared with last year," said Pu of Yuanta. "However, as it would be the first year for Pegatron's Casetek to make iPhone components, it still needs some time to fully manage the quality issues that could in the near term have a negative impact on its profitability."
For the longer term, Pegatron's move to make more key components provides positive factors for the whole company to gain a better position in the supply chain, Pu said.