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X-ray image of the iPhone X (Courtesy of iFixit) (
The Big Story

How the iPhone reshaped Asian tech

Apple and its suppliers have thrived but growth worries loom

DEBBY WU and CHENG TING-FANG, Nikkei staff writers | China

TAIPEI -- In 2006, Hon Hai Precision Industry was about to take on a major role in an epochal shift in consumer electronics, though few of the Taiwanese company's employees could have imagined what was about to hit them. At the time, the company, better known as Foxconn, made most of its money assembling personal computers for big American companies like Dell. But a contract for a new product -- one that had been an obsession of Apple CEO Steve Jobs for years -- would soon change all that.

Over the next decade, the iPhone would help push Foxconn's revenue from $38 billion to $145 billion and turn it into one of the world's largest employers. Meanwhile, Dell -- once a marquee customer of Foxconn's -- was bought out by founder Michael Dell and taken private in 2013, having fallen victim to the rise of tablets and smartphones.

The introduction of the iPhone X in September capped a remarkable 10-year run of Apple's iconic smartphone. There have been more than 1.2 billion iPhones sold globally since its launch in 2007, transforming the fortunes of Apple and large swaths of Asia's tech industry. Besides Foxconn, it helped turn Asian companies like lens maker Largan Precision into giants, while once-mighty electronics groups like Acer and Nintendo were forced to take massive writedowns. Along the way, Apple and its Asian suppliers came under withering scrutiny over labor practices in the region, forcing companies such as Foxconn to adapt their policies.

Apple co-founder Steve Jobs unveils the first iPhone at the Macworld conference on Jan. 9, 2007, in San Francisco.   © Getty Images

Now the iPhone and its suppliers are facing challenges that would be familiar to the PC companies a decade or so ago. Though the iPhone X is expected to sell some 32 million units over the holidays, according to an estimate by Arthur Liao at Fubon Securities, the once-hip handset is becoming a mature product. Demand is slowing and it is facing stiff competition from lower-priced Chinese smartphones. Apple's suppliers are beginning to talk about when the smartphone itself will join the long list of technology's disrupted.

"Industries will change. We won't stay in the smartphone age forever," Tung Tzu-hsien, chairman of contract manufacturer Pegatron, told reporters in December. "The smartphone has enjoyed a boom for over 10 years. Many people ask me whether it will decline like notebooks."

Tung said he has not seen anything that would threaten smartphone demand, but noted that the so-called internet of things will create "many niche markets" such as sensors for medical care.

According to research company IDC, the smartphone market will see a 3.3% compound annual growth rate from 2016 to 2021, compared to 10.4% in 2015. Annual iPhone shipments grew 2.3% in the past fiscal year ended in September. Last year, Apple sold 215.4 million iPhones, capturing 14.5% of the global market, trailing Samsung Electronics' 309.4 million smartphone sales, according to research company Strategy Analytics.

"The overall smartphone market is quickly maturing. We are looking at some only 3% to 4% of growth each year now -- still growing, but we no longer have dramatic growth like past years," said Sean Kao, an analyst at IDC.

Few remember that when the iPhone first hit the market, Apple had to slash the price tag by $200 to $399 to win over skeptical consumers. But the U.S. tech company's sales eventually grew more than nine times, reaching $229.23 billion in 2017. Its market value, at around $895 billion, has led market watchers to wonder whether it will become the first $1 trillion company.

Major iPhone suppliers saw their revenues boom, too, amid a transformation of Asia's tech supply chain. "Over the years, Apple has been raising the average selling price of iPhones, whose functionality has also been improving as time goes by. If given the same margins, their suppliers' profits naturally would increase," said Vincent Chen, an analyst at Taipei-based Yuanta Investment Consulting.

A Foxconn plant in the southern Chinese city of Shenzhen, Guangdong Province, in 2010: The Taiwanese iPhone assembler's fortunes have skyrocketed along with Apple's over the past decade.   © Getty Images

The iPhone pushed technological innovation among its suppliers and encouraged new companies to expand quickly. Apple benefited from often-fierce competition among its suppliers and partners, who in many cases rely on high volumes to make up for low profit margins. Higher up the value chain, however, profits can be fat -- analysts say winners from the new iPhone X will include South Korea's Samsung, which provides OLED screens, and Taiwan Semiconductor Manufacturing Co., which makes core processor chips. 

Almost 70% of 200 officially identified Apple suppliers are Asian, with Taiwanese companies accounting for about 25% and the number of Chinese companies in the iPhone ecosystem growing fast. To keep up with demand over the last decade, Asian hardware suppliers hired hundreds of thousands of new workers, with Foxconn employing close to 1 million in China alone.

"At the beginning of the iPhone boom, about the time iPhone 4 arrived, we were all kept busy but few complained about work and long hours because we were being paid well," said an executive at a Taiwanese company that makes iPhone parts. He declined to have his company or himself identified, as Apple forbids its suppliers to discuss the company's plans publicly.

But the iPhone's rise also coincided with -- or accelerated -- the decline of other Asian tech companies. Some PC brands, such as Taiwan's Acer, fell amid a brutal price war. And the iPhone's integration of multiple features, including a camera, a music player and gaming, also devastated companies that made feature phones, gaming consoles and stand-alone cameras. Japanese electronics giants including Sony, Nintendo, Toshiba, Canon and Nikon got kneecapped -- though Sony now supplies sensors for the iPhone's camera.

Sometimes even having a supply contract with Apple wasn't enough. Wintek, a former Taiwanese touch module supplier for iPhones, filed for bankruptcy in 2014 after embarking on a costly expansion just before Apple stopped using its technology. Having once generated more than NT$100 billion ($3.3 billion) in annual revenue, Wintek was forced to transfer its technologies to Chinese rival O-film Tech, abandon its facilities, lay off some 40,000 employees and finally delist in 2015. More than 1,700 suppliers to Wintek were also affected.

TPK Holding, another major touch module supplier for Apple, also got wrong-footed when Apple adopted a different iPhone technology in 2012. The Taiwanese company suffered losses in 2015 and 2016, though it is expected to swing back to profits this year. Still, shares of TPK Holding have lost 90% of their value since their peak of NT$956 in May 2011.

"The whole supply chain has been reshuffled and re-created" in the last 10 years, Kao said. "The companies I knew in the 2000s making parts for feature phone brands are totally different from those making parts for smartphones."

Kao said Apple continues to be a trendsetter when it comes to coming up with new smartphone features, such as the iPhone X's Face ID, a facial recognition technology that allows users to unlock phones and make payments. He said Apple suppliers need to be very alert to market trends so they can better assess what Apple's next step will be. If they don't, they may win massive orders one year, then lose them the next year.

"Supplying to Apple means you need to invest a lot in advance for new technologies and new equipment but you do not know whether you could find other customers to use that technology or production capacity once Apple ditches your technology or shifts orders to your rivals," Kao said.

Labor plight

One of the key factors behind the iPhone's success is the relatively cheap Chinese labor that helped deliver cutting-edge gadgets according to Apple's demanding schedule.

A spate of suicides at Foxconn campuses in southern China in 2010 put the manufacturer's -- and Apple's -- labor practices under close scrutiny.   © Getty Images

But 18 attempted suicides, which resulted in 14 deaths, at Foxconn's campuses in southern China in 2010 highlighted the harsh work conditions these frontline workers had to endure, including long hours. Following the tragedies, Apple tightened its code of conduct regarding labor practices at its suppliers' sites and capped overtime, while Foxconn raised wages, installed care centers staffed by medical professionals and counselors and allowed its Chinese employees to choose their own housing rather than stay in company dorms.

Yet the Apple supply chain continues to come under fire for various labor rights issues, including recent reports that student interns worked too much overtime during the iPhone X's peak production season at Foxconn's main iPhone production facility in the central Chinese city of Zhengzhou.

"I believe there have been some improvements in Apple's supply chain in the past decade. However, when compared to the profits which Apple makes, these improvements have been very limited," Li Qiang, founder of New York-based China Labor Watch, said in an email.

Apple rejected Li's assertions, pointing to its 2016 supplier responsibility report which noted that the company performed 705 audits of its suppliers, which "demonstrated an improved ability to meet our stringent standards." It also said it partnered with suppliers to train more than 2.4 million workers on their rights as employees that year.

Apple's dependence on Asian workers for iPhone production also resulted in political heat back at home. During his presidential campaign, Donald Trump repeatedly targeted Apple for using overseas labor and vowed to push it to bring manufacturing jobs back to the U.S. "We're gonna get Apple to start building their damn computers and things in this country, instead of in other countries," Trump said in a speech in January 2016.

On his visit to China earlier in December, Apple CEO Tim Cook said a skilled workforce, rather than cheap labor, is what draws manufacturers to the country.   © Reuters

Apple CEO Tim Cook has said that American workers sometimes lacked the vocational skills the company needs to make iPhones, while praising the quality of work in China. "There's confusion about China. The popular conception is that companies come to China because of low labor costs," he said. "That is not the reason to come to China from a supply point of view, the reason is because of the skill," Cook said this month at a forum held by Fortune in the southern Chinese city of Guangzhou.

With smartphone demand hitting a plateau, Apple is looking to China for growth. But Apple has been facing intensifying competition in the world's second-largest economy due to the rise of China's domestic brands, which offer similar features to the iPhone but with a significantly lower price tag.

According to research company Canalys, iPhone shipments in China dropped for six consecutive quarters before returning to growth in the third quarter. Still, the iPhone has recently trailed behind China's own Huawei, Oppo, Vivo and Xiaomi, Canalys estimates.

To boost its presence in China and ensure smooth relations with the government, Cook has made more than 10 visits to the country as CEO, and the company has announced plans to set up four research and development centers there. Yet he sparked an outcry recently with a decision to accommodate Beijing and remove hundreds of apps, including Skype, The New York Times and VPNs that allowed Chinese users to circumvent domestic internet control, from China's app store.

Cook stoked further controversy at a tech forum in China in December with remarks that free speech advocates charged were a tacit endorsement of Beijing's internet censorship policies. "The theme of this conference -- developing a digital economy for openness and shared benefits -- is a vision we at Apple share," Cook said.

Xiaomi, whose founder Lei Jun is pictured here in February in Beijing, is one of several Chinese smartphone makers that are outselling Apple at home.   © Getty Images

Days later, he defended the remarks by saying he was choosing to engage with China. "My view is that you show up and you participate, because nothing ever changes from the sidelines," he said.

Into the cloud

Ten years is an eternity in the tech business, as the once-mighty PC makers can attest. Now some Apple suppliers are starting to think about the future of the smartphone, with some concluding that while certain of its functionalities will survive, handsets as a product may evolve into different forms.

"The [technological] shift could be more toward user experience, to technical services, rather than physical hardware. Companies like ourselves have to look at what the world is going to be like 10 years from now: What are we supposed to transform ourselves into? Can we continue just to be a manufacturer? Those will be very interesting questions we'll ask ourselves," another industry executive said.

At the same time, Apple is lessening its dependence on hardware as it pushes further into cloud computing services, content and payment businesses. Apple has even shown signs that it wants to compete with Netflix and Amazon in media, having recently bought the rights to a new TV show starring Reese Witherspoon and Jennifer Aniston.

"We probably have reached an inflection point that Apple and its hardware suppliers are going on divergent growth paths," Chen said.

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