Friday, May 31, 2013

Load-balancing: Apple moves manufacturing from Foxconn to Pegatron

Apple's BFF and manufacturing partner Foxconn is less "best" than it used to be, according to a Wednesday report. The report was first publicized by the Wall Street Journal, and noted that Apple's secondary manufacturing partner Pegatron, is seeing a boost in work from the Cupertino, Calif.-based company.

In fact, the report said, Pegatron will be the primary assembler of the lower-cost iPhone that is expected to be offered later this year. This is a huge step up for Pegatron; it became a minor manufacturer of iPhones in 2011 and began building iPad minis last year.

According to the report, at least one reason for Apple's decision is Apple CEO Tim Cook's desire to balance the company's manufacturing workload to different partners. However, there were additional reasons, cited.

One, sources said, is Apple's displeasure over past incidents such as Foxconn switching component suppliers without informing Apple. In addition, Foxconn has had trouble manufacturing the iPhone 5, with one unidentified Foxconn executive telling the WSJ last year that producing the iPhone 5 was "very complicated," which caused the device's well-known supply issues.

The official added that the iPhone 5 was "the most difficult device that Foxconn has ever assembled."

There were also reports of brand-new iPhone 5s coming out of the box scratched, and reported issues with labor unrest at Foxconn manufacturing plants.

Not to be discounted is the change at the top. Several sources said that former Apple CEO Steve Jobs was quite forgiving of any Foxconn missteps. Cook, however, was formerly Apple's COO, and deeply involved in the supply chain. Cook wants to place a greater premium on risk diversification, but despite that, Cook and Foxconn head Terry Gou continue to have a strong relationship.

Reportedly, Pegatron is hiring in droves. The company plans to increase its Chinese workforce by up to 40 percent during the second half of the year, which tends to validate the WSJ story. It's also true that although Pegatron CFO Charles Lin declined to comment to Reuters earlier this month as to whether the company would produce a lower-cost iPhone, he did say that 60 percent of Pegatron's 2013 revenue is expected to come during the second half of 2013, which jives with release date rumors for the lower-cost iPhone.

Rumors of a lower-cost iPhone have been rampant for years, but Piper Jaffray analyst Gene Munster believes the device will launch in September of this year, at an unsubsidized $300 price. Trial production of the device is expected to begin as soon as June.

The Septmeber timeframe is fluid, of course. KGI Securities analyst Ming-Chi Kuo earlier predicted that the iPhone 5S, lower-cost iPhone, and iPad mini 2 could be delayed due to production issues.

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