TAIPEI — Large-scale iPhone assembler Pegatron said on Thursday that it would speed up efforts to relocate production to Southeast Asia from China, where trade tensions add a further reason to reconsider new capacity investments.
“We are going to do it with or without tariffs imposed under Section 301 [of the U.S. Trade Act],” Pegatron Chief Financial Officer Charles Lin said in a teleconference, referring to the company’s shift away from manufacturing in China. “The intensifying trade tension accelerates our decision to do it.”
Pegatron worries not only about U.S. President Donald Trump’s administration, but also the rising difficulty of securing workers in mainland China, the Taiwanese company’s finance chief said.
“On top of rising wages every year, the labor shortage in China during peak season has become more and more serious in the past three or four years,” Lin said. “We have to diversify our production to fix the labor issues.”
Pegatron, the second-largest iPhone assembler after Taiwanese peer Foxconn Technology Group, has based most of its manufacturing in China. In addition to iPhones, it makes notebook computers and other consumer electronics, networking equipment and “internet of things” devices for clients including Sony, Microsoft and Google. Some of its networking products have already been hit by the higher tariffs imposed by Trump on Chinese-made goods.
In early October, the Nikkei Asian Review first reported that Pegatron executives were looking for land in Taiwan to build new plants for non-Apple products. Nikkei also reported on Apple supplier Goertek’s plans to move some AirPod production to Vietnam.
Lin said Pegatron’s new manufacturing sites might be scattered in up to three countries around Southeast Asia, as there is no single country like China that can provide collaboration across sites during peak manufacturing season.
But compared with the centralized management approach that Pegatron has honed for decades in China, managing scattered production sites in the coming years would pose a greater strain on the company’s resources, the finance chief acknowledged.
Pegatron becomes the latest Apple supplier to confirm plans for relocating production outside of China. The search by Pegatron and its supply chain peers comes at a difficult time, with iPhone unit sales slowing as the smartphone market matures.
Nikkei reported on Monday that Apple has notified Foxconn, which trades as Hon Hai Precision Industry, and Pegatron that it would not need extra capacity reserved for iPhone XR, the lowest-priced new model this year. Many analysts’ supply chain checks also revealed lackluster demand for the new iPhones.
“We just revised down our house view [of] shipments for three new iPhone models this year to 73 million units, compared with 79 million units in the year-ago period,” said Nicole Tu, an analyst at Yuanta Investment Consulting.
Tu said her agency especially lowered the shipment forecast of the budget iPhone XR from 39 million units to 32 million. “We found a weaker-than-expected demand for iPhone XR after it hit shelves at the end of October,” Tu said.
Pegatron CEO S.J. Liao did not directly address the demand outlook for iPhones this quarter. But he said the company worries that the trade war between the world’s two largest economies might slow the momentum for the global economy and influence consumer behavior.
“The new product just began to ship on Oct. 26, and we will monitor closely about the demand given there are many different voices in the market,” Allen Horng, chairman and CEO of Apple casing supplier Catcher Technology, said on Wednesday.
“I haven’t seen changes in our orders, but I would not rule out the possibilities that there will be adjustments given near-term market dynamics,” the chairman said.
Horng added that many uncertainties for the industry are linked to the U.S.-China trade tensions.
“We could begin to see some impact stemmed from the trade war, and we are monitoring closely on the movement,” the Catcher CEO said. “Hopefully, the worst scenario won’t happen to the supply chain.”
At the same time, the casing maker is still studying options for and talking with customers about increasing production sites outside China, according to Horng.
“This would involve the whole supply chain, as the whole supply chain needs to move all together,” he said. Horng did not specify any areas for relocation plans. Catcher has manufacturing facilities in Taiwan and mainland China.
“We think it would be more urgent for the electronics assemblers to relocate some production outside China to avoid trade war risks,” said Yuanta’s Tu. “But the parts and component makers will eventually also need to follow should assemblers decide to move some capacity elsewhere to stay competitive in the supply chain.”