As Apple basks in the unprecedented demand for its latest iPhones, suppliers from Tokyo to Taipei are sharing in the spoils. With iPhone sales up 40 per cent year-on-year in the first quarter, Murata — a Japanese producer of energy-storing ceramic capacitors that counts Apple as its biggest customer — said its operating profit rose 116 per cent from a year earlier.
Earnings at Taiwan’s Largan, which supplies iPhone camera modules, were up 61 per cent, while those of the South Korean iPhone screen supplier LG Display were almost eight times the level of a year before.
The booming earnings in Apple’s supply chain demonstrate the impact of smartphone market shifts on the web of Asian component suppliers and assemblers that are the bedrock of the industry.
But the playing field for these groups is set to shift, as competition intensifies between key players in the increasingly mature smartphone industry.
“I’m worried about the overall smartphone market starting to slow,” says Steven Pelayo, head of Asian technology research at HSBC, who predicts unit sales growth “in the high single-digits” over the next three years — down from 28 per cent last year and 39 per cent in 2013, according to research group IDC.
Concern is focusing on the prospects for the increasingly saturated Chinese market, the world’s biggest, where IDC says smartphone sales contracted by 4 per cent in the first quarter — the first such decline for six years. Slowing growth there has now begun to darken the outlook for the Chinese smartphone producers that have enjoyed explosive sales growth in recent years, whittling away the market share of global leader Samsung Electronics.
Even Xiaomi, which has surged over the past two years to become China’s leading smartphone provider, has suffered quarterly sales contractions in each of the past two quarters according to the research group Strategy Analytics, which warned that its “rapid growth is now coming to an end”.
This trend has cast a shadow over the Taiwanese suppliers that service the Chinese smartphone brands. The share price of MediaTek, a Taiwanese group that leads the Chinese market for smartphone processor chips, doubled in the two years to last July, but it has since fallen almost a third.
Beyond the broad concerns about the Chinese smartphone market, the gloomier sentiment on MediaTek reflects a further threat to Taiwan’s huge component industry: the expansion of Chinese competitors into ever more sophisticated areas of the supply chain.
As well as the US-based global market leader Qualcomm, MediaTek must contend with China’s Spreadtrum, a chip designer whose processors are gaining a growing share of the Chinese market. Meanwhile shares in Ningbo-based Sunny Optical, which supplies camera modules to the likes of Xiaomi and Lenovo, have doubled in the past year.
“It’s clear the Chinese brands prefer to have Chinese suppliers,” says Nicolas Baratte, head of technology research for CLSA. “There is a different type of understanding between Chinese companies. The Chinese supply chain is amazingly flexible in terms of tolerance for specification change and redesign, and flexible payment terms.”
Yet with the Chinese market slowing, he adds, some Chinese suppliers — notably phone assembly groups such as Wingtech and Longcheer — are increasingly pinning their expansion hopes on work for faster-growing brands from other countries, especially India.
A reliance on foreign customers has been thrust upon Japan’s handset component suppliers by that country’s dramatic decline in the mobile phone market — but they have responded strongly according to analysts who say Japanese groups account for a third of the parts found in the iPhone, while achieving strong sales of high-tech components to Chinese producers.
Those two sources of demand provide contrasting opportunities to groups such as capacitor supplier Murata, says Shoji Sato, an analyst at Morgan Stanley MUFG Securities. While the unit cost of the cutting-edge components it provides to Apple are up to 10 times higher than those supplied to Chinese producers, it is expecting growing demand from the latter as they buy parts to support a move towards phones with fast 4G data connections.
The Japanese supply chain includes major electronics groups such as Sony and Sharp, which have strong positions in camera sensors and screens respectively despite the collapse in sales at their own handset divisions.
Sony plans to invest $1.7bn over the next year boosting sensor production to meet demand from clients including Apple, Samsung Electronics and Xiaomi, which it expects to drive a near-quintupling of its operating profit to Y320bn in its current financial year.
Its peer Sharp has had a more traumatic experience in the smartphone supply chain, investing heavily in display panel production capacity only to lose market share to cheaper rivals in Asia. Last week Sharp announced an annual loss of $1.9bn and said it would lay off a tenth of its workers, with analysts citing its exclusion as a supplier for the iPhone 6 as one reason for its woes.
In South Korea, Samsung’s components business has also become its biggest source of profits, with its world-leading memory chip business overtaking a handset business whose market share fell heavily last year.
Even as it competes fiercely with Apple in the premium smartphone market, Samsung’s logic chip business is expected this year to reverse the heavy operating loss of 2014 after winning a contract to produce processor chips for the next iPhone.
That business is also benefiting from Samsung’s move to reduce its reliance on external suppliers wherever possible, helping it to protect margins at its smartphone business. The new flagship Galaxy S6 phone, at least in its early production, is forgoing Qualcomm processors in favour of Samsung’s own Exynos chip, as well as using baseband radio chips and power management chips made in-house.
While Samsung’s components business has cushioned the effect of its handset troubles, there has been no such protection for the South Korean suppliers that piggybacked on its rise to smartphone dominance. Touchscreen panel supplier Iljin Display and Partron, which supplies antennas and camera modules to Samsung, saw operating profit decline 62 per cent and 51 per cent respectively last year.
Shares in some of these suppliers have strengthened over the past six months on hopes for Samsung’s revamped handset strategy, but the companies themselves appear to be hedging their bets on the smartphone market, says Daniel Kim, an analyst at Macquarie.
“Virtually every Korean component company is working really hard to increase business with Chinese companies,” he says. “The shock in 2014 from Samsung’s smartphone business was a wake-up call. They want to diversify.”
Smartphone sales beat records but shares in companies that make them have not
Sales of the iPhone 6 may have smashed smartphone industry records, but shares in the company that assembles most of the devices have drifted lower since the product launch last September.
Hon Hai Precision Industries, better known as Foxconn, is being hit by Apple’s efforts to secure its supply chain via greater diversification, notably among its Taiwanese partners.
Foxconn is losing assembly work to fellow Taiwanese group Pegatron, which will put together more than a quarter of iPhones made this year according to analysts at Nomura.
And while its Foxconn Technology subsidiary produced all of Apple’s phone casings as recently as 2011, its share is set to drop to 69 per cent this year, with smaller Taiwanese companies such as Catcher and Casetek filling more of the demand, Nomura says.
Speculation is now focusing on the niche Taiwanese groups that could benefit from new features in the next iPhone: expectations of a more sophisticated touch screen system have been pushing up the share prices of screen component suppliers Flexium and Zhen Ding.
And while Apple work is being spread more thinly among its Taiwanese suppliers, it remains indispensable to the sector, says Arthur Liao at Fubon Securities. “If Apple is good, Taiwan is good - that’s for sure,” he says.