Cheap labor and a bevy of strong suppliers have been the hallmarks of success for Chinese electronics maker Foxconn. But lately, some of its disciples have been hopping the nearest strait to Taiwan, where a company called Pegatron will give up almost all of its profits in exchange for the privilege of manufacturing your next iPad Mini or Microsoft Surface.
Foxconn (aka Hon Hai), which derives 60-70% of its revenue from its work for Apple, eked out a profit of 3.7% last quarter. Pegatron’s profit margin, meanwhile, was a mere 0.8%. The reason? Pegatron is a much smaller and less tested company (Pegatron revenues total one-quarter of Foxconn’s). Cutting margins to lure Foxconn clients like Apple is one way to gain scale.
Pegatron forecasted that its revenues will slip 25-30% next quarter, partly because of falling demand for the iPad Mini, which it manufacturers along with older iPhone models like the iPhone 4 and 4S. On the bright side, the company also announced that it will boost its workforce by 40% in this year’s second quarter, prompting speculation that it will start manufacturing the bulk of Apple’s rumored cheaper versions of the iPhone. A lower-cost manufacturer making a lower-cost smartphone would be a natural fit. It would also allow Apple to diversify its manufacturers.
Foxconn may not miss the business. Its revenue dropped 19.2% in the first quarter as demand for the iPhone has slipped. The company is trying to wean itself off Apple and become its own brand-name manufacturer, a path forged by Taiwan-based Asus and Beijing-based Lenovo. That kind of transition may be inevitable for other lower-cost manufacturers like Pegatron. If Apple’s fortunes are flagging, in the long run your only options as its manufacturer—the strategy adopted by Foxconn—seem to be either to find the next Apple, or to become its competitor.