Column chart of Chinese sales as a per cent of total global revenue showing Apple

Luxshare rises as China’s homegrown iPhone manufacturer

When 21-year-old Wang Laichun walked through the gates of a connector factory owned by Taiwan’s Foxconn in 1988, she was just another migrant worker. Little did she — or her employer — know that 32 years later, she would turn into a serious challenger for Foxconn, the company which has dominated the production of tech gadgets for decades.

In July, Ms Wang’s company Luxshare said it would buy two China-based subsidiaries of Foxconn rival Wistron, including one iPhone plant, in a Rmb3.3bn ($474m) deal that puts assembly of the iPhone, the centrepiece of global technology manufacturing, in the hands of a Chinese company for the first time.

As the US is in an escalating stand-off with China and seeks to cut Chinese companies out of the global technology industry, it could also mark the kick-off for partitioning the iPhone supply chain.

“Amid this trade war and tech war, this is a natural step for Apple,” said Alex Ng, an analyst at China Merchant Bank International. “We will eventually see one system for China, and another for non-China.”

Executives at Taiwanese electronics manufacturing services (EMS) companies and analysts said giving Luxshare a systemic role in iPhone production was a good risk management strategy for Apple. With no end in sight to tensions between Beijing and Washington, China is less likely to retaliate against US companies that use Chinese companies for manufacturing, because it would hurt its own economy, the people said.

“One driver behind the rise of Chinese EMS companies is that vendors are trying to achieve a certain localisation of the supply chain,” said Kyna Wong, an analyst at Credit Suisse.

Industry experts said Apple could let Foxconn, Pegatron and Wistron, the Taiwanese EMS companies that have controlled iPhone manufacturing so far, concentrate on expanding capacity outside China for serving the US and other western markets, while developing Luxshare into the leading assembler of iPhones for the Chinese market.

Few doubt Luxshare is up to the task. Ms Wang’s company has conquered key parts of the iPhone supply chain over the past few years. Although its 2019 revenues were only 5 per cent of Foxconn’s, the Chinese company’s market capitalisation soared past that of its Taiwanese rival earlier this year.

After 11 years working at Foxconn and Cheng Uei, the electronics manufacturing group run by the brother of Foxconn’s founder Terry Gou, Ms Wang set up her own business in 1999, working with her brother Wang Laisheng to supply connectors to Foxconn. “They were our subcontractor,” said a Foxconn executive.

Soon Luxshare also started selling to other electronics contract manufacturers including Flextronics, Cheng Uei and Lite-On, and established very close ties with some. Cheng Uei even invested Rmb40m in Luxshare before its 2010 initial public offering and acquired 25 per cent stakes each in two subsidiaries — a tie-up the Taiwanese company ended in 2018.

Luxshare declined requests for an interview and a factory visit. But people who have worked with the company said it resembled Foxconn in many respects. “Some of Chairman Gou’s famous sayings were hanging on the walls, and her management style was also really similar to his,” said the Foxconn executive, pointing to an emphasis on discipline and execution.

But Ms Wang has gone much further in her emulation of Mr Gou. After taking Luxshare public in 2010, she went on an acquisition spree, buying a pole position in the iPhone supply chain component by component — just like Foxconn had done.

After investing in Chinese and Hong Kong-backed cable and connector makers, it proceeded with tie-ups with Taiwanese earphone maker Merry Electronics and Lite-On, a producer of camera modules for smartphones also from Taiwan.

The acquisitions helped make Luxshare a key supplier for AirPods, Apple’s earbuds.

According to industry experts, Tim Cook, Apple’s chief executive, has been a crucial factor in Luxshare’s meteoric rise. “He supported Luxshare in key moments, and leaned on Foxconn to help cultivate them,” said Kirk Yang, a private equity investor who covered Foxconn for more than a decade as an investment banking analyst.

Pointing to Mr Cook’s past job as a procurement manager and his key role in building Apple’s supply chain with contract manufacturers, Mr Yang said: “As a procurement manager, he wants more than one supplier.”

Luxshare has in the past quickly raised the efficiency and profitability of its newly acquired assets. When it starts running iPhone assembly at Wistron’s China plant, those famed execution skills will be crucial. For Wistron, the smallest among Apple’s three iPhone assemblers with only about a 10 per cent share of orders, the business has become a drag on profitability.

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Luxshare’s entry is expected to result in further squeezing already razor-thin margins in the assembly business as it sets about conquering a bigger share from Foxconn and Pegatron. Don Yew, an analyst at Morningstar, said that with iPhone sales growth increasingly driven by lower-end models, Apple needed to cut manufacturing cost. “They do that by introducing new players, Chinese players which will compete on price,” he said.

Industry insiders said Luxshare could grab 20 per cent of iPhone orders over time — roughly in line with China’s share of the global iPhone market.

But while this will eat into the Taiwanese incumbents’ market share, it could help speed up their efforts to reduce their exposure to China and instead expand in south-east Asia and India.

People close to Luxshare claimed Foxconn welcomed the company’s entry into iPhone assembly. An executive at Luxshare said neither Foxconn nor another contract manufacturer had “a vested interest to lose”.