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iPhone X Production Issues Impact Apple’s Assembly Partners

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Apple’s manufacturing and assembly partners

Previously in this series, we noted that Apple (AAPL) purchases a variety of components for its iPhones from multiple suppliers. The company also outsources manufacturing of some components to third-party foundries like TSMC (TSM).

Apple also partners with Foxconn, Pegatron, and Wistron to acquire components, as well as to assemble and test iPhones based on the demand received by the handset maker. This assembly and testing process takes about 150 days.

According to the Manufacturing Purchase Obligations mentioned in Apple’s fiscal 4Q17[1. fiscal 4Q17 ended September 30, 2017] filings, the company expects to pay its manufacturing and assembly partners $37.6 billion, most of which is noncancelable.

As a result, we believe that Apple is unlikely to make any major production cuts. Let’s see how this scenario could impact its manufacturing and assembly partners.

TSMC

In 2016, TSMC became the sole manufacturer of Apple’s A-series core processors. Apple contributed 17% to the foundry’s revenues in 2016. Bernstein Research expects this contribution to increase to ~20% in 2017 and increase further in 2018.

As shown in the chart above, TSMC’s revenues rose 28.0% month-over-month in August 2017, which is higher than the 23.5% increase posted in August 2016. The company’s revenues are typically high in August as it prepares for its September launch of the iPhone.

Apple’s revenues slow in September and jump again in October and November as it prepares for the holiday season.

Because Apple has a noncancelable contract with its partners, TSMC is unlikely to face any production cuts from Apple. The foundry expects its 4Q17 revenues to increase 9.3% sequentially to $9.1 billion. This trend is an improvement over the flat growth reported in 4Q16.

Foxconn

Foxconn is Apple’s main assembler for the iPhone. The company benefited in 2017, as it is the exclusive assembler of the iPhone X.

September is generally a strong quarter for Foxconn, as it acquires components from all suppliers and assembles the iPhone. The following months see modest monthly growth in revenues.

However, this scenario was slightly different for Foxconn in 2017. The company reported strong revenues in September and November, as the iPhone X was released in November. Foxconn could report growth in December 2017, although December is typically a weak month for the company.

Assembly partners

Pegatron’s revenues rose ~8.3% month-over-month to ~$5.5 billion in October 2017. The company was the exclusive supplier of the wireless charger for all 2017 iPhone models.

In 2017, Apple started manufacturing iPhones in India, which proved beneficial for its Taiwan-based (EWT) assembly partner Wistron. Wistron was the first OEM[2. original equipment manufacturer] for 2017 iPhones in India.

Wistron’s revenues rose ~12.4% month-over-month to ~$3.0 billion in October 2017. The company looks to expand its operations in India by building additional facilities.

Next, we’ll see how 2017 iPhone sales could impact Apple’s earnings.

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