The pain of the fruit chain, the sorrow of the supply chain

Source: Lightcone Intelligence

Author: Lu Yingxi

In 2010, in the early stages of intensive preparations for Xiaomi, Lei Jun did an important thing and personally went to discuss cooperation with supply chain manufacturers.

At that time, Lei Jun was already a well-known entrepreneur and angel investor in China, but at that time, Xiaomi could not even find a supplier willing to provide screws.

Why is this happening?

At that time, domestic mobile phone manufacturers were mostly subject to supply chain manufacturers from chips, screens to cameras and panels. What the supply chain had, the manufacturers could do. If there was no supply chain, Xiaomi would not be able to make mobile phones.

However, the supply chain manufacturers at that time were suffering from the backlog of "copycat phone" inventory. If they built a new production line, they would need to reconsider the cost. Faced with Xiaomi, a brand they had never heard of, they did not dare to take a gamble.

In the same year, Apple’s milestone product iPhone 4 was officially launched. According to foreign media reports, Apple’s monthly production capacity can reach 3 million units. Therefore, compared to the uncertainty of Xiaomi's production capacity at the time, most manufacturers hoped to gain Apple's favor.

When the first-generation iPhone was designed, Apple first found Foxconn, a Taiwanese company in China, shipped parts and materials from different suppliers to Foxconn for assembly, and handed over the production orders for each subsequent generation of iPhones to Foxconn.

However, the dominance of Foxconn made Apple somewhat wary. In order to check and balance Foxconn, Apple successively supported Wistron and Pegatron. Since then, the supply chain has gradually moved to mainland China, cultivating Luxshare Precision, Lens Technology and Goertek. shares and other mainland supply chain manufacturers.

This was undoubtedly a major benefit to the domestic supply chain at that time. Apple has high unit prices, large order volumes, and stable cooperation. Which electronics factory wouldn't want to receive orders from such a large customer?

As a result, Apple's huge demand for accessories and OEM demand has driven the development of the domestic consumer electronics supply chain. Today, China already has the world's first-class consumer electronics parts supply chain and assembly foundries. But from another perspective, Apple supply chain manufacturers have gradually suffered from "Apple dependence" after relying on big trees for many years.

Take the recent explosion of Goertek shares in the past few days. After the news of being cut off by Apple, the market value of Goertek shares evaporated by nearly 8 billion yuan in a single day, and the cumulative evaporated market value has exceeded 110 billion yuan.

This is hard not to remind people of Ou Feiguang, who was once kicked out of the "Fruit Chain". OFILM was once the "leading" camera module manufacturer in the supply chain. Data shows that in 2020 alone, Apple contributed 14.512 billion yuan in revenue to OFILM, accounting for 30% of the total revenue. Since being kicked out of the "fruit chain" in March last year, OFILM's stock price has been "falling and falling." As of November 11, OFILM's market value has shrunk by nearly 67.7 billion yuan from its peak of 84.9 billion.

On November 11, foreign media also reported that Foxconn plans to adjust the production operations of the Indian factory and triple the number of employees at the factory in the next two years. Currently, Chinese Apple supply chain manufacturers such as Foxconn, Luxshare Precision, Wistron and Pegatron are building factories in Southeast Asia.

The life and death of the "fruit chain" is completely in Apple's hands, and in recent years, Apple's supply chain has been moving to Southeast Asia. This makes people ask: What should we do if we lose Apple's order?

When it comes to Apple's foundries, many people will naturally think of Foxconn. Since the first generation of iPhone, Foxconn has been Apple's largest "official" foundry. Ten years ago, Foxconn put out a recruitment advertisement with "food, accommodation and laundry included", attracting countless "deep drifters" who went south to work in Guangdong. At the entrance of Longhua Foxconn in Shenzhen, nearly 10,000 people lined up every day. Waiting for a job.

But if you mention Luxshare Precision, some people may find the name a bit unfamiliar.

Let us first turn the time back to 1988.

At that time, following the wave of reform and opening up, Foxconn built a factory in Shenzhen and recruited the first batch of assembly line workers. Wang Laichun was one of them.

This working girl was born in rural Shantou and never even went to high school. She went to Shenzhen to work alone. She spent ten years becoming a section chief at Foxconn, then resigned and founded Luxshare Precision.

At first, relying on its relationship with Foxconn, Luxshare Precision received many Apple orders provided by Foxconn, but Wang Laichun's ambitions went far beyond that.

After establishing a foothold, Luxshare Precision began to aggressively acquire companies that have cooperative relationships with Apple, from acquiring Liantao Electronics to produce connectors for the iPad in 2011, to acquiring the complete manufacturing contract for Apple's AirPods headphones in 2017, and then in 2020 By acquiring Wistron's shares in Kunshan, Jiangsu Province, it became the first Apple OEM in mainland China, entering the entire iPhone OEM chain. Today, 70% of Luxshare Precision's business is related to Apple.

However, Luxshare Precision is just one of many representatives of the domestic "Apple chain". Judging from the list of Apple suppliers, the number of suppliers in mainland China has been gradually increasing in recent years. Not long ago, Apple announced the list of major suppliers for fiscal year 2021. Among the 190 companies, 91 were from China, accounting for 47.9%, ranking first. Among them, there are 7 new mainland Chinese manufacturers, including Wingtech Technology, Crystal Optech, and Zhongke Sanhuan.

For decades, mainland suppliers have successfully supported half of the “fruit chain”. Specifically, at present, Luxshare Precision has successfully won orders for AirPods, Apple Watch and iPhone; as the second largest industrial and commercial manufacturer of Apple AirPods, Goertek has also entered Apple's supply chain as early as 2010, providing Apple supplies acoustic components, wired headphones, and more.

Taking advantage of Apple, the domestic consumer electronics supply chain has grown rapidly. Nowadays, if you produce a mobile phone in China, you can find several high-quality suppliers in China, ranging from the processor to the small screw.

Apple's order demand has effectively integrated the domestic supply chain, and the domestic supply chain has also fed back to domestic mobile phone brands after it matured. Domestic mobile phone brands such as Huawei, Xiaomi and OPPO have rapidly risen with the advantages of the supply chain. It is reported that the Mate50 previously released by Huawei uses domestic components such as RF chips and filters.

It is precisely because of the upgrade of the domestic mobile phone industry chain that we have the confidence to produce domestic mobile phones. It is not difficult to understand why some people think that "if there were no Apple, there would be no Xiaomi 1999."

It can be said that behind Apple's success, it is inseparable from the shadow of China's consumer electronics supply chain, and China's consumer electronics supply chain has completed its transformation from scratch, and Apple has also contributed a lot.

However, in front of Cook, the "supply chain management master", it is not that simple for the "fruit chain" to solve the problem once and for all. If they want not to be kicked off the poker table, they must abide by Apple's "game rules."

Apple's offline retail stores were the most profitable retail stores per square foot in the world in 2017, without a doubt.

Every day before the new iPhone goes on sale, scalpers and enthusiastic "Apple fans" will appear in front of Apple stores in the early morning and form long lines.

But on the release date of this year’s new iPhone 14 series, no one expected that the iPhone 14 would be unsaleable. In the morning, scalpers were frantically shopping for goods at higher prices, but at night, they couldn't even sell them for a small price, and all the new phones were lost.

It is undeniable that Apple's ability to attract money is still the best among its peers, but in the context of the global consumer electronics downturn, even Apple, which has high hopes, cannot avoid the fate of being affected.

A research report released by US investment bank Jefferies on October 30 pointed out that in the week starting from October 24, iPhone sales in China plummeted 27%.

Apple is having a tough time, and the chill is quickly spreading to the supply chain.

The price of hugging the thigh is to slowly be controlled by Apple.

It is reported that Apple will sign exclusive technology and product agreements with some manufacturers in the supply chain. In other words, if this supply chain company chooses to enter the "fruit chain", it must give Apple's production needs its first priority. At the same time, in order to meet Apple's standards, the control software, systems and production lines of the "fruit chains" are all customized by Apple, thus gradually becoming Apple's "puppet".

Financial report data shows that among Goertek’s revenue in 2021, Apple as the first customer accounted for 42.49% of the revenue. Since becoming Apple’s second largest OEM for AirPods, Goertek’s share price has increased by more than 450%.

However, after it was revealed that Goertek shares were "cut off" by Apple this time, it immediately hit the "one-word board" limit at the opening of trading on November 9, and its market value evaporated by nearly 8 billion yuan in a single day.

If you are familiar with the consumer electronics industry, you may immediately think of OFILM, which was kicked out of the "fruit chain" before. In March last year, OFILM, which specializes in providing lenses for Apple, was suddenly kicked out of the "fruit chain". Its business situation took a turn for the worse, and it has continued to suffer losses in the past two years.

Success or failure all depends on the apple, which has become one of the symptoms of the "fruit chain". Moreover, life in the besieged city was not as easy as imagined.

Many people only see "Apple eats meat, suppliers eat soup", but Apple's routine is to come up with a pie of "long-term stable cooperation and large order volume" before cooperation, so that suppliers can taste the sweetness first. But after that, there will be less and less cakes in my mouth every time.

Take Luxshare Precision as an example. After receiving an order for AirPods in 2017, its revenue grew rapidly, and in 2021 it achieved revenue of hundreds of billions. However, the gross profit margin has been declining year by year. Data shows that from 2017 to 2021, Luxshare Precision's gross profit margin was 20%, 21.05%, 19.91%, 18.09%, and 12.28% respectively.

According to media reports, several supply chain companies such as Quanta and Compal have already withdrawn from Apple's supply chain because they could not tolerate low gross profits.

To sum up, working for Apple means "less money, more work".

Why don’t you make money working for Apple? The reason is simple. Cook, a well-known supply chain management guru, does not directly reduce profits, but uses checks and balances to allow suppliers to reduce profits themselves.

In order not to feed tigers, Apple adjusts the list of supply chain manufacturers every year and supports new suppliers to check and balance old suppliers. For example, in 2021, Luxshare Precision was supported to suppress Foxconn, and in 2020, OFILM was kicked out of the fruit chain.

This year, Apple has broken up iPhone 14 OEM orders, allowing different OEMs to bid, and whoever has the lower cost will get the order.

Behind the vicious price war, the gross profit margin of suppliers is getting lower and lower. According to previous reports, among the 30 domestic “fruit chain” listed companies in 2021, only 10 companies achieved positive year-on-year net profit growth. Among them, Derun Electronics and Xinlun New Materials are expected to have net losses attributable to shareholders of listed companies ranging from 480 million to 680 million yuan and 900 million to 1.1 billion yuan respectively.

When suppliers fight, Apple just needs to reap the benefits. Apple's 2022 fourth fiscal quarter report shows that its gross profit margin reached 42.3%, of which product gross profit margin was 34.6%, an increase of 10% from the previous quarter.

But even if it is so difficult, there are still a few people like Compal who take the initiative to withdraw. Manufacturers in the besieged city are busy getting involved, while many supply chain companies outside the besieged city are also eyeing it. At the beginning, Luxshare Precision took the opportunity to enter the market because the yield rate of AirPods produced by Taiwan Inventec was not high, so it took the opportunity to become the largest OEM manufacturer of AirPods.

Under Apple's cruel "game rules", it is still unknown who will become the next "Luxshare Precision", but judging from the current situation, the involution is still continuing.

On the one hand, the domestic "fruit chain" is crazily involved, and on the other hand, Apple has not been idle. In recent years, it has gradually shifted its supply chain to Southeast Asia. Starting in 2020, Apple has established Airpods and MacBook production lines in Vietnam. It is reported that Apple already has 31 cooperative factories in Vietnam.

Are the good days of the domestic “fruit chain” coming to an end?

In fact, there is no need to be overly anxious. Although the former has more say in the game between Apple and Fruit Chain, it is not that difficult for Apple to completely change the supply chain in a short time. Simple. According to Apple's latest supplier list for fiscal year 2021, there are 91 Chinese companies among Apple's top 200 suppliers, of which 46 are from mainland China (including Hong Kong and Macau), accounting for 24%, and 45 are from Taiwan.

At the same time, according to the flying geese model summarized by Japanese economist Akamatsu Kaname, Asian countries have formed a gradient industrial classification through industrial transfer, and each has formed its own comparative advantage. Obviously, behind this general trend of low-end manufacturing moving to Southeast Asia is more of a manifestation of the upgrading of the domestic supply chain.

However, people who have no long-term worries must have immediate worries. Whether it was OFILM being kicked out of the "fruit chain" before or the market value of Goertek's shares plummeting after the explosion, various signs have shown that relying solely on Apple is no longer the best way out for supply chain manufacturers. What domestic “fruit chains” should probably be more worried about now is what they should do if they leave Apple? After all, anyone can become the next "O-Film".

It is difficult to replicate the glory of those years. There are actually only two paths before suppliers: one is to continue to deepen Apple's supply chain and penetrate into the core business circle; the other is to find another way to make a living in new businesses.

In recent years, with the upgrade of China's consumer electronics manufacturing industry, mainland storage manufacturers such as Yangtze Memory and GigaDevice have begun to provide core chips for Apple, and BOE has also begun to enter the "high-end bureau" of Apple's supply chain, providing its Provide high-end OLED displays.

There are more and more opportunities in the domestic “fruit chain”, but being excluded from the core business is still an indisputable fact. Among all domestic supply chain manufacturers, most are responsible for assembling and producing non-core components. Few companies can truly enter Apple's core business. The core business modules are still dominated by foreign manufacturers such as Qualcomm.

What is worthy of recognition is that after more than ten years of "torture" by Apple, domestic Apple supply chain manufacturers have learned a lot.

As we all know, Apple’s requirements for selecting supply chain manufacturers are among the top five in the industry, and it also has very strict requirements for manufacturers after cooperation. Li Feng, founding partner of Fengrui Capital, once said that in AAC Technology’s Apple production line, all control software, computers and ERP systems come from Apple. If there is a problem with the production line, the person in charge of the relevant production line will receive a letter from Apple. remote mail.

At the same time, although as a technology company, Apple's R&D investment has not been high. In fiscal year 2021, Apple's R&D investment was US$21.914 billion, accounting for only 6% of revenue. One of the important reasons is the transfer of R&D costs to suppliers.

Apple only needs to make a request, but the technical implementation requires suppliers to spend money to complete it. This also means that suppliers need to continuously increase their investment in research and development, so that their research and development capabilities can be exercised to a certain extent.

Although these basic capabilities are not enough to allow the "fruit chains" to easily escape Apple's control, they can pave the way for their new business.

In fact, many Apple supply chain manufacturers have already embarked on the journey of exploring the second curve, with new energy vehicles and smart wearable devices being the mainstream.

Taking Goertek as an example, it has gradually shifted its business from TWS headsets to VR products, providing OEM services to VR equipment manufacturers such as Meta and Pico, and its VR OEM market share is as high as 70%.

And relying on the foundation of previous automation, new energy vehicles have also become a new choice for many "fruit chains".

As early as 2015, Lens Technology entered the field of new energy vehicles and was responsible for the automotive electronic glass product line; Luxshare Precision also reached a cooperation with Chery at the beginning of this year, intending to cooperate on the basis of the ODM model of car manufacturing. Consumer electronics foundries have transformed into Tier 1 manufacturers of new energy vehicles. In addition, the “fruit chains” involved in the new energy vehicle industry chain include Foxconn, Sunny Optical Technology, Lingyi Intelligent Manufacturing, etc.

Putting eggs into different baskets can indeed help the "fruit chain" spread risks. However, most of these new businesses are still in their infancy, and it is difficult to produce immediate results in a short period of time. At least before the new business takes shape, suppliers We still have to continue to love and kill Apple.

From 2007 to 2017, the golden decade when "fruit chains" relied on Apple to breathe oxygen has passed. However, in the past five years, these new businesses have not been able to become the propeller for supply chain manufacturers in the next decade.

The road is long and long.

This article is reprinted from "Light Cone Intelligence" by Global IoT Observation. The content is the independent opinion of the author and does not represent the position of Global IoT Observation. It is for communication and learning purposes only. If you have any questions, please contact us at info@gsi24.com.

Latest articlesabout