Nov. 11, 2013 7:07 a.m. ET
TAIPEI—Being an Apple Inc. AAPL +1.57% Apple Inc. U.S.: Nasdaq $520.56 +8.07 +1.57% Nov. 8, 2013 4:00 pm Volume (Delayed 15m) : 9.82M AFTER HOURS $521.00 +0.44 +0.08% Nov. 8, 2013 7:59 pm Volume (Delayed 15m): 155,219 P/E Ratio 13.04 Market Cap $468.37 Billion Dividend Yield 2.34% Rev. per Employee $2,127,850 11/11/13 Apple Supplier Pegatron Feels ... 11/10/13 Apple Finds Surprising Growth ... 11/10/13 Is Apple Putting Flex in the i... More quote details and news » supplier can be both sweet and bitter.
Pegatron Corp. 4938.TW -3.36% Pegatron Corp. Taiwan NT$38.80 -1.35 -3.36% Nov. 11, 2013 2:46 pm Volume : 11.20M P/E Ratio 11.41 Market Cap NT$92.99 Billion Dividend Yield 3.82% Rev. per Employee NT$5,173,430 11/11/13 Apple Supplier Pegatron Feels ... 10/16/13 Pegatron Outlook Murkier As Ap... 10/04/13 Taiwan Is Nexus for Informatio... More quote details and news » booked record third-quarter revenue on Monday, buoyed by orders for the iPhone 5C as it became the primary supplier of the smartphone for the first time. But its margins were squeezed, weighed down by costs for the rapid ramp-up in production.
The earnings result suggests what could be in store for other assemblers next year, as Apple increasingly branches out its supplier base to diversify risk and cut costs. Becoming a major Apple supplier means huge scale of orders, but also brings logistical hurdles, hefty production costs and—as Hon Hai Precision Industry Ltd. 2317.TW +1.35% Hon Hai Precision Industry Co. Ltd. Taiwan NT$74.90 +1.00 +1.35% Nov. 11, 2013 2:45 pm Volume : 34.24M P/E Ratio 9.83 Market Cap NT$970.21 Billion Dividend Yield 2.00% Rev. per Employee NT$2,881,260 11/06/13 Apple Adds Suppliers to Boost ... 10/31/13 Hon Hai Makes Push Into Softwa... 10/16/13 Apple Cuts iPhone 5C Orders More quote details and news » has found—microscopic scrutiny by labor groups.
After years of relying exclusively on Hon Hai, also known as Foxconn, to produce iPhones and iPads, Apple has been shifting more business to Pegatron in a bid to balance out its supplier base as its number of product lines expands, people familiar with the matter said. In addition to making the iPhone 5C, Pegatron assembles the iPad Mini for Apple.
Apple is also making plans to add two new manufacturers, Wistron Corp. and Compal Communications Inc., 8078.TW 0.00% Compal Communications Inc. Taiwan NT$50.50 0.00 0.00% Nov. 11, 2013 2:46 pm Volume : 692,953 P/E Ratio N/A Market Cap NT$30.69 Billion Dividend Yield 2.38% Rev. per Employee NT$4,551,190 11/06/13 Apple Adds Suppliers to Boost ... 10/01/13 Compal Electronics to Buy Out ... 10/01/13 Compal Electronics to Buy Out ... More quote details and news » to its supply chain to boost production of smartphones and tablets to ensure it can meet demand, people familiar with the situation said.
"Apple has been thinking of diversifying its sourcing further, which means uncertainty for suppliers," said Daiwa Securities 8601.TO +1.90% Daiwa Securities Group Inc. Japan: Tokyo ¥911 +17 +1.90% Nov. 11, 2013 3:00 pm Volume : 9.21M P/E Ratio 9.94 Market Cap ¥1563.94 Billion Dividend Yield 2.20% Rev. per Employee ¥46,924,300 10/29/13 Brokerage Earnings Show Japan ... More quote details and news » analyst Steven Tseng. "Increasingly, suppliers will be facing the potential of pricing pressure."
For Pegatron, Apple has brought record sales volume, but also production challenges. Pegatron suffered from a severe labor shortage in the third quarter as it worked to ramp up production and it leaned heavily on third-party recruiters to find enough workers to fill its ranks, the company said.
The situation has now reversed. Apple cut its orders for the plastic-cased iPhone 5C after weak sales, while raising its orders from Hon Hai of the more popular high-end iPhone 5S, which has a fingerprint sensor, people familiar with the matter said. Apple launched both models in September, breaking with its previous practice of launching one phone a year.
"There is no more worker shortage," Pegatron Chief Financial Officer Charles Lin said at an investor conference on Monday.
Pegatron executives declined to comment on Apple and other clients. Apple said it doesn't comment on suppliers.
Apple is the source of about 30% of Pegatron's sales, and about 40% of Hon Hai's sales, according to analyst estimates.
Pegatron's third-quarter net profit rose 52% to 2.48 billion New Taiwan dollars ($84 million) from NT$1.63 billion a year earlier. The bottom line was also boosted by foreign exchange gains of NT$249 million and other non-operating income. Revenue rose 14% to a record NT$253.98 billion for the three months ended Sept. 30 from NT$222.89 billion a year earlier.
Pegatron's third-quarter revenue gains were largely driven by September sales, which almost doubled from August and rose 75% from a year earlier to a record NT$116.9 billion.
But operating margin for the company's contract manufacturing operation remained below 1% and fell in the third quarter due to costs of the production ramp-up, Mr. Lin said. The company expects it to rise in the fourth quarter as it tries to keep costs low, he said, without providing specific figures.
Pegatron also cautioned that the pace of sales growth will slow in the fourth quarter.
"We're expecting single-digit growth for our non-computing segment for the fourth quarter," Chief Executive Jason Cheng said.
As Pegatron has become a larger Apple supplier, it has also drawn attention from labor groups who previously focused solely on Hon Hai.
Following a report by China Labor Watch in July, Pegatron has made a number of changes at its factories to improve labor conditions. In the longer term, the company is also eyeing automation.
"China's labor costs are rising 10% to 15% a year, and ideally we would decrease our reliance on human workers enough each year to offset that," Mr. Lin said. He didn't give specific figures.
Hon Hai, which rode the Apple boom to become the world's biggest electronics contract manufacturer, is scheduled to report earnings on Wednesday. The company's third-quarter net profit is expected to fall 14% to NT$26.00 billion from NT$30.26 billion a year earlier, according to a survey of eight analysts polled by The Wall Street Journal.
Write to Eva Dou at eva.dou@wsj.com
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