Apple’s Cheaper iPhone To Be Manufactured By Pegatron; Is Foxconn’s Monopoly At Stake?

The long-rumored low-cost iPhone, intended for emerging markets where Apple has struggled to gain a foothold, will be manufactured by Pegatron to reduce Apple's potential for over-dependence on Foxconn, according to a new report.

Pegatron, a Taiwanese electronics company, became a minor producer of iPhones in 2011 and started manufacturing iPad mini models last year, the Wall Street Journal reported.

Apple selected the company to be “the primary assembler” of its yet-to-be-announced low-cost iPhone because it's already integrated into Apple's supply-chain, according to the report.

“Pegatron is likely to offer more attractive production deals as it tries to garner a bigger slice of Apple's substantial consumer electronics business,” a report by Apple Insider said. It added that Foxconn’s previous advantage of scale has declined of late because of steps it had to take to improve working conditions in its factories.

If Apple shifts more of its manufacturing to Pegatron from Foxconn, it could help Apple avoid the kinds of supply-chain disasters that stem from being too dependent on a single manufacturer.

“Pegatron's rise means an end to the monopoly that Foxconn Technology Group -- the trade name for Hon Hai Precision Industry Co., the world's largest electronics contract manufacturer -- has held over the production of Apple's mobile products,” the WSJ report said.

“People familiar with the matter point to strategic reasons for the shift: risk diversification after Foxconn's manufacturing glitches last year with the iPhone 5 that resulted in scratches on the metal casings, and Apple's decision to expand its product lines amid growing competition from Samsung Electronics Co. and others,” the report added.

In addition, Apple found it difficult to control Foxconn. There were incidents when the company changed its component-sourcing policy without notifying Apple.

“The iPhone 5 is the most difficult device that Foxconn has ever assembled," a Foxconn executive told the Journal. "To make it light and thin, the design is very complicated. It takes time to learn how to make this new device. Practice makes perfect. Our productivity has been improving day by day.”

Meanwhile, Pegatron is reportedly hiring as many as 40,000 workers for the second half of 2013, which has fueled further speculation that a less expensive iPhone model is in the pipeline.