Smartphone parts makers see small profits

While Apple fans around the world drool in expectation of new iPhones this week, Chinese component providers are having a hard time.

United Win Technology Ltd. which is a former LCD supplier for Apple in an industrial park in Jiangsu Province's Suzhou City -- a major base of original equipment manufacturers (OEMs) making parts or subsystems for other companies' end products, particularly electronic devices -- has been closed for months.

"We are in a bad financial position and the company cannot keep afloat," United Win Technology Ltd. said in a statement.

In June, BKSE Bokwang E&T Co. Ltd., the largest printed board OEM for Samsung, also closed a plant in Suzhou, after orders from its single customer sharply declined.

According to market tracker IDC, the brand's market share in China plummeted to 9.3 percent in the first quarter of 2015, from 18 percent in the same period last year, mainly squeezed by rising homegrown makers Xiaomi, Huawei, Vivo and Oppo.

The picture is also grim in Dongguan City, Guangdong Province, another base of OEMs. Wintek, the largest phone LCD manufacturer in Taiwan, has shut down two subsidiaries in Dongguan.

"Smartphone OEMs are facing a crisis," said Yuan Mingren, adviser to the Taiwan Businessmen's Association in Dongguan.

The number of empty factories in the city has been on the rise since 2014, and migrant residents, most of which were workers, dropped by roughly one third over the past five years.

Foxconn, with 25 factories on the Chinese mainland, is Apple's major OEM for iPhones. Samsung has 249 OEM companies on the mainland.

"Chinese OEMs for global smartphone makers live on every thin margins. It is natural for them to contain costs by closing plants or cutting jobs," said IT industry observer Liang Zhenpeng.

Most of China's OEMs stay at the very bottom of the industrial chain and rely on one single customer, because they usually lack core technology, he said.

"If the market shrinks or production costs rise, they are vulnerable," Liang said.

The OEM crisis is looming because labor costs are rising and technology is upgrading. As an industry leader, Foxconn has bigger bargaining power than smaller OEMs and therefore maintains its profitability, but the company still feels the pinch.

Since 2013, the company has laid off 50,000 employees in Kunshan, Jiangsu Province, and is considering replacing humans with robots.

"The golden days for OEM companies are over," said Zhang Yansheng, secretary-general of the academic committee of the National Development and Reform Commission.

Innovations were risky and imitations were safe in the past, but it is impossible for China to build a strong manufacturing sector just on copycatting, he said.

"During the past 35 years, innovators in China lost out to imitators. But in the future, companies that fail to innovate will certainly die," Zhang said. Endi