Apple iPhone production is at the center of a possible coup

According to Reuters, three people with knowledge of the situation say that Apple’s top iPhone assembler Foxconn has created a task force to discuss the threat it feels from Chinese assembler Luxshare. To show how serious this matter is to the Taiwan-based Foxconn, the latter’s own co-founder, Terry Gou, came up with the plan to go after Luxshare. The issue that seems to threaten Foxconn the most is Luxshare’s position as the first company located in mainland China to assemble iPhone units. Most of the firms that manufacture the device are Taiwanese.

Foxconn is concerned that Chinese-based rival Luxshare is being supported by the Chinese government

The task force wants to investigate Luxshare to discover whether the Communist Chinese government supports Luxshare. On the face of things, Luxshare is a small company that grosses in one year only 5% of the amount that Foxconn takes in. But in Beijing, there is a sense that Luxshare is an up and coming company that can help China become more dominant in global technology. One of the sources told Reuters that “Luxshare is set to rise … it’s just a matter of how fast it could be. It makes sense for China to build up its own supply chain and Luxshare is in line with that state policy.”

It’s all part of a plan called “red supply chain” where Chinese firms with support from the country’s government produce products for Apple and other global tech firms. Last month, Taiwan based think tank Market Intelligence & Consulting Institute wrote that “Facing the rise of the red supply chain, the threat of Taiwan manufacturers being replaced continues to increase.” Back in July, Luxshare purchased two small factories that were owned by another Taiwan based iPhone assembler, Wistron. Luxshare already manufactures one of Apple’s most popular products, the wireless Bluetooth AirPods. The firm started its journey by acquiring a company in 2011 that made connector cables for the iPhone and the MacBook. Eventually it started manufacturing acoustic components for the iPhone and then moved on to the AirPods.

Another one of Reuters’ sources called Luxshare a “formidable opponent”, and said Foxconn has been researching Luxshare with a goal to “defeat it completely.” And there are reasons for Foxconn to worry about Chinese government involvement in Luxshare. The latter has received the equivalent of about $150 million in government subsidies from 2016 through the first half of this year. $75 million of that total was received last year alone.

Foxconn has denied that Reuters’ story is correct and said that reports about a task force at Foxconn are “not grounded in facts” and that there were “no meetings or any other contact. There have also been no other extraordinary actions taken by the management team.” Luxshare declined to comment and Apple would not respond to Reuters’ request for a statement. As Luxshare moved up Apple’s supply chain, revenue rose along the way. Last year it grossed the equivalent of $9.35 billion, a year-over-year hike of 75%. Interestingly, while Luxshare grosses only 5% of Foxconn’s top line, it’s market capitalization is $59 billion compared to $39 billion for Foxconn. And Morningstar says that that 58% of Luxshare’s revenue is derived from Apple.

This is a perfect time for Luxshare to attempt a coup against Foxconn. Manufacturing consultant David Collins says that Foxconn’s move away from China provides Luxshare with the opportunity to make a move against Foxconn. Collins notes that “Foxconn’s share price is down roughly 50% from two years ago. They see blood in the water.” And Luxshare has started to poach Foxconn for employees. In one situation cited by Reuters, the company offered a bit more than $75,000 cash to a Foxconn executive so that he could move his family from Taiwan to China.