Goertek halts ‘smart acoustic product’ assembly

Chinese audio components maker Goertek has warned that a major overseas client asked it to suspend production of a “smart acoustic product”, which analysts suspect to be the AirPods Pro 2, reducing the Shenzhen-listed firm’s revenue by 3.3 billion yuan (US$455 million) this fourth quarter.

Goertek, which has been making Apple’s high-end AirPods Pro series of wireless Bluetooth headsets since 2020, said in an announcement late on Tuesday that its cooperation with the unnamed client remains intact, but indicated that “this incident’s impact on the company’s business performance is still under review”.

Shares of Goertek closed down 10 per cent to 20.72 yuan on Wednesday. The company, headquartered in the city of Weifang in eastern Shandong province, did not immediately reply to a request for comment.

In a tweet posted early on Wednesday, TF International Securities analyst Kuo Ming-Chi said his latest survey showed that the product in question “may be Apple’s AirPods Pro 2”, the assembly of which was paused “more likely due to production issues rather than demand issues”.

Shenzhen-based Luxshare ICT, Apple’s primary AirPods Pro supplier, has expanded manufacturing to fill the production gap and become the exclusive assembler of the AirPods Pro 2, according to Kuo.

He added that it remains unclear when Goertek will resume production of AirPods Pro 2 and whether this incident could impact the company’s share of Apple product orders next year.

Kuo estimated fourth-quarter shipments of the second-generation AirPods Pro to reach about 20 million units.

An equity research note by Jefferies on Wednesday also suggested that the AirPods Pro 2 was the product that Goertek was asked to halt production this fourth quarter. “At the moment, there are no order cuts” or any move to kick out Goertek from its customer’s supply chain, the Jefferies report said.

This setback by Goertek comes amid Apple’s efforts to further diversify its contract manufacturing partners and expand its supply chain network outside China.

Apple for the first time has asked some of its suppliers to shift part of AirPods and Beats earphone production to India, according to a Nikkei Asia report on Sunday.

Apple’s latest publicly released supplier list showed that the US tech giant added six new Chinese contractors, while cutting seven previous suppliers on the mainland during its past financial year to September.

Mainland China accounted for 91 of Apple’s top 190 disclosed suppliers, according to the US tech giant’s supplier list for its financial year ended September 25, 2021. There were 13 factories in India that form part of Apple’s supply chain, while Vietnam had 26 factories.

Goertek’s 2021 annual report showed that its top five clients accounted for nearly 90 per cent of total revenue, while its largest client made up more than 40 per cent of overall sales.

Since Goertek’s major overseas client typically has a dual-supplier policy, the Jefferies report suggested that “it is unlikely for this customer to totally rely on the other supplier for its TWS [true wireless stereo headsets] and other products” – referring to the primary AirPods Pro contract manufacturer, Luxshare.

“Even if the 3.3 billion yuan of orders are transferred to Luxshare, the impact would only be less than 4 per cent of Luxshare’s estimated fourth-quarter revenue,” the report said. Jefferies said Goertek’s share of AirPods Pro 2 volume orders “is relatively small against Luxshare’s total revenue size”.

Apple accounted for 22 per cent of the global TWS device shipments in the second quarter, according to a report by Counterpoint Research in September. Xiaomi Corp and Samsung Electronics were ranked second and third with market shares of 9 per cent and 5 per cent, respectively.

There is much room to grow in this market for suppliers like Goertek. The size of the global TWS earbuds market is predicted to reach US$536.2 billion in 2030, more than 10 times that of the US$51.36 billion total estimated in 2022, according to a report from Grand View Research.

Still, Goertek has been moving to diversify beyond acoustic products. The company has been making virtual reality headsets for ByteDance-owned Pico Interactive and Meta Platforms, parent of social networking giant Facebook. South China Morning Post