Why this Chinese Apple AirPods maker is vulnerable to supply chain chaos even though it has filed thousands of patents

Analysts have warned that the Shandong-based company may share the fate of Ofilm, which was also booted off Apple’s supplier list
Goertek’s current plight has raised fresh questions about China’s move to boost patent applications, particularly when it comes to product quality

Apple

Ben Jiangin Beijing

Published: 10:00am, 16 Nov 2022

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Goertek, a key AirPods supplier, became a symbol of China’s weakened position in Apple’s supply chain last week when it said that a big overseas client had dumped it for certain orders.

This could not mean anyone else but Apple and investors in Shenzhen dumped Goertek’s stock. Its shares are down 9 per cent in the past five days, although there was a 4.7 per cent bounce back on Tuesday.

Analysts have warned that the Shandong-based company may share the fate of Ofilm, a Chinese manufacturer which was also sideswiped after Apple booted it off its supplier list, laying bare the current vulnerability of ‘made-in-China’ in global supply chains amid rising US-China trade tensions.

Apple has been moving to diversify its supply chain beyond China to countries like India and Vietnam, as Covid-19 lockdowns on the mainland disrupt manufacturing activity and as growing tensions between Beijing and Washington unsettle business in the world’s second-largest economy.

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Apple dropped Ofilm as a supplier in March last year after it was added to Washington’s trade blacklist over alleged involvement in a government programme that transferred ethnic minorities from Xinjiang to work at the company’s factories. Neither Apple nor Ofilm have commented on the forced labour allegation.

However, mainland China remains the US tech giant’s primary production base, where about half of the factories run by its top 190 disclosed suppliers are located, according to a South China Morning Post analysis of the firm’s contractor list for its financial year ended September 25, 2021.

But unlike Apple suppliers such as Taiwan Semiconductor Manufacturing Company (TSMC), the world’s top chip foundry with substantial bargaining power, firms such as Goertek and Ofilm are often at the mercy of Apple’s decisions.

The official Economic Information Daily, a newspaper affiliated with state news agency Xinhua, quoted Pan Helin, a researcher affiliated with Zhejiang University as saying that inclusion on Apple’s official supplier list is both a blessing and a curse for Chinese companies.

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“Companies in this supply chain have a weak voice and they constantly face the danger of being dumped by Apple,” Pan was quoted as saying.

While Goertek did not elaborate on the reasons for losing orders from a major client, a number of analysts – including well-regarded TF International Securities analyst Kuo Ming-chi – said that Apple had found quality problems with AirPod Pro 2 ear buds made by Goertek.

BOC International analysts stated in a research note that when Apple cancels a manufacturing order, it is often a punishment measure for a supplier that has failed to meet its exacting standards.

Goertek did not respond to a request for comment on Tuesday, and Apple declined to comment.

On paper, Goertek is a powerful hi-tech manufacturer, saying in its latest annual report that it had filed over 3,400 patents in the past year. In total, it has applied to register 25,800 patents, and about 15,500 have been granted by the Chinese patent authority.

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Patent filings in China have ballooned after the government encouraged and subsidised companies to file – making the country the world’s No. 1 in terms of patent applications.

Goertek’s patent applications climbed from 206 in 2011 to over 3,000 in 2017, and it has received substantial subsidies, receiving 13 million yuan (US$1.85 million) in 2019 alone.

But the patents have not freed Goertek from its reliance on Apple. Goertek’s data reveals that its largest client accounts for nearly half of overall sales.

Goertek’s current plight has raised fresh questions about China’s move to boost patent applications, particularly when it comes to product quality.

According to the China National Intellectual Property Administration, it took the country 15 years to register its first 1 million patents. But it only took four years to hit 2 million patents, and one and half years more to hit five million patents.

Jason Wu, co-founder of IP consultancy PRIP Research, told the Post that patent subsidies are part of the problem – along with low agent and administrative fees – meaning that the cost to file a patent in China is just a tenth of what it costs in the US and Europe.

“China has been phasing out the subsidies, but new patents are still sprouting up because the administrative fee is significantly lower when compared to other countries,” said Wu.