Compal Electronics has set its 2018 capex at NT$6 billion (US$205.7 million), up over 70% from the NT$3.4 billion spent in 2017 with half of the amount planned to be used in automation equipment.

Some market watchers pointed out that most IT firms are experiencing rising labor costs in China due to changes in the country's labor market, and that automated production lines have become a solution to rising labor costs.

Compal is a manufacturer of Apple's iPad and Apple Watch, and some of their parts have to be made via high-level automated production lines. Compal's investments are expected to support increased shipments of the two products in 2018, the watchers said.

Compal's fourth-quarter-2017 consolidated revenues rose 10% sequentially and 16% on year to arrive at NT$254.84 billion, but gross margins went down 0.1pp sequentially and 0.8pp on year to reach only 3.3%. Its operating profit margins also slipped 0.3pp sequentially and 0.1pp on year to stand at 1%.

Despite the fact that Compal's non-operating profits increased significantly by 143% sequentially in the fourth quarter of 2017, the company's net profits still dropped 10% sequentially and 20% on year to arrive at NT$2.1 billion or EPS of NT$0.48.

Compal noted that the gross margin and operating profit margin dropped in the fourth quarter of 2017 because of the NT dollar's appreciation, labor shortages in China, increased expenses in R&D and marketing, and changes in clients' product mixes.

For 2017, Compal reported gross margin of only 3.6%, down 0.7pp on year; and its net profit dropped 29% on year to reach NT$5.75 billion or EPS of NT$1.32.

A loss of NT$3.59 billion in 2017 from LeEco's bad debt reduced the year's profit.

The market watchers also noted that the Apple Watch, which Compal began supplying in the fourth quarter of 2017, was a major cause driving down the ODM's gross margin. Since the smartwatch was difficult to assemble and Compal only had limited orders for the device in 2017, the ODM hardly saw profit from the product line, the watchers said.

Chen declined to comment on specific clients or products, but pointed out that Compal's investments in new product lines had put pressure on the gross margins of its non-PC business. However, the new product lines are expected to see shipments expand significantly the end of the second quarter or in the third quarter of 2018.

In the fourth quarter of 2017, revenues from non-PC businesses accounted for over 30% of Compal's overall amount, while those from the PC business reached 33%. Compal is also expecting strong income from its smart speaker orders.

As for the smartphone business, Compal is now taking a conservative approach to obtaining orders. It is now mainly cooperating with two big clients and a smaller one, with priority given to profitability over shipment quantities. With China's smartphone market already reaching saturation, Compal expects India to be the next growth driver. But the market's growth momentum remains unclear.