Luxshare and Goertek are increasingly important players in the vast Apple supply chain

Two of Apple’s most important Chinese product assemblers are venturing into chip packaging for the iPhone maker, as Beijing continues to set its sights on creating a fully-fledged domestic semiconductor industry.

Luxshare is building chip systems-in-package (SiP) for Apple’s AirPod earbuds after it won a substantial number of orders at the expense of Taiwanese and U.S. rivals, sources briefed on the matter told Nikkei Asia.

Goertek is also eyeing the chip assembly business, but due to technical difficulties has so far gained far fewer orders on that front than Luxshare, the sources said.

For Apple, having two more chip assemblers in its supply chain gives it more bargaining power. For Beijing, having domestic companies move up the value chain and into the more technology-intensive arena of semiconductors helps it with a key policy goal: to build a fully independent chip industry that is insulated from U.S. crackdowns and other geopolitical pressures.

Luxshare and Goertek are increasingly important players in the vast Apple supply chain. They were among the first to heed the call to diversify production bases and started moving AirPod production to northern Vietnam as early as 2019. Now Luxshare is also helping set up chip assembly capacity there, further supporting Apple’s move to create a more complete supply chain in the country.

Luxshare is particularly eager to improve its chip skills as it looks to expand into new fields, including electric vehicles. To shorten the learning curve for SiP production, the company has been hiring engineers with chip packaging know-how from Universal Scientific Industries (USI), an affiliate of Taiwan’s ASE Tech Holding, the world’s biggest chip packaging and testing service provider, the sources said.

The production quality of Luxshare’s and Goertek’s SiP modules is not as high or consistent as that of market leaders like USI and Amkor of the U.S., people familiar with the matter said. The Chinese players have an advantage, however, in that they are in charge of the final assembly of the products. This allows them to offer more cost-effective solutions for chip packaging than their competitors, and could help them gain even more orders in the future.

The chip assembly that Luxshare is doing is less advanced than the cutting-edge chip packaging that top chipmakers like Samsung, Intel and Taiwan Semiconductor Manufacturing Co. are betting on, but it still requires significant technical know-how.

Chip packaging itself is becoming a key area in the race for ever more powerful chips.

ASE recently joined Intel, Samsung, TSMC and Qualcomm in setting up a consortium to establish industrywide standards for chip packaging to aid development of more powerful electronic devices.

Luxshare and Goertek, meanwhile, are two of China’s most ambitious tech companies. In addition to AirPods, Luxshare has become a big assembler of iPhones and the Apple Watch, while Goertek is the key manufacturer of Meta’s popular VR headsets, and edged out Pegatron to become the No. 2 assembler of Sony’s PlayStation 5.

The pair have enjoyed rapid revenue growth over the past few years, though Luxshare logged its first-ever profit decline in 2021, which the company attributed to the global chip shortage, higher logistics costs and product development expenses.