By Greg Gao

Two of Apple’s key suppliers from China, Luxshare Precision(立讯精密) and Goertek(歌尔), began to provide chip packaging services for Apple’s AirPods wireless headphones, people familiar with the matter said.

Meanwhile, Goertek is also moving into the chip assembly business, but due to technical barriers, it has obtained far fewer orders than Luxshare Precision. Now the two companies are playing an increasingly important role in Apple’s sprawling supply chain.

A system in package, or SiP, is a way of bundling two or more ICs, such as processors and memory, inside a single package to achieve a complete function. This is particularly valuable in space-constrained environments like wearables and mobile phones as it reduces the complexity of the printed circuit board and overall design.

In addition to AirPods, Luxshare is also an assembler of iPhones and Apple Watches. While Goertek is the main manufacturer of Meta's popular VR headsets and the second-largest assembler of Sony's PlayStation 5 game console.

For Apple, the addition of two chip assemblers in its supply chain gives it greater bargaining power when it outsources its manufacturing. At the same time, it is also beneficial to the development of the entire semiconductor industry in China, said an industry observer. The two Chinese companies have managed to move up the value chain and entered the more technology-intensive semiconductor field, helping the country to create a completely independent chip industry.

Luxshare is particularly eager to improve its chip packaging skills as it seeks to foray into new areas, including electric vehicles. To shorten the learning curve for SiP, Luxshare has been hiring engineers with chip packaging technology experience, industry insiders pointed out.

Although the production quality of SiP modules from Luxshare Precision and Goertek may not be the best, the two manufacturers have an advantage in that they are responsible for the assembly of the final products. This allows them to provide more cost-effective chip packaging solutions than their competitors, which could help them win more orders in the future, people familiar with the matter said.

The two companies have experienced rapid revenue growth over the past few years. Though Luxshare saw its first-ever profit decline in 2021, this was mainly due to a global shortage of chips and rising logistics costs. Luxshare’s shareholders approved an RMB13.5 billion ($2.1 billion) financing plan to strengthen its technological capabilities last week. The company said it would invest RMB950 million($149 million) to expand its SiP business and chip packaging business.

Goertek has spun off a chip packaging department and began preparations for an initial public offering recently. Industry analysts pointed out that it is not surprising that Chinese companies such as Luxshare and Goertek have tried eagerly to improve their semiconductor capabilities as China continues to set its sights on creating a fully-fledged domestic semiconductor industry.