TAIPEI -- Apple has chosen China's Luxshare to help develop augmented reality devices, Nikkei Asia has learned, the first time the iPhone maker has tapped a Chinese supplier for a first-generation product.

Luxshare, China's rapidly rising tech manufacturing champion, has taken over the AR development team in Shanghai that was previously owned by Taiwan's Pegatron, according to five people with knowledge of the matter.

Luxshare's participation is a milestone for Chinese tech suppliers. In previous decades, Apple has relied on Taiwanese suppliers like Foxconn to help it develop the first generations of new product lines. Its decision to rely on a Chinese player like Luxshare comes amid heightened tech tensions between the U.S. and China, and scrutiny of Apple's own reliance on its supply chain in China.

Pegatron, a longtime iPhone assembler, was the first supplier to help Apple develop AR devices, but collaboration on that front was on and off for four years. The Taiwanese company has been making Microsoft's Hololens mixed-reality headset for years but became skeptical about Apple's AR plans and gradually exited the project to focus on other applications such as automotive and servers, a supply chain executive with knowledge of the matter told Nikkei Asia.

Luxshare, on the other hand, hopes to grab as much business in as many areas as possible from Apple, four people told Nikkei Asia. It has grown over the years to become the U.S. company's most important China-based supplier and already helps build iPhones, the Apple Watch and AirPods.

Foxconn is also helping with the AR project, four people told Nikkei Asia. The longtime iPhone assembler will work on parallel development of a cheaper second-generation AR device, four sources said. Foxconn's focus will be on automating mass production and improving production performance to help Apple lower overall costs, according to two people familiar with the plans.

Apple has high expectations for augmented reality and is tapping the full range of its supply chain to make its devices a success. Two of its most important suppliers, Taiwan Semiconductor Manufacturing Co. and Sony of Japan, have been chosen to develop micro OLED displays for the devices, three people said. Part of the development of these displays has taken place at Apple's secretive campus in northern Taiwan, Nikkei Asia previously reported.

Microdisplays are built on the base of chips that go through specific display coating processes. Such display technologies are used in military goggles and are extremely expensive. Each microdisplay costs $150 and an AR device needs a pair of such screens. The OLED display used in the 6.1-inch iPhone 14 model costs around $55 to $60.

In addition, a single 12-inch wafer yields only a few dozen such microdisplay chips based on the current development process, according to people familiar with the matter. The cost of the display technologies and chips could push the retail price of Apple's AR gadget to $3,000-$5,000, based on analysts and industry executives' estimates.

"Apple's first generation of AR devices will be extremely expensive, and really only can attract those passionate tech geeks or premium customers," an executive with knowledge of the development told Nikkei Asia. "But Apple hopes to push the price down in the second generation of devices, which is in parallel development, to a more affordable price, like a high-end Mac computer, and hopes to attract a bigger user base."

Chiu Shih-fang, a tech supply chain analyst with the Taiwan Institute of Economic Research, said Chinese suppliers used to be the latecomers in the Apple supply chain and Luxshare's foray into new product development is a sign of the company's growing importance to Apple.

"However, it does not necessarily mean Luxshare's development capability is absolutely good enough to threaten the Taiwanese suppliers. Take Pegatron's case for example. We can see the company itself is shifting its operation focus toward electric vehicles and other new businesses," Chiu told Nikkei Asia.

The analyst said it remains to be seen whether Apple's AR devices, which are likely to be expensive in the first generation, will become a hit amid the slowing global economy and rising inflation. "There are still uncertainties whether it will be a successful product with long-lasting sales momentum."

Apple, TSMC, Sony, Pegatron and Foxconn declined to comment. Luxshare did not respond to Nikkei Asia's request for comment.

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