Process and Manufacturing, Part 2 (Own your Factory)

Scott Francis
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Horace Dediu’s analysis of Apple’s new factories is a compelling read.  Apple has such scale, and so much cash, and cashflow, that it is engaging in strategy that is deeper and further into the possible future than most companies. Of course, Apple wisely looked to suppliers for its components and even final assembly as the scale of what Apple was building exceeded its ability to grow from a small computer manufacturer into a behemoth electronics company.

In this arena, Dediu’s analysis is plausible: That it is time for Apple to look at owning factories again.

Apple already invests in its production – buying tooling, prepaying for orders to lock in pricing.  It has been leveraging its massive scale to buy flash memory since the early days of iPhones, when the iPod was still king (remember?).  But it also invested in understanding production processes and production lines at a level that no other US-based computer or phone manufacturer seemed to do – whether they owned their own factories or not.

In his latest piece, Asymco includes analysis of Apple’s investments in the last two years:

Since then we’ve seen evidence of significant investment in manufacturing tooling, where Apple is effectively purchasing the means of production rather than just renting or contracting it out.

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It did not stop there. It has also used capital to ensure capacity through pre-orders thereby allowing the skills and labor to be more predictably applied by its suppliers (and preventing competitors from having sufficient supplies). Apple has also taken control of chip design for the vast majority of its CPUs thus building a more bespoke supplier chain.

Apple’s interest in vertical integration, and its massive profits, pre-dispose it to look deep into its supply processes and look at where it can add value to the process by owning that part of the process.

But the Asymco analysis includes an additional reason:

An insidious problem emerges when outsourcing:  suppliers tend to become competitors. It happened in the PC industry with Acer vs. Dell. But it’s also happening to Apple. Consider how Samsung’s foreknowledge of Apple’s orders allowed them to anticipate the demand for large screen smartphones. Receiving orders years in advance for memory, screens and CPUs in the hundreds of millions would be a clear indication of demand. Receiving funds with which to build capacity is an enormous help when turning on production for your own versions of the product.

With that knowledge and the capacity built to serve Apple, Samsung was able to go from near zero market share in smartphones to being the largest vendor in two years a feat that Apple itself could not accomplish.

The supplier-turned-competitor is one of the risks of outsourcing production and is at the root of disruption from value chain evolution.

This is a great argument to motivate Apple to do a few things:

  1. Diversify suppliers to take away some of their informational (or even profit) advantage.
  2. Take equity stakes in suppliers, positioning the company for a future buyout, or to influence that company’s ambitions
  3. Continue to deeply understand the manufacturing processes of everything that goes into an Apple product.  This learning cuts both ways. The supplier is learning from Apple, but could not Apple also learn something from its erstwhile partner, Samsung?
  4. Take over the means of production in key areas of the product – starting with the areas that are most differentiated.

Even in the fourth point, Apple should continue to work with suppliers as well – in order to diversify supply risks.

But the other reason to pursue owning its own means of production:  Apple cares deeply about process and design.  And understanding the means of production influences design – not just by the constraints that manufacturing imposes, but also by the creative loop that can happen when this communication is close at hand.