The Financial Times recently posted 2 articles on Apple Inc.
The first one titled "How Apple tied its fortunes to China" explained how Apple under then COO Tim Cook started on the path of basing it's production in China, reaping huge benefits.
- embedding employees into supplier facilities for months
- co-designing processes, staying on to ensure compliance
- designing machines for niche processes
- create and design custom parts, using custom machinery, and well designed processes
This led to 95% of products being made in China and earning a fifth of their revenue from China
To illustrate this, the article used the example of the ability to create products no one thought was possible, such as the 'unibody' Macbook Pro
They used CNC machines which allows a designer to use 3D image files to create complex parts. The machines are expensive and usually used to make prototypes. This did not deter Apple, they bought 10,000 of the machines from Fanuc (which was years of their pipeline) and then scoured the globe for more when they ran out of supply. They basically wanted to use these expensive machines in production lines, instead of just making prototypes.
Apple looks for suppliers by interrogating the boss of the supplier company, and down the hierarchy to the lowest employee on the most minute of technical details. If the supplier is picked, Apple asks them to make a custom part in large quantities, effectively taking control of the supplier's entire R&D supply chain. Suppliers were more than happy to accommodate as the chance to make a part for hundreds of millions of products is too good to pass up
This created an entire eco-system of companies who could manufacture what Apple needed, all concentrated in China, while Western manufacturing atrophied. It also had the side effect of causing technology transfer from the West to China. Apple competitors, facing pressure to match Apple's manufacturing prowess, had to hand over valuable IP to Chinese suppliers in order to keep up.
This is an eye opening story about true long term focus and being willing to invest (not just money but other forms of capital) for the future to build a powerful moat. It is of course debatable now if this is truly a good thing but it must be said at the early stages, there were few signs this is a bad strategy.
The first one titled "How Apple tied its fortunes to China" explained how Apple under then COO Tim Cook started on the path of basing it's production in China, reaping huge benefits.
The second one titled "What it would take for Apple to disentangle itself from China" tried to guess how Apple can de-risk it's China focused production (hint: it is super difficult if not outright impossible).
Both of them are good reads if you can get past the paywall (the FT subscription is worth it).
What stood out to me is the story in the first article, on the lengths to which Apple went to set up their Chinese industrial supply chain. It's not just simple outsourcing but things like:
- embedding employees into supplier facilities for months
- co-designing processes, staying on to ensure compliance
- designing machines for niche processes
- create and design custom parts, using custom machinery, and well designed processes
This led to 95% of products being made in China and earning a fifth of their revenue from China
To illustrate this, the article used the example of the ability to create products no one thought was possible, such as the 'unibody' Macbook Pro
They used CNC machines which allows a designer to use 3D image files to create complex parts. The machines are expensive and usually used to make prototypes. This did not deter Apple, they bought 10,000 of the machines from Fanuc (which was years of their pipeline) and then scoured the globe for more when they ran out of supply. They basically wanted to use these expensive machines in production lines, instead of just making prototypes.
Apple looks for suppliers by interrogating the boss of the supplier company, and down the hierarchy to the lowest employee on the most minute of technical details. If the supplier is picked, Apple asks them to make a custom part in large quantities, effectively taking control of the supplier's entire R&D supply chain. Suppliers were more than happy to accommodate as the chance to make a part for hundreds of millions of products is too good to pass up
This created an entire eco-system of companies who could manufacture what Apple needed, all concentrated in China, while Western manufacturing atrophied. It also had the side effect of causing technology transfer from the West to China. Apple competitors, facing pressure to match Apple's manufacturing prowess, had to hand over valuable IP to Chinese suppliers in order to keep up.
This is an eye opening story about true long term focus and being willing to invest (not just money but other forms of capital) for the future to build a powerful moat. It is of course debatable now if this is truly a good thing but it must be said at the early stages, there were few signs this is a bad strategy.
It also illustrates how an edge is transformed into a big risk as it becomes too big to move out of China, a dilemma Tim Cook and Apple shareholders have to reckon with. They have become trapped by their own moat.
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