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It's time for Apple to look at owning factories again

Toshiba plant to make LCD panels for Apple: report | Reuters.

Apple will invest in a portion of the investment for the factory, the Nikkei said.

This is one of the more interesting news items I’ve seen for a while.

[UPDATE] Toshiba denies rumor Apple will invest in mobile display subsidiary

There was a time when Apple designed and owned factories. From an interview with John Sculley:

That went all the way through to the systems when he built the Macintosh factory. It was supposed to be the first automated factory but what it really was a final assembly and test factory with a  pick-to-pack robotic automation. It is not as novel today as it was 25 years ago, but I can remember when the CEO of General Motors along with  Ross Perot came out just to look at the  Macintosh factory. All we were doing was final assembly and test but it was done so beautifully. It was as well thought through in design as a factory–a lights out factory requiring many people–as the products were.

During the 90s the manufacturing function moved outside Apple’s ownership umbrella. It was more economical, more flexible and more scaleable to outsource manufacturing to Asia. The time has come to rethink this.

For the past few decades outsourced manufacturing has grown in scale and scope as prices fell and quality increased. However there are signs that this global web of suppliers and assemblers is reaching a point of disruptive change.

Press attention has focused on labor practices, pay structures and the enormity of factory towns where literally millions of workers are employed and housed. As is often the case press attention only hints at some causality and as such misses the point. Journalists looking for a story about child labor or suicidal workers might serve us better by putting the spotlight on the fact that factory towns are not competitive.

centralized Manufacturing is not good enough for the coming mobile computing disruption

The real problem with Chinese factory towns is that they are not flexible enough. By concentrating facilities and workers, electronics manufacturers have improved on measures of scale and quality but are still only able to ramp up and down on individual products once or twice per year. This does not meet the need to increase responsiveness to markets and the pace of development and design. It also reaches some critical overweight mass. Capacity cannot double or triple again to meet the need of six billion consumers. There are signs that the business model must change.

Typically a product is born in Product Marketing, progresses through Design, R&D and then to Manufacturing and finally to Sales. Each of these stages of development has to be re-started for each new product, often in a pipeline fashion. However, some of these stages are increasing their cycle times while others are at their limits. This limits the throughput of the whole chain. If, for example, R&D can put out two product designs in the space it takes for one Sales cycle then they need to be tasked with different product while they wait for “capacity” in Sales to catch up.

My contention is that the bottleneck in device product development is now manufacturing. The evidence is that Apple (among many others) cannot meet demand. Sometimes it’s a lack of components, but often there is a forecast error and capacity is simply not allocated. What I also see is that this bottleneck is not solvable with the current value chain architecture. When there are 5 billion consumers of platform devices, centralized factory town manufacturing does not match the cycle time of either design or of consumption.

The answer to low capacity is more investment in more lines of production, more workers and more suppliers. However the problem is that this takes time. The window of opportunity for a product is less than six months.

Consider the iPhone product cycle. A new variant goes into development 18 months to two years before it’s launched. It’s ready for manufacturing a few months before launch. The R&D team is off making the next version long before the product hits any shelves. The cycle time for R&D changes unpredictably. Sometimes it slips, sometimes it may be shorter because the changes are minor. Perhaps marketing sees the need to react to changing market conditions. However, manufacturing plods along at an inflexible rate.

How can it be fixed?

I’m not an expert in this area, but as a student of disruption I see signs of opportunity to re-engineer the manufacturing business model. The patterns from history are plain to see: Centralized systems get broken down and re-aligned with new bases of competition. Value chains disintegrate and re-integrate as profit algorithms change.

The new algorithm says you need to ramp production quickly (up and down) and to increase “product turns” from one to two each year. Each ramp needs to be even bigger than they are now. Maybe by a factor of two. Products should be built closer to where they are consumed to drive costs and delays out of transportation and tariffs. Carbon footprints need to be reduced.

Sounds daunting. But the rewards could be enormous. The business model may need re-definition. By owning the means of production, the value added can be shifted to another point (i.e. production can be run at a loss in exchange for higher margins elsewhere.)

All this requires capital. Lots of it. Apple has it. I see no better use for it than to re-define production as a synchronized development module.

It’s time to look at owning factories again.

  • Nugzar

    Great observation Horace! It is, once again, time to vertically integrate from components manufacturing all the way to the consumer. It is due to the reasons cited in the post.
    How long do you think it will take before it's time to come back to the outsourced manufacturing model?

    • ChriS

      Very good observation indeed.

      However, coming from this chain I can tell you that taking more ownership in production is like smashing a glass into tiny pieces to make it easier to carry.

      Taking the extreme case of full production outsourcing for a handset as example (like you did):
      – If you take the handset production in your own hands to solve the bottleneck you mentioned, the product which was previously considered by you as one piece you had to forecast to your factory, suddenly explodes in multiple tiny pieces: PCB, chipset, memory, screen, camera, just to name a few.
      You can control your handset-production now, but now you have to control supply of components from multiple 3rd parties based on the very same demand forecast as before.
      – You can go one step deeper and i.e. produce the named components in-house. The result is that even they explode in tiny pieces.
      For a screen you have to secure substrate, you have to secure the components of the touch-panel,
      For a camera you have to secure the sensor, the lens, the image processor, etc.

      Already at this stage the product-manufacturer would be uncompetitive and out of his field.
      The more you go deeper, the more you multiply the factors. You would have to secure that you can produce the same amount of every component in the same timeframe, because in the end you need each of them to assemble one product.

      So while trying to solve a problem, the problem just shifted it to a different level in the process.
      What the manufacturer got as result was that he now has to do stuff he's not sufficiently experienced in, because he is not specialized in LCDs, not specialized in camera-modules, PCB's, memory etc.
      He is specialized in consumer electronics…

      In my experience, the problem you see today (like "we can't deliver because THEY can't supply the needed components) is in many cases not the supply, but the forecast of demand.

      You can basically get everything in sufficient quantity if you tell on-time that you need it and are willing to take the risk if you finally don't.
      But the general approach nowadays is to select a supplier, make a "secure" forecast of demand, and push him to the limit in case you suddenly need more.

      Even if the Toshiba-rumour is not true, if you go there tomorrow and make a contract with them to deliver you 10 million LCD's per month from 2H/2011, they will do it.
      If they don't have the capacity, they will increase their capacity. After all you gave them a reason to do so.

      ChriS

  • Les S

    You seem to suggest that more factories but with smaller output per factory is needed. Are you suggesting that the manufacturing of parts be decentralized or just the assembly, or both? Do you envision something akin to as an Apple factory in every region of the US, every state? Something like having an Apple factory only 30 minutes away from any major metro area?

  • Ross Johnston

    Phones are on a somewhat artificial 2-year cycle due to the mobile operators, but I’d argue there’s also a limit to how much new hardware consumers can, well… consume :-)

    I think Apple’s model of releasing a new hardware version every year works really well. Everyone expects it’s coming and plans accordingly to upgrade. And software can be optimized in the mean time. Consoles are even more stable – very few hardware spins buts lots of software optimization.

    But maybe your point isn’t actually changing the hardware but just being more responsive to the changing demand for a given piece of hardware?

    But at the minute it’s not clear to me which is the driving force – artifical lifecycles because of manufacturing bottlenecks or natural lifecycles because of end users’ reluctance to switch hardware more often.

  • MattF

    I agree that the current manufacturing paradigm is hitting its limits– note this:
    http://spectrum.ieee.org/riskfactor/semiconductor

    … where a 70 millisecond breakdown in one factory will affect prices for months. However, the fix is not at all obvious. Decentralization raises quality control issues, rapid changes raise inventory and (again) quality issues. And for Apple, where quality is one of the basic selling points, this can't be papered over.

  • Enrique

    Althought I agree that there have been problems delivering, manufacturing and regulating the output is a complex process. I would like to see the opinion on this by an expert in this subject.

  • dchu220

    Manufacturing is a dirty business and many American companies don't want a piece of it because of the difficulties of dealing with the work condition issues. Its easier for companies to outsource the problem and pass on the resonsibilities.

    In the case of Foxconn, who controls a monopoly on the production of many vital components, it is much harder to walk away from them than it would seem. In fact, Foxconn has started competing with some of it's own customers as it tries to move up the value chain itself by producing it's own laptops.

    I do agree that if there is a company that could do it, it's Apple. But the rumor floating out in Asia that a lot of the hardware engineering for the iPad was done by Chinese companies and that the 'designed in Cupertino' label is slowly becoming more of marketing label.

    • MattF

      There's two rather controversial assertions, and I think I disagree with both of them.

      It's a fact that American companies have moved manufacturing off-shore, but the standard explanation is economics– and not delicate sensibilities. Right now, on-shore manufacturing is more expensive, but if wages in Asia and transportation costs keep rising, that could change.

      And as for Apple 'off-shoring' its R&D/design work, that's news to me.

      • dchu220

        The R&D work is purely speculative, but would not surprise me since there are a lot of design firms in Taiwan that design for American companies. It's not that much different between the role of an architect who draws out their vision and an structural engineer who actually figures out how to build the building.

        It's not as simple as wages and transportation costs. It's also about the infrastructure. America has devested it's manufacturing infrastructure. You can't build that over night. You would need so many component providers to also make the jump. Final landing costs are insignificant when compared to the shipping costs of all the individual components.

      • Joe_Winfield_IL

        I can't find the link, but I read several months ago that the CEO of Foxconn was considering building in the US. He said the costs differences today are negligible – that more of the work would be automated in the US and the transportation/time/tariffs would mostly offset the higher labor. His concern seemed to be primarily in the litigious nature of American culture. He was more afraid of open-ended liability, both from employees and from 3rd parties, than of marginal costs.

      • r00tabega

        There is the over-litigious nature as well as real and enforced environmental regulation in the US as opposed to China. Strong enough kickbacks (ie, corruption) can override both, but that's expensive.

        Both of these factors are of issue (and both are politically hot-buttons, so again, more potential for inefficiencies due to corruption).

      • dchu220

        I'd love to see that article.

        I have heard of chinese companies locating to certain parts of the US to manufacture certain goods, but electronics has not been one of them.

      • Adam

        He would like to produce components in the US and ship them to China for final assembly?
        http://www.businessweek.com/magazine/content/10_3

        « Gou envisions a fully automated plant to produce components within five years. "If I can automate in the U.S.A. and ship to China, cost-wise it can still be competitive," he says. »

      • dchu220

        Thanks Adam.

      • dms

        Not to nitpick, but you cannot equate Taiwan with China. That's akin to equating the UK and US. The labor and manufacturing markets are very different in each of those countries.

        Also, structural engineers are hardly the ones who "figures out how to build the building." They play a critical but limited part. There is far more to a building than the structure, just as there is far more to a Macbook than just its unibody enclosure.

    • Adam

      Right on Foxconn, wrong on secret Chinese companies doing the design for iPad hardware.

      Don't be fooled by the fools floating rumors that Apple is becoming 'all marketing'. Quite the opposite, Apple is one of the few companies who gets how important it is to have the cross-fertilization that happens when the creative work is done from one central location. Walt Disney is one of Steve Jobs' heroes, and look how he runs the Apple Campus like a big creative design studio, intentionally keeping head-count down to A-team players so that this cross-fertilization can take place. People forget how advanced the iPad was when it first came out — so far ahead of anyone else in terms of the vectors that matter, like battery life, size and weight, an accurate touch screen of that size. You can't do that by outsourcing key parts of the design to China. It's just not possible, and it's one of the key competitive advantages that Apple has had historically over these device integrators.

      • dchu220

        My bad Adam. I jumped the gun on my comments.

      • Adam

        No need to apologize. It's just an exchange of ideas here. More than any one person being "right", I value the discussion, and you sparked an interesting discussion here. :-)

    • dchu220

      I reread my post and I need to clarify my statement.

      I shouldnt have gone so far as to say that 'designed in Cupertino' is becoming a marketing label. I apologize. I also don't think that talking about things I hear is appropriate for this blog. I hope you guys can forgive me. I'll keep to objective analysis in the future.

      • ericgen

        Actually, I think there's value in you talking about things that you hear, as long as you qualify them as such. You travel a lot and come in contact with a lot of different perspectives. I, for one, would at least like to hear about them. While the things you choose to share doesn't mean that they are what is necessarily actually happening, properly qualified, they mean that they are what some people think is happening.

        Different perspectives are useful.

  • SoItsComeToThis

    Its a huge risk and I wonder if its worth the reward. Not only is the capital expensive, the experience and knowledge is nearly impossible to replicate easily. The time investment to get to a certain level of expertise is great and will add costs beyond construction and labor.

    Still, I'm excited at the opportunity to witness the disruption – both in terms of Apple's products and the effect on the marketplace and the disruption in manufacturing.

    • dchu220

      I agree. Even though I would like to see more manufacturing come back to the US.

      If a disruption in manufacturing were to occur, I doubt it would start in Apple's top line products. For the iPhone4, Foxconn had to purchase a lot of specialized machines at great cost just to make the antenna. It's clearly a case where they are not over-performing Apple's demands. Whether we like it or not, Apple is married to Foxconn.

  • Danthemason

    And then there is that pesky political joker in the deck. There are many reasons to diversify. All are based in provident planning.

  • Thomcarl

    I worked for Apple in the 1990's at their plant in Fountain CO, good employer until Gil Oatmealeo (my name for him) panicked and sold the whole place to a bunch of sweat shop operators named SCI. I along with 90% of the technical staff refused the offered 20% pay cut and walked out of the place. I love Apple products and have several in my home today, but Apple can go screw themselves, I would never work for them again.

    • Joe_Winfield_IL

      I can't put myself in your shoes, but it seems to me that the Apple of today is a very different company than the one you worked for.

  • http://twitter.com/rcastano @rcastano

    Its a very well thought argument Horace, but I am not sure I agree that manufacturing is the bottleneck here. Manpower is not something that the chinese have a limited supply just yet. My take is that Apple pushes the limits of what can be done at the current plant capabilities. Apple requests for specialities like A4 chips, unibody machining, retina displays and 10" touch-screens in humongous quantities come when some of these technologies are just out of the oven. I think that is what is putting the suppliers in trouble.

    I agree with dchu220 that manufacturing is a dirty process and doing it would distract countless high rank management resources. These resources are doing what they know best, and that is managing innovation and getting insanely great products to us.

    I just cant agree with you this time.

    • Joe_Winfield_IL

      You are differentiating between assembly and component manufacturing. I'm not sure if the author is doing the same. "manufacturing" could also include fabrication of chipsets, machining, etc. Keep in mind that Intel still has fabrication plants high labor cost areas of the US.

      Generic componentry such as flash memory doesn't make sense to internalize, as there are a few very large players who have already worked out all the bugs. But where Apple holds patents or proprietary tech, it doesn't seem unreasonable to do manufacturing in house to speed up the cycle.

  • Iphoned

    As a US citizen, I’d love it. As as a shareholder, would’t want for Apple to turn into a capital intensive business. Sad, but true.

  • timnash

    With Toshiba, Apple may well have agreed an advance purchase order, similar to those with LG for iPad screens and companies making flash memory. In return for $500m, which the company uses to part finance the facility, Apple can reserve part of the production according to its needs and gets the lowest price and the $500m is paid off in deliveries of components. As adding Toshiba would expand the tablet screen suppliers from Samsung (already a competitor with its Android tablet) and LG, this would be a good use of $.

    The more agreements of this type that Apple has, the more production problems through lack of components are shifted to competitors. Companies, which accept this type of funding from Apple, need to find less capital and know where they will be selling a good part of their production, lessening the risk of this type of investment.

  • Russell

    @Horace,

    Great read.

    Dell innnovated in this area and gave itself a ten year competitive advantage (CA )over its competitors. If Apple was able to gain an CA in this area, would it not be more durable and sustainable? I point to the fact that almost all its competitors have such different business models. Would it not discourage/prevent them from duplicating?

    The "innovation" advantage Apple currently has is only sustainable for so long, but a hard to duplicate business model would would be more a "durable CA" that only Dell, MSFT, CSCO,ORCL and a few others have enjoyed over extended periods. If Jobs wants that type of control, i could see this as a potential window of opportunity.

    • unhinged

      I beg to differ. Innovation is the only durable competitive advantage. Dell won the race to the bottom, but the law of diminishing returns comes in to play on costs and profits.

      Continual, ongoing innovation, however, changes the ballgame on a regular basis and delays the onset of diminishing returns. It's incredibly hard to do, but that's the reason why Apple today is such a strong company. Will they remain so? I'm not sure, but they'll make a ton of money in the mean time.

  • Jason

    Very interesting article and something I've speculated on since Apple released the iPad. To me it appears that Apple has been designing their products to be manufactured here with the unibody enclosures. The simplicity of Apple's design philosophy is going to be a huge advantage if/when they do make that move.

    The second reason I see this happening for is information control. Information leaks about new Apple products are accurate so much more so now that few images that pop-up online are even questioned for accuracy and the culprit is nearly always the same, some prototype that someone at these oversea's factories get's their hands on, or a case manufacturer.

    If Apple could pull-off a home-shore manufacturing facility it would be a win-win-win. They could control production problems better, they could control information leaks better and they would win respect with the American Consumer. Even if all of this came at a slight per-unit increase in cost I would think it would be worth it – yet another way Apple would keep it's competitors scrambling.

    • r00tabega

      You're saying that information leaks in China are less controlled than here in the states? You gotta be kidding… if someone "threw themselves out of a window" here and happened to have a prototype, the press would go nuts. There, it's just papered over and everyone goes about their business.

      That aside, I would love (for other reasons) to see Apple pull manufacturing (even just assembly) back on-shore, but I'm not sure it will happen.

  • chuck

    Yes! Yes! I’d love to see what Apple could do to the ‘state of manufacturing’. It would be great if Apple could make it happen in the US, but AAPL is an international company now… this game-changing effort could happen any where in the world and I’d be happy.

  • Marian

    Actually, the carbon footprint to bring a product from a Chinese harbor to an U.S. harbor is minuscule. Sea transportation is insanely efficient.

    • Joe_Winfield_IL

      The transportation isn't the issue. Chinese manufacturing is typically run on coal power, and not the low sulfur coal that is burned in developed countries. There are countless ways in which emissions can be improved, but you're right in asserting that ocean freight is not a huge culprit (per unit).

      • asymco

        Not to mention that sometimes the stuff is shipped air freight.

  • Adam

    Great post. Apple will soon be generating cash at a rate of 20 billion or more a year. They don't talk about it a lot, but it goes without saying that Steve is looking at every possible angle on how to deploy this cash to his best possible competitive advantage. They need some of this cash for retail expansion, and some for securing a steady supply of commodity components, but otherwise they literally have nothing to do with the money. As has been pointed out here before, they are not going to make any big acquisitions. And it's very unlikely they'd dole it out to shareholders.

    Having that large a constant flow of cash at your disposal changes the rules of what's possible, and I would not be surprised if they would be willing to make the HUGE investment that would be necessary to accomplish this. Steve is not afraid of making bold bets. It would be difficult, if not impossible, for any other competitor to replicate, so it makes sense strategically. Microsoft has the money, but not the will — or the shareholder support. Google has the money, but are caught up in too many other businesses that are cash-intensive (acquisitions, youtube server farms, etc.). Nokia and RIM are in a downward slide and will be to cash-strapped to keep up.

    I say they should go for it. As a shareholder, though, I am concerned with how Wallstreet would react to that strategy. They wouldn't get it, and it would show up on their balance sheet in a huge way.

  • r00tabega

    Bank of Apple?

    Seriously, Apple could figure out how to hide that kind of manufacturing investment from their balance sheet if they really wanted to do it (ie, partially controlled spin-off, etc).

  • http://twitter.com/dawsonlemus @dawsonlemus

    Apple seems very keen on controlling the complete user experience its end-users have with its products.

    I've been wondering for a while if Apple could buy a cellphone service operator, in order to curate the whole user experience. After all, Sprint's Market Cap is only about 13 Bn USD and the US is still its #1 market.

    It would be extremely disruptive, wouldn't it?

    • Atul Barry

      Good point. However, the Sprint infrastructure is CDMA. I could see Apple doing a deal with the T- Mobile though. Besides the US, it has Continental presence as well. Apple can start with just buying their US arm.

    • http://twitter.com/parvc @parvc

      apple should provide a satellite phone service. It would be global and you wouldn't have to worry about the phone carriers.

  • bft

    They ought to distance themselves from FoxConn because someday the Chinese government might decide that they have had enough of Apple and kick them out.

    • TomCF

      Not as long as Apple is at the top of hardware revenue. It's not like FoxConn is going to dump Apple and magically replace it with another customer. It would certainly hurt Apple, but it would kill FoxConn.

  • Steve

    I can definitely see benefits to owning another level of the stack that it takes to get a product all the way from design to customer. Apple is particularly focused on the details of the final product and that takes a lot of feedback through parts of the organization that are often separate, so this could produce a big competitive advantage (as noted above).

    The thing is, it seems to me that getting into manufacturing is hard. Really hard.

    Kinda like getting into retail.

    It is Apple's experience with retail that makes me think that this isn't necessarily crazy talk. Probably crazy talk, but not necessarily.

    • Dave52

      Agree; it sounds crazy but Apple may be able to pull it off. Interestingly, while Apple retailing has been hugely successful, there are still other major sources of Apple products (minus much of the Apple Retail Experience). I wonder if/how that might translate into manufacturing.

      I'd also be curious to know what Apple owning manufacturing would me in terms of geographical location and employment. Putting manufacturing closer to engineering/design may still result in much of it being in Asia (per the earlier "Designed in Cupertino" comment). Same with transportation costs – might be low enough to allow manufacturing to be distant from distribution and retail (for cost reasons, anyway).

  • BrianM

    Great argument in theory, but it does not explain how moving manufacturing "in-house" is going to solve the same problem.

    Increasing production increases risk while also increasing cost.
    Time from production to shelf is actually pretty small with the current model.

    Theory tends to break down when it meets the real world.

    • Adam

      "Sorry, Steve: Here's Why Apple Stores Won't Work"
      http://www.businessweek.com/magazine/content/01_2

      No, you very well may be right, but given the track record, if Apple did decide to go this route I wouldn't bet against them.

      • BrianM

        True, if they did go this route, it would be because they found a way to make it work.
        Dedicated facilities in North America just don't seem to be cost effective for small items.

  • http://www.notesark.com iphoned

    Such a move would be a great waste of shareholder funds. There is nothing Apple can do in manufacturing that they can't get a contract manufacturer to do just as well but without tying in capital. But they would be smart to move manufacturing out of China.

    • asymco

      By the same argument you could say that there is nothing that Apple does that they could not get a contractor to do. Apple could outsource retail, design, marketing, and even R&D (like Acer does). The value is in the integration not in the individual functions or processes.

      • Iphoned

        Not true. Manufacturing is the only one on that list that is capital intensive and on top of it all is not their core competency at the moment and is not costumer facing. Show me a manufacturing business, and I'll show you poor return on capital, which financially underpins shareholder returns.

      • ChriS

        I agree with Iphoned here, manufacturing is not a big-revenue business. If it would be, i.e. Qualcomm would probably be in there for years already.

        But I would expect Apple to realize sooner or later that they don't have to deal with a big production company like FoxConn, their orders alone are big enough to select a small company and build it up in the way they want it to be.
        And for that, they won't even have to buy that company…

      • ChriS

        To clarify, by "big revenue" I mean by all means, not just financially, so better "big benefit"
        You need to invest alot and still it doesn't mean you get a reasonable advantage from it in medium-term.

      • asymco

        You're analyzing manufacturing in isolation. This is the usual problem with business analysis that misses disruptive impacts. In isolation Apple's cash returns less than 1% ROC. However that is not measuring option value. Nor is any analysis of manufacturing in isolation measuring the return to the company of strategic leverage–something which I might add is not measurable as it relates to the future, about which we have no data. This is the essential sum-is-greater-than-the-parts logic of integration.

        It is precisely this sort of ROC analysis which encourages my view of a coming disruption. ROC has been discussed as a clear warning sign of impending strategic failure.

      • ChriS

        True again, yes.
        But Apple's current business style is to take no risks on physical goods.
        They invest alot in intellectual property, and alot of time and resources in creating a product, but despite of the launch, they keep investments low on the actual hardware itself.
        This way they don't have to bother that much with the "execution" of their ideas and its consequences, they leave that to their suppliers.

        I understand what you mean, but its a huuuge step to enter this field. And in the end, most of the "headaches" of outsourced manufacturing would still remain, they would just shift from "product supply issues" to "component supply issues"

        I think its much more attractive to expand their R&D more into hardware development and create further IP's there.
        Its much easier to explain the advantage of that to all parties and make full use of it in marketing…

  • steffen_jobs

    terrible idea. when steve jobs is no longer around the factories will be an albatross for apple.

    • asymco

      Why wouldn't everything Apple does internally become an albatross once Steve Jobs is no longer around?

      • Iphoned

        This is fundamentally different. Returns on capital would plummet and so would returns to shareholders mathematically tied to high and improving returns on capital. For this reason, very unlikely to happen.

      • dchu220

        The reason a lot of companies get disrupted is because they focus too much on returns on capital. Marginal costs are great for judging sustaining innovations but horrible at judging disruptive innovations.

        Horace is right. The high-end electronics manufacturing business is in the consolidation phase and is ripe to be disrupted. I just don't think the disruption will occur in Apple's top line products first.

      • asymco

        If you think Apple decides only on the basis of ROC then you have a lot of explaining to do about that $51 billion sitting in treasuries. An even deeper assumption you might be making is that Apple cares for any measure of returns to shareholders. As a shareholder I'm immensely grateful that they don't.

  • Yowsers

    I'm reminded of the Apple Store story. Apple was derided for it (a safe call, then…), but is now the envy of the retailing world. The lesson being that Apple would likely look for a unique advantage for doing their own manufacturing above and beyond mere number crunching (but they'll crunch numbers, too, no doubt).

    Granted, retail is the opposite end of the stream from manufacturing, and is a totally different world. I can't quite imagine what the manufacturing advantage would be.

    If Apple does move back into manufacturing, I expect it would first be seen as piecemeal acquisitions and new plant builds for key parts of the mfg chain — PA Semi's acquisition an early step towards that. They may only need to take part of the manufacturing chain — not all of it. Just like Apple uses its own chips (from PA Semi), it also uses those from a number of other suppliers.

  • John

    I’m skeptical Apple would do this, but I would love to see it happen. For high value products labor costs are a rather small part of the total price of a product.

    I could see Ape doing this for three reasons.

    First, it might allow them to deploy some proprietary manufacturing techniques that would be difficult using outsourcing.

    Second, it might allow for the designers and engineers to imagine more innivative products if they are closely coupled with manufacturing. I know many of of them currently visit China to watch over the process but that is not the same thing.

    Third, it helps Apple keep more IP in-house. That’s better than educating Foxconn so they can become a future competitor.

    Re sea shipping, it is efficient but ships burn bunker oil, the dirtiest fuel available.

  • http://twitter.com/BrianSHall @BrianSHall

    Baby steps…
    I really can't speak on the business validity of this move by Apple. However, I've long advocated that Apple locate a very small portion at least of its manufacturing back in the US. Let's hope…

  • Wlady Sios

    How come I CANNOT EVER see the comments when using Safari, the APPLE browser, but I can using, for example, Chrome? I click on the comments part of the page & in Safari, I just get a page refresh. With Chrome, the comments appear below that day's column.

    Well????.

    • http://www.geise.com PXLated

      No problem here in Safari

    • Charel

      That is exactly how I see them in Safari as I see yours now.

    • iBob

      On my iPad I must have javascript turned on to see the comments. Check in preferences that it is running.

  • hiscross

    The Asia manufactures have been using just-in-time model for close to 20 years. Moving, let's say, the iPhone manufacturing to the USA will result in longer product delays, higher cost, and quality control issues. Jobs built an impressive NeXT manufacturing facility that cost NeXT dearly. California, like all Blue states tax the crap out businesses. Who do you think pays those taxes? Yes, you the consumer. Don't blame the Asian manufactures, blame the US forecasters. They predict how much to build. They cost Apple a bunch in 2000 with the Cube.

  • Steko

    Surprised at no mention for Samsung which makes high end screens, flash memory, batteries and semiconductors.

    Toshiba also. Maybe Apple could pay $10B for 25% of Toshiba to where they have control over the production but don't actually sign the checks to the workers.

  • Rou

    I think working with Foxconn for final assembly is for the best. Apple should focus on bringing components under their roof and getting an advantage through them.
    There are so many high-value and critical components built with fabs in Apple products, bringing that area in under Apple's roof would be huge.
    Apple joining the alliance of Global Foundries, Samsung,IBM etc. would be a total waste as they and everyone else already have access to the fruits.

    The greatest prize in technology is Intels process and access to them would create years of competetive advantage. It can be done in many ways, all of which will cost alot of money.
    I see this as the ultimate, greatest and most expensive thing Apple can do with their money. And as a bonus, the benefits would be guaranteed unlike starting their own factories. With the Infineon purchase, between themselves Intel and Apple have most of the expensive components in-house.

    This can be done is many ways, most likely a simple contract for access to Intel as a foundry or an outright marriage. Either would scream win for both parties.

  • Charel

    I read a series of articles on German manufacturers who, after outsourcing their manufacturing to China and the Far East, returned it all to Germany as the cost benefit did not outweigh the flexibility and quality they needed.
    They found that the time and money spend on managing and training to achieve the quality was wasteful. They also objected to the theft of their propriety intellectual knowledge in design and manufacturing skills.

    Why would not Apple decide to build a state of the art automated manufacturing plant to launch a new product line. It could be in the West, be it in Europe or the Americas. The skills needed they already seem to have in house.

    • ChriS

      You got a point.
      This proofs to be true for some areas, I never heard such a story from a company in consumer electronics or IT-business though.
      The opposite seems to apply in these areas. Could be a co-incidence, but every company which was trying to keep manufacturing in Europe became uncompetitive in mid-term (Philips, Grundig, Sony Ericsson,..)
      Companies like Samsung and LG are producing LCD/Plasma TV's in Europe, but I assume the cost-advantage is related to size&weight of the product, as barely anything small-sized seems to be manufactured in big volume outside of Asia…

      • Charel

        That is why it would be disruptive.

      • dchu220

        But that's not how you disrupt an industry.

        You disrupt an industry by changing what is important. For example, the iPad places a greater value on mobility and battery life than processing power. In Horace's example, he thinks manufacturing could be reorganized around increased response time to fluctuations in consumer demand versus labor costs.

        If state-of-the-art automated manufacturing plants alone were such an advantage, we would already see them in China. They don't need to be in the US.

      • Charel

        China has ample labor available so they would not be very interested in fully automated manufacturing. Soon Foxconn will have a million employees. Apple will be very involved at a distance to ensure the quality of their products made in China.

        By fully automated, state of the art, I mean an integrated flexible manufacturing plant run by Apple. Close to the design and flexible as to type of product and quantity of products determined by the market.

    • http://twitter.com/judsontwit @judsontwit

      Germany may not be a good analogue for American industrial practices.

      This Washington Post article has an anecdotal take on differences between American and German economic policy that may actually encourage more domestic manufacturing for them.

      I don't have an opinion on the article myself, but I thought it would be an interesting side-note to your point.
      http://www.washingtonpost.com/wp-dyn/content/arti

      • Charel

        Maybe the US should change their approach to manufacturing and learn something from Germany and the Europeans.

  • blah

    Consider that most of Apple's customers will be in China in just a matter of years. Moving the factory to the USA would not help the carbon footprint. However, innovation in robotic manufacturing could be a great use of capital. I'm sure they are working on it.

    • asymco

      I did not suggest moving to the US. Where did that idea come up? Nor did I have single factory. The idea is to distribute manufacturing. Maybe one factory per country. Maybe design factories to fit inside shipping containers and drop ship them in every city (Google went half-way and designed its servers to fit in shipping containers but stacked the containers in a few sites.)

      • Joe_Winfield_IL

        I was just thinking how many threads on this topic lead to the topic of US manufacturing (including one of my own comments), when you made no mention of it in your post. We Americans are very narrow minded in our perceptions. Either a US based company makes products here, or they make products in China. Taiwan, Hong Kong, Vietnam, India, etc. are all "China" to most Americans. Europe is invalid as an option, as are central and south America. Africa? Oh that's right there's a huge landmass just south of Europe!

        To be fair, US manufacturing has been a constant hot-topic in the news for the last few years, as we have been in a recession that disproportionately affects families with jobs in blue-collar industries. Both major political parties obsess on the topic of "bringing jobs back" to the US, so it is the natural inclination of your American readers to skew towards this bias.

        One major benefit of decentralized manufacturing is that product outages would be localized, rather than systemic. Inventory management would be much more cumbersome. However, with proper IT investment, Apple could utilize excess local capacity in one market to offset shortages in another. In some ways, accurate forecasting becomes much less important under a decentralized system.

      • asymco

        For the record, Nokia used to manufacture in Mexico for the US market. They also have a plant in Finland and had one in Germany that was relocated to Romania. There are also operations in Asia.

        As Nokia needs to produce a far larger number of devices than Apple, it's interesting that they are not outsourcing to do so (at least not for the majority of products). Things are changing all the time, so it's not permanent, but there is a precedent where a large scale vendor found it profitable to in-source phone assembly.

      • Joe_Winfield_IL

        Nokia is, at its core, a cellphone manufacturer. Apple never developed the competency for fabricating small devices on a large scale. I would guess that early on in the iPod's reign, Apple decided that they couldn't quickly replicate the knowledge that their contract manufacturers had learned by trial and error. Eventually, they achieved tremendous margins and share without having to make anything themselves.

        iPhone comes along, and again Apple is a neophyte relative to the hardware big boys. Again they achieve the windfall profits without the headaches of manufacturing. The difference with iPhone is that there are dozens of worthy competitors on a very fast refresh cycle, with a constrained supply of key components. I trust that Apple is continually evaluating all major effects of this fundamental difference, and that vertical integration is on the table if it makes sense.

  • KenC

    Interesting idea, but I would worry about China's reaction. Just as Apple is making noises about a big retail push in China, the notion of moving mfring back stateside could cause a backlash. China puts up all sorts of trade barriers in front of companies that want to sell in China who don't manufacture in China.

    If you look at some of iFixit's teardowns of Apple products it does seem increasingly like it is more efficient to manufacture. At some point the additional assembly cost between there and here might be quite small, given some of the other potential savings. I know Foxconn does alot of assembly for Apple, but alot of the components are sourced from Korean, Japanese and Taiwanese companies. Does Foxconn actually manufacture any of the major components in an Apple product other than CNCing the unibody frames for laptops, and the iOS devices? Isn't their work mostly assembly?

    • dchu220

      Foxconn controls the manufacturing of a lot commodity components which allows them to under bid most of their contract manufacturing competitors. They take may choose to manufacture a product at break even or even at a loss sometimes because they will make it up in the sales of the components. It's a similar strategy to HPs inkjet printers or Gillette's razors.

    • asymco

      The percent of the cost of a device that can be attributed to labor is usually between 2% to 5%. I don't see that going up. It's still significant in huge volumes, but it's actually probably less than warranty expense which is a lot more labor. Maybe Apple should manufacture in its Apple stores and cross-train the staff.

      • Laurent Giroud

        Just to be nit picking a little bit:
        labor is ultimately 100% of the cost of any device. True, neither Apple nor Foxconn pay the workers of the electric utilities, but these external costs are reflected in their electricity bills, the same is true of any equipment that they buy: in the end you pay for the wages of the humans who produced them (and the corresponding shareholders).

        So I guess what you mean direct-partner-employed labor costs.

        It's pretty impressive that Foxconn (or any other Apple manufacturing partner) direct costs seem to be mainly due to the value of the "raw materials" that they buy. Still 95-98% seems very high and doesn't seem to leave much place for added value (hence margin). I can understand why Foxconn wants to move up the value chain.

        That seems to be the figure which most supports your proposition: should Apple find itself capable of producing some of the "raw components" (say, an ARM CPU) that they task Foxconn to assemble, they'd rip the entirety of the profits which would had to their margins, not Foxconn's. Seeing this, I indeed understand how having their own components factory would make sense.

  • davel

    I am not sure I understand what the problem is here.

    I do not know about manufacturing but my understanding is that it is in reality a non trivial exercise.

    For whatever reason Apple got out of manufacturing. From a purely selfish standpoint I would love for Apple to own the whole process. They could build factories in the USA, Europe,Asia, etc. It would shorten their supply line to the customer and help bring manufacturing expertise back to the USA.

    However, it brings a lot of negative issues. I see Apple as the best consumer products company bar none. They focus on simplicity and function. Extraneous actions are minimized, quality is paramount.

    They are not leading edge in hardware. This is not a bad thing. Bleeding edge by definition is painful. That is not what Apple is about. You want something that is stable and predictable. That is part of what makes Apple work. It just works. Leading edge means sometimes it doesn't.

    They are very good at waiting for technologies and implementing them because they know why they want something. Many companies that compete in their space put features in just because. They produce products in the hope that it works.

    Manufacturing is not something I see as a core competency. It takes a lot of attention to detail and would take a lot of energy to get a factory right. You have to deal with environmental issues of pollution, supply, etc. When there is a manufacturing defect you need to stop and figure out how to make it work. It is very distracting and very taxing. You also have labor issues and anything else related to the process.

    Is this something Apple wants to deal with? They got hammered on chemicals by Greenpeace and eventually embraced the criticism. I think manufacturing is just too distracting. They have enough on their plate executing the vision of the next generation of their products. I do not think they need the headache of managing the manufacturing process too.

  • Wodster

    Great comments!

    "Designed In California, Built in America" were to be on a card with every new Apple computer and phone, it could really make Americans feel better about buying a more expensive product

    As an investor, I do fear that if Apple were to make the announcement that they were building factories on US soil, it would not be received well initially, but then as others have pointed out, we were nervous when they started making all those Apple stores too!

    Jobs met with Obama not long ago, could this have been part of their discussion?

  • dchu220

    It would be great for Apple to move it's manufacturing back to America, but they won't do it for idealogical reasons. I also don't think it's a wise business move to try to mix the two. Businesses survive by creating value for their customers and pricing it accordingly. The mass market doesn't care where products are made.

    It's important to note that the green movement in Corporate America caught on when CFOs realized how much money could be saved from energy efficiency.

  • Panda

    I run 2 OEM/ODM factories in China and Vietnam.
    Horace got a good point. A very good point for discussion, but probably not an attributable factor for disruption in mobile space.
    Buying factories (for vertical integration) only work best for very segmented component makers, not a product designer and mass marketer like Apple.
    Acer and Asus had to spin off OEM manufacturing subsidiaries just to go to retail. I don’t see why Apple need to “lock down” factories just to ease the strained supply in short- or long-term purposes.
    Apple, however, should buy companies that hold essential IP (e.g. right to Liquidmetal’s amorphous alloy or Instrinsity’ for its ARM Cortex design) or, to a lesser extent, factories with unique scale and exclusive right to manufacture an irreplaceable components (my humble manufacturing experience and past observation tell me “reverse engineering” eventually gets the upper hand, prevails, and thus leaves little breeding time to “exclusivity” to hatch…).
    Don’t buy factories. I know all about it. We are a bunch of no-skilled Joe’s that live on barely legal minimum wages plus monthly 100+ over-time hours (I heard that Pixar’s animators are doing do without getting any public audit for code of conduct violation…).
    I haven’t seen Nike picking up any Asian shoe factories as far as I could possibly remember. Nor does Phil Knight have any immediate intention to bring the shoe-making business back to the States. Why should Apple??

  • http://twitter.com/judsontwit @judsontwit

    Imagine if Apple were to suddenly use their large price margins to justify local American manufacturing.

    I don't think they will, but it would certainly be an eye-opening move.

  • arjun_

    This is the final frontier for Apple, more or less. It is not easy, perhaps impossible.

    A good exercise would be to pry open the most popular products and analyze the number and nature of assembly steps. How much can be automated? What is the length and complexity of the assembly line?

  • Sandeep

    Apple should buy strategic companies like ARM, Facebook, AMD etc with their cash, building and owning factories is not such a great idea

  • asymco

    Shannon Cross of Cross Research writes:

    2. Adding “Made In America” to “Designed In California”
    Apple has revolutionized portable music players, smart phones and tablets, while also developing aluminum manufacturing technology. However, the supply chain and location of computer manufacturing has essentially remained the same. We think one use of cash could be to onshore some of Apple’s manufacturing. As labor costs become a small portion of the BOM and Apple relies more on its own manufacturing technology and tools (e.g., aluminum unibody construction), we think this could become a competitive differentiator. We were struck by the simplicity of Apple’s newest MacBook Air. It appears most of the components are on the motherboard with batteries taking up the remainder of the case.

    Such a move would have powerful marketing and strategic angles, as well. Apple already designs both OSes (Mac OS and iOS), and all hardware, domestically. It actively advertises this fact, prominently, on its products’ packaging, by writing “designed by Apple in California.” We also point to the spate of negative publicity the industry has experienced surrounding Asian labor practices at the key PC supply chain companies, in addition to the negative political sentiment surrounding US-China trade and currency negotiations. We believe US public sentiment is approaching the point where having the choice of an American produced computer or phone would resonate well.

    In fact, Apple’s decision to invest in a significant data center in North Carolina, in addition to purchasing and recently from HP), could form the nucleus for a campaign that leads the public to increasingly identify Apple’s brand as a hometown/American/local brand.considerable property in Cupertino for its new campus (both a few years ago

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