Apple have given up the means of production if true they are doomed

[gaelic cowboy]

While browsing my paper this morning I found this article in the Irish Independent business section which they have taken from the Telegraph. It raises a serious question about the future of companies in the West or anywhere really on continual outsourcing. The continual hollowing of production is good up to a point but it reminds me of the story we used to be told in college of television production in the USA if you think of it who makes telly's now in US. The big companies continued to outsource to suppliers in Japan until the suppliers started to offer good televisions themselves due to learning the methods of production from America the big American tv companies found they were outflanked because they had given up the ability to produce supposedly in order to concentrate on high value research. The eventual Chinese produced american Ipod will become a Chinese produced Chinese Ipod if Apples not careful.

I just thought it was interesting article and timely seeing as we have a When China's taking over thread on the go.

Why Apple can't control its Chinese factories

Why Apple can't control its Chinese factories

By Malcolm Moore in Shanghai
Monday March 08 2010
While Apple is to be applauded for auditing its suppliers in an attempt to identify poor working conditions, its suppliers are so powerful that Apple can't effect real change - and nor can any other tech company.

Last year, after a 25-year-old Chinese university graduate committed suicide at one of the factories that makes Apple's iPhone, executives from the Californian company flew in for an urgent review.

Sun Danyong threw himself from the 12th floor window of his apartment block after an iPhone prototype went missing on his watch.

Before he jumped, he sent a message to a friend claiming that security staff at Foxconn, the notoriously secretive Taiwanese company that makes all of Apple's mobile phones and the upcoming iPad, had beaten him severely.

The allegations deeply shocked Apple's management, and there were calls for Foxconn to be fired.

The Taiwanese firm, which operates a series of mega-factories on the Chinese mainland, has been described as "inhumane and militant" by China Labour Watch, a US-based NGO.

However, at the end of the day, Apple was powerless to change the situation. According to analysts, Foxconn and its two rivals, Quanta and Pegatron, are the only three companies in the world that are capable of quickly mass-manufacturing Apple products of the right quality.

Industry insiders said it is this triumvirate, and not Apple, that really holds the power in the relationship. "In the near term, there is absolutely nothing that Apple can do to shift away from these companies," said Edward Yen, a technology analyst at UBS.

"Apple's biggest concern is whether the factories can deliver on time, and get the quality right. There really aren't that many players who can do that, major players who have the skillset and flexibility," he added.

Apple's lack of power over its suppliers came under the spotlight again last week, when the company's own investigation revealed widespread allegations of abuse among the 102 factories that manufacture its goods.

Apple's 2010 Supplier Responsibility report listed claims of child labour, excessive working hours, environmental abuses and very low wages at many of its suppliers.

And while Apple deserves credit for transparently auditing its suppliers and publishing the results, it was notable how little the US company could do to resolve the problems.

Many issues had worsened in the last year, but Apple only terminated the contract of a single supplier.

"Apple can't do anything about it, it has nowhere else it can turn to to make its products," said one expert in sourcing from Chinese factories.

"If they try and move business away from Foxconn, Foxconn can simply go out and buy whichever supplier they turn to".

Although Apple carefully chooses the smaller component companies that make the parts that go into its computers, iPods and iPhones, it is the triumvirate of big suppliers who are in charge of running the system day-by-day.

If Apple tried to take its business elsewhere, it would risk losing its entire supply chain.

The three companies are behemoths in their own right, producing goods for a roster of blue-chip brands, including Sony, HP, Dell, Acer and Nokia. Quanta is the world's largest laptop maker, and manufactures 90pc of Apple's Macbooks, according to Mr Yen.

Foxconn, meanwhile, makes all of the iPhones and the two companies split the production of Apple's iMac desktop computers half-and-half. Pegatron makes some of Apple's iPod models.

All three companies are deeply secretive. Foxconn did not respond to requests for a comment on its relationship with Apple, while Elton Yang, the vice president of Quanta said: "We strictly follow up any core policy stipulated by our customers. Meanwhile we shall not and could not comment on anything regarding our customers."

Apple, asked about the abuses in its report, said: "Last year Apple proactively audited more than 100 supplier facilities around the world to ensure that they comply with Apple's strict standards. We have also created extensive training programs to educate workers about their right to a safe and respectful work environment."

Apple controls its research and development, dreaming up its products in Cupertino, California, and then passing the blueprints to its suppliers.

However, elsewhere in the technology industry, the relationship between big name brands and the triumvirate is changing rapidly.

Analysts said Apple's rivals, HP and Dell, have even less control of their supply chain. "With Dell, HP and Acer, they pretty much say to Quanta and Foxconn: 'Show us what you've got'," said Mr Yen.

It is the suppliers, rather than HP and Dell, who come up with new designs and technology. Both Quanta and Foxconn have heavily invested in making sure they are at the cutting edge.

Quanta, for example, made a $10m (€7.32m) investment last year in Tilera, a chip-maker whose technology may allow users to control their computers by waving their hands in front of their screen.

Foxconn has backed Innovation Works, the technology incubation firm started by Kaifu Lee, the former head of Google in China.

Nevertheless, Mr Yen predicted it would take Apple a long time if it wanted to change the practices in the Chinese system.

"If they genuinely do not like what is happening, they can build up the capabilities of another supplier, feeding it a few projects here and there. They can't do it overnight though. It would take a couple of years."

- Malcolm Moore in Shanghai

© Telegraph.co.uk

[Fragony]

"Apple, asked about the abuses in its report, said: "Last year Apple proactively audited more than 100 supplier facilities around the world to ensure that they comply with Apple's strict standards. We have also created extensive training programs to educate workers about their right to a safe and respectful work environment."

Apple and their total bull, there is a reason my macbook didn't come with a 'no children were harmed making this product' sticker. Has to be the most hypocrite company ever, good computers though.

[gaelic cowboy]

Yes good computers but if they continue on the path suggested in my post they are doomed to be overtaken by there own suppliers tbh I was a bit disappointed when I read the article I thought Apple were cleverer than that after all they stole most the ideas for there own designs from Xerox when they started out does Stevie boy really think it cannot happen to him in return.

[Fragony]

Apple is a sexy brand they will live, but everybody will just have to come to terms with this century being Asia's golden age. We had our time and it was fun, Asians are more intelligent then us, they do it better, and they do it cheaper.

[gaelic cowboy]

Yes and no Frag globalisation has lifted Asia and they will be more important in the medium term future and possibly the top dog in the longer term but this problem of hollowing production is symptomstic of the whole bloody asset bubble that just popped. Banks forgot to be boring and thought they were some kind of hedge fund they ended up ruining there own business model because they followed the profit motive above the business motive the same is happening to manufacturing companies. Shifting production to the east is fine but shifting it all is silly in the long term for your company overly concentrating in one region is a recipe for strategic disaster on the part of any company.

[Fragony]

Asia has a major problem as well, they are over-stretching, they can make cheap stuff but they will always demand on the west to buy it if they keep going like this, the average Chinese doesn't benefit from this huge shift of economic power, the chance on civil unrest is considerate. They (in this case I specifically mean China) can do that only for so long. But it's one bad machine that China, immensely powerful.

[gaelic cowboy]

Asia has a major problem as well, they are over-stretching, they can make cheap stuff but they will always demand on the west to buy it if they keep going like this, the average Chinese doesn't benefit from this huge shift of economic power, the chance on civil unrest is considerate. They (in this case I specifically mean China) can do that only for so long. But it's one bad machine that China, immensely powerful.

Agreed on all points

[Furunculus]

those countries which do concentrate on certain high value research won't necessarily do so bad:
http://blogs.telegraph.co.uk/finance...onomic-future/

What the iPod tells us about Britain's economic future

By Edmund Conway Economics Last updated: November 26th, 2009

In my column this morning on manufacturing (Shock news – Britain still makes things) I didn’t have space to mention one other important misconception about manufacturing: that just because something is “made in China” or somewhere else in the emerging world doesn’t necessarily mean that the money from its construction goes to that place alone. This helps explain why, in broad terms, a developed economy does not need a trade surplus (or even a balance) in order to survive.

Let’s take the iPod (or the iPhone for that matter) as an example. On the back of it it says “Designed by Apple, Made in China” or words to that effect. What this tells you is who designed it and who put it together. What it doesn’t reveal is the complex economic web that the product represents – that the cash you pay for one of them is scattered to many different countries around the world.

In a very enlightening series of papers on precisely this, a team of US academics (Greg Linden, Jason Dedrick and Kenneth L. Kraemer, all of the University of California, Irvine) have found out where the money goes, and their conclusions might come as something of a surprise.

For one, although in trade statistics the Chinese export value for a unit of a 30GB video model in 2006 was about $150 (in other words for every iPod sold $150 went onto the Chinese exports ledger) Chinese producers really only “earned” around $4. China, you see, is really just the place where most of the other components that go inside the iPod are shipped and assembled. The remaining cash instead went to the US, Japan and a host of other countries (among which the UK is one) who made the parts that go inside. In other words, the country where the product is constructed does not necessarily get the lion’s share of the profits.

ipodchart

In fact, this breakdown of where the cash you pay for an iPod goes shows that the vast majority finds its way straight back to the US, rather than going to China. A hefty chunk represents the retail and distribution costs (which will depend on where you are, though in the case of this diagram they are in the US), then after that Apple recoups a massive chunk, effectively for having designed the thing. The rest of the money goes to the people who make what goes inside. As it happens, for most of the (older) iPods the team examined, the most expensive components were the hard disks, which were manufactured by Toshiba, a Japanese company, in the Philippines. Here, again, the same principle was at work: the designer of the hardware recouped far more of the profit than the factory which puts it together.

Due to the way trade statistics are compiled, these flows of cash back to the US are unlikely to show up in the trade balance. But when you work out the overall US balance of payments, it will show that cash has flowed back into the country as a direct result of the intellectual property Apple owns in the iPod. It is a cursory reminder that we don’t necessarily need to hammer steel and bash products together here in the UK in order to become a better-balanced manufacturer.

There was all sorts of hand-wringing that took place a few years ago when Dyson made the decision to relocate the manufacture of their products to Malaysia, but the same principles that apply to the iPod also apply to the Dyson products. It is highly likely that Britain gets a far greater share of the proceeds from every vacuum the company sells than either Malaysia or any of the other component manufacturers or assemblers.

It is another reminder, too, of the importance of innovation for the UK economy. But before, God help me, I start sounding like Gordon Brown, here are the economists’ own conclusions. Check out their website, which has their recent papers on the real story of globalisation, trade and manufacturing.

First, nationality matters. While the iPod is manufactured offshore and has a global roster of suppliers, the greatest benefits from this innovation go to Apple, an American company, with predominantly American employees and stockholders who reap the benefits… Apple keeps its product design, software development, product management, marketing and other high value functions in the U.S. This is not necessarily because the U.S. work force has superior capabilities in all of these areas, but because Apple has developed very specialized knowledge and ways of doing things that reside within the company and would be difficult to transfer to external locations.

Second, innovation matters. The producers of high value, critical components capture a large share of the value of an innovative product… For the 30GB Video iPod, the highest-value components are the hard drive and the display, both supplied by Japanese companies. Thus Japan captures the next largest share of the value of the iPod, thanks to its companies’ strengths in those technologies. US chip makers such as Broadcom and PortalPlayer [one might also add Wolfson of Edinburgh which provides the audio codex chip] provide less costly inputs, but earn high margins and thus bring additional value to the U.S. By contrast, Inventec, which was actually responsible for assembly of this iPod (the activity that most people think of as “making” a product), earns a relatively modest share of its value. So in general, the greatest value from providing inputs to an innovative product goes to the countries whose firms provide critical, differentiated technologies.

Third, trade statistics can mislead as much as inform. For every $299 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost) plus the cost of shipping. Yet the value added to the product through assembly in China is at most a few dollars. Even if we included the direct labor involved in making various parts and components in China, it would still add only marginally to China’s share of the value.

By this same logic, if the iPod were assembled in the U.S., most of the corresponding $150 bilateral (US-China) trade deficit would disappear, but the overall U.S. trade deficit associated with each unit would only fall by a few dollars. The rest would simply shift to the countries where the components are made, as those would have to be imported to the U.S. for final assembly.

This is not to say that the U.S.-China trade imbalance is not a serious concern in a broader sense, but it shows that there is a need for better data to understand what that deficit really means for each country.

To conclude, no single country is the source of all innovation and therefore U.S. companies need to work with international partners to bring new products to market. These companies will capture profits commensurate with the extra value they bring to the table. This is simply the nature of business in the 21st century, and the fact that many U.S. companies are successful in this environment brings significant benefits to the U.S. economy.
As long as the U.S. market remains dynamic, with innovative firms and risk-taking entrepreneurs, global innovation should continue to create value for American investors and wellpaid jobs for knowledge workers. But if those companies get complacent or lose focus, there are plenty of foreign competitors ready to take their places.

PS Incidentally, after writing my column I’ve received a few encouraging emails from readers who have themselves made the switch from finance to manufacturing. One is Ian Hart. Not so long ago he was employed in the City to put his scientific background and qualifications to “good use”, trading derivatives. In the wake of the crisis, he has applied them to something far more worthwhile, making gin. He has created his own London Dry Gin, Sacred Gin, which has already won a number of awards. Excellent news! If anyone has any similar stories – for instance a rocket scientist who is now actually making rockets – do let us know.

to use that example of the ipod/iphone/ipad; every single one of them contains a CPU designed by and licensed from ARM holdings, a British company, just as every single one contains a GPU designed by and licensed from Imagination Technologies, again a British company.

as do most nokia phones, most android phones, most blackberry's, all palm phones, most smartbooks........................

by way of evidence, from today:
http://channel.hexus.net/content/item.php?item=22794
http://channel.hexus.net/content/item.php?item=21859

[Fragony]

Agreed on all points

Yes but I still think Star-wars is better then LotR and that the EU and the UN were founded by Hitler.

Agreement wth?

[gaelic cowboy]

Yes but I still think Star-wars is better then LotR and that the EU and the UN were founded by Hitler.

Agreement wth?

with the below comments obviously

Asia has a major problem as well, they are over-stretching, they can make cheap stuff but they will always demand on the west to buy it if they keep going like this, the average Chinese doesn't benefit from this huge shift of economic power, the chance on civil unrest is considerate. They (in this case I specifically mean China) can do that only for so long. But it's one bad machine that China, immensely powerful.

I suppose the main thing to take away is yes China could collapse but that would be just as disastrous for western companies as it would for China. If your company has totally relocated production to the east then if china collapsed your suppliers are gone now if any one of your competetiors kept a company or two at home they have all the market not good idea long term

[Tellos Athenaios]

For most companies outsourcing should be a short term solution. Initial competitive advantages (lower costs) degrade over time, but the disadvantages stick (longer line of communications, less control over the final product; typically workers with lesser skillset). This is why, for example, India is still not the Mecca of IT outsourcing it once was predicted to be(come).

[gaelic cowboy]

Another thing I forgot is actually its twice the work for management if you outsource and have very tight supply lines you have to continually be in contact with suppliers and even there subsuppliers to ensure smooth production. Little nugget from my own experience is when there was a fire in one of the INTEL fabs it affected Motorolla badly cos there supply lines were very tight and they lost serious market share. There competitors bought all the chips availabe because they did not just rely on the say so of INTEL that production would be back ontrack soon and of course Motorolla had no way to make there own chips.

[Husar]

Another thing I forgot is actually its twice the work for management if you outsource and have very tight supply lines you have to continually be in contact with suppliers and even there subsuppliers to ensure smooth production. Little nugget from my own experience is when there was a fire in one of the INTEL fabs it affected Motorolla badly cos there supply lines were very tight and they lost serious market share. There competitors bought all the chips availabe because they did not just rely on the say so of INTEL that production would be back ontrack soon and of course Motorolla had no way to make there own chips.

Had there been a difference if Motorola had had their own factory and their own factory had burned down? Had!*

Spoiler Alert, click show to read: 

*Yes, past-terms confuse me sometimes, feel free to correct it.

[Sasaki Kojiro]

The eventual Chinese produced american Ipod will become a Chinese produced Chinese Ipod if Apples not careful.

But it won't be called an iPod, so what does Apple have to worry about? It seems like it would be more of an issue for other companies.

[gaelic cowboy]

But it won't be called an iPod, so what does Apple have to worry about? It seems like it would be more of an issue for other companies.

Because Apple would not be able to produce anything at all having shifted production to China they would in effect have lost the ability to produce Ipods

[Sasaki Kojiro]

Because Apple would not be able to produce anything at all having shifted production to China they would in effect have lost the ability to produce Ipods

Yeah, but why would the production companies suddenly quite making apple iPods unless they can sell their chinese iPod's?

[gaelic cowboy]

Ask yourself why anyone changes brands then do you remember the early mp3 players yeah neither do I

Japanese tv suppliers did the same to american tv companies does anyone even know an american tv brand now

[Centurion1]

yeah but who wants to run a production line in america ill be honest, we are more lazy, more expensive, and worse workers.

the cost difference for a us and a chinese worker is so drastically different. for example all that faulty stuff toyota recently produced were almost completely made in new american factories. not exactly reassuring for business owners is it.

America needs to find a way to be industrial instead of post industrial service nation but it may be too late.

[Furunculus]

yeah but who wants to run a production line in america ill be honest, we are more lazy, more expensive, and worse workers.

i'm with Centurion.

i even gave you guys an article detailing how little of the value of a product lies in manufacture, and how hi-tech companies keep the profits despite the perception of china-takes-all, and all i get is silence!

you want to live in a run-down peasant tenement in 25 years time, then fine, keeping trying to out-compete china on manufacturing costs, your retirement will be grim.

if not then invent to crazy new *(^% that other people just have to have in their products, compete or die.*




* or try to live in the EU where they will raise tariffs and pretend the rest of the world isn't happening whilst demographics nosedive.

[gaelic cowboy]

America needs to find a way to be industrial instead of post industrial service nation but it may be too late.

More automation is the key for US companies then quality quality quality needs to be bashed into the heads of the workers its the only way. The reality is that our world is moving to a post industrial state even in China and its only going to get more service orientated in the future. Today one worker no matter where in the world makes more for less in less time than 100 years ago and thats a good thing manufacturing will become less important in such a world due to the fact that we fulfill the needs without using the globes full potential for consumer goods.

However moving to a completely service and research base in America and depending on suppliers to be strategic long term partners is not a sensible strategy for any business. I have no doubt this strategy looks cool on the share price blah blah keep high value jobs at home blah blah outsource the cheap jobs blah blah consumer gets cheaper IPod everyone is happy well no they should not be cos those research jobs can go just as easy and if your supplier comes up with the next killer app and tells you get stuffed what can you do you have no plant in America to make products.

[Furunculus]

However moving to a completely service and research base in America and depending on suppliers to be strategic long term partners is not a sensible strategy for any business

they aren't.

there is a reason why that intel announced the intention to invest ~$9B in new semi conductor fabrication plants in america.

not in ireland.
or in israel,
or even in china or taiwan.

in america!

[gaelic cowboy]

i'm with Centurion.

i even gave you guys an article detailing how little of the value of a product lies in manufacture, and how hi-tech companies keep the profits despite the perception of china-takes-all, and all i get is silence!

you want to live in a run-down peasant tenement in 25 years time, then fine, keeping trying to out-compete china on manufacturing costs, your retirement will be grim.

if not then invent to crazy new *(^% that other people just have to have in their products, compete or die.*




* or try to live in the EU where they will raise tariffs and pretend the rest of the world isn't happening whilst demographics nosedive.

Furunclus your foscusing on the wrong things you cannot move all production to cheaper regions its not good strategic thinking it is quite frankly inherently unstable one war or earthquake in whatever country your in and all your production plants are out of action.

By all means outsource if you have twenty factories keep four or five in US same in Europe rest in Asia spread your into say three key centers in US, Europe and Asia now your really competing but if you outsource all your production and think oh its ok we just keep the research you will get caught and suddenly you wont be able to compete or anything. Obviously you need to invest in more automation in the more expensive regions but that is the price of keeping your business strategically safe

[gaelic cowboy]

they aren't.

there is a reason why that intel announced the intention to invest ~$9B in new semi conductor fabrication plants in america.

not in ireland.
or in israel,
or even in china or taiwan.

in america!

They are an example of a strategically sound company they also have research and design plants in Ireland, Israel etc etc etc

[Furunculus]

dyson attempts to bring back engineering to the UK:
http://www.telegraph.co.uk/finance/f...ng-vacuum.html

[Beskar]

The problem with some of the things (which I actually agree with), is that many people whine about the costs and the fact it would need to be a nationalised industry, since private sector wouldn't touch it with a barge pole.

I would love to see big engineering projects returning to Britain and have high-speed rail akin to France and Japan. British Rail was basically the blueprint which everyone else copied and improved upon while we stuck with the past. Many of his other ideas in that article I agree with.

[gaelic cowboy]

The problem with some of the things (which I actually agree with), is that many people whine about the costs and the fact it would need to be a nationalised industry, since private sector wouldn't touch it with a barge pole.

Not necessarily the key is automation which requires getting rid of jobs and ensuring quality outsourcing is NOT a bad thing but like everything it should not be carried to any extreme. Price and costs are big issues but no company takes them to the ultimate low price. If price is the only key factor then Myanmar is where you go to not China but costs are not the be all and end all of the equation duty customs access to raw materials energy water people safety etc all need to be factored.

I would love to see big engineering projects returning to Britain and have high-speed rail akin to France and Japan. British Rail was basically the blueprint which everyone else copied and improved upon while we stuck with the past. Many of his other ideas in that article I agree with.

Large scale rail projects in Britain are unsuitable as the country is too small and too crowded maybe if the link was to Scotland or something from London but the route is hardly that profitable and my favorite Irishman from Mullingar would probably undercut the whole thing with cheap flights. Furunculus has shown what you do in his last link encourage someone to invent as it were the next big thing and then try to leverage it which is good for consumers and Britain.

[Beskar]

I am still wanting a tunnel to connect Northern Ireland and Scotland together, like the Channel Tunnel.

[gaelic cowboy]

You never know it may happen one day although if the tech was available it might be more profitable to go from Wexford to Wales closer to London and all that course that would be like star trek stuff with maglevs and all that

[drone]

I hope companies also take into account the theft of their IP when outsourcing production to China.

[gaelic cowboy]

I hope companies also take into account the theft of their IP when outsourcing production to China.

They do its a serious concern