Technological iced tea

“Apple’s Achilles Heel” and the secret behind the most successful consumer product of all time

In 2007, Nokia had 900 million users. The market dominance of the Finnish phone company is so great that Forbes headlines, “Who can catch up with the king of phones?” on the cover page. That same year, Apple released the first iPhone.

16 years later, everyone knows the story of how Nokia was overthrown. The monument once did not have enough software power to keep up with visionary co-founder Steve Jobs and Apple’s design genius Jony Ive.

However, the large screen, multi-touch and not the only strength of Apple. Even before the iPhone was born, Apple was outperforming Nokia in terms of hardware and products. And the “half-bitten apple” does this by betting big on China, especially its manufacturing sector.

In the memory of supply chain researcher Kevin O’Marah, in mid-2007, he was surprised when Apple from an almost unknown company climbed to No. 2 in the Supply Chain Top 25. is an annual ranking that evaluates businesses with the best-run supply chains.

“Everybody was shocked, because Apple had a pretty bad reputation,” he recalls.

But that event was an early indicator of a profound change in the way Apple operates. Seven years later, the company was ranked No. 1 consecutively. And Apple also became the world’s most valuable company, but at the same time became the center of geopolitical tensions.

China’s “key” in the secret to making the most successful consumer products of all time

After doing some research, O’Marah began to realize that Apple wasn’t really just “outsourcing” manufacturing in China as most people understood. Instead, Apple has built supply chains and production lines with such great complexity, depth, and cost that Apple’s fortunes are inextricably linked with China.

 Apple s Achilles Heel and the secret behind the most successful consumer product of all time | Technological iced tea

Over the past 15 years, Apple has sent its best product designers and manufacturing engineers to China. These people have a co-design role, oversee the manufacturing process until everything is running smoothly, and work closely with suppliers to ensure they adhere to tight contracts.

It is this supply chain that has transformed both Apple and China. And running the supply chain is so important to Apple that the “architect” behind it, Chief Operating Officer Tim Cook, has been chosen to succeed Steve Jobs as CEO in 2011. Cook is the switch. Apple’s production line from the US to China, where he created unmatched efficiency – the secret to Apple’s rise.

Pour a mountain of money into China

Apple isn’t the first computer company to start moving production to China. By the time Cook joined Apple in 1998, other companies like HP and Compaq were already active there.

It takes components designed specifically for its products, transforms its entire production lines, and transforms the lines into giant complex systems of unprecedented scale and flexibility. have seen.

In the 2007 supply chain rankings, P&G, Toyota, and Walmart all had overall ratings at least twice as high as Apple’s. However, for the “inventory turnover” index (calculated by dividing sales in a given period by the average value of inventory in the same period), Apple always leads.

Cook once described inventory as “basically the devil”, comparing electronics to dairy products that break down after a few days. Apple has an inventory turnover ratio 2.5 times that of Nokia and 12 times that of Coca-Cola.

The company also invested heavily in building differentiated advantages around its production lines, while competitors only gave suppliers instructions and asked them to implement.

 Apple s Achilles Heel and the secret behind the most successful consumer product of all time | Technological iced tea

Photo: FT.

With iPhone production booming, the value of Apple’s assets in China – mostly devices used in the production of iPhones – has increased from $370 million in 2009 to $7.3 billion. USD as of 2012. That means machines in China are worth more than all of Apple’s buildings and retail stores, estimates Horace Dediu, a former Nokia executive who now runs the research firm. market research Asymco.

After investing huge amounts of money, Apple can deploy production techniques that other companies can hardly even imagine. For example, in 2008, the company released the unibody MacBook Pro with a unibody aluminum housing – a product line that Jony Ive described as “with a level of precision that is completely unheard of by industry insiders”.

Apple was able to make this product using CNC machines, creating complex components from 3D image files. CNC machines have been around for decades but are very expensive (up to $500,000 each) and are therefore only used for making prototypes. However, three former Apple engineers said the company has purchased more than 10,000 CNC machines, so it can produce on a large scale.

The same model applies to iPhones and iPads.

Foxconn’s Gamble

When looking for suppliers, Apple has very strict standards. Engineers from California come to the site to learn about the capabilities of the supplier, questioning the management team closely to get a deep understanding of how the company works. After many hours of exchange, the engineer will ask the company to mass produce a component at Apple’s request. In particular, that engineer will have a very good understanding of the supplier’s R&D work.

This deep insight approach to specifics is influenced by Tim Cook himself. This helps Apple push suppliers, sometimes allowing them to break their own barriers.

Being a supplier for Apple, producing components that can be used in hundreds of millions of devices is a deal too big to refuse and also very profitable. In 2000, Foxconn started assembling iMacs and had $3 billion in revenue – half that of rival Flextronics. 10 years later, Foxconn’s revenue has reached $ 98 billion – higher than the 5 biggest competitors combined.

 Apple s Achilles Heel and the secret behind the most successful consumer product of all time | Technological iced tea

Foxconn’s revenue has skyrocketed since becoming an Apple partner.

Foxconn won the contract to assemble iPhone and iPad after founder Terry Gou had a meeting with Tim Cook. Gou told Cook he was underestimating demand for the two devices, according to Alan Yeung, a former Foxconn executive.

Guo was so confident that he pledged to immediately build two new dormitories for workers. 1 in Zhengzhou – which is known as “iPhone city”, and 1 in Chengdu – which is called “iPad city”.

And Guo was right. From 2009 to 2011, iPhone shipments nearly quadrupled, to 93 million units. In the first 9 months, 15 million iPads shipped.

As of October 2010, Foxconn’s factories in Shenzhen have nearly 500,000 workers working at high intensity. Apple estimates that since 2008, it has trained at least 23.6 million workers – more than the population of the island of Taiwan.

In addition to low costs, Foxconn also provides Apple with an abundant labor force. Whenever Apple needs to increase production, Foxconn can respond. Not only meet the quantity, Chinese workers are also highly skilled.

Hard to go back?

The symbiotic relationship benefits both Apple and Beijing. Industry insiders said other phone carriers also tried hard to catch up, but could not. So they turned to Chinese suppliers for help, giving up their intellectual property rights in exchange for the fast production speed.

In other words, Apple is the catalyst that helps Chinese suppliers win more orders and advance rapidly in technology. Today, China accounts for about 70% of global smartphone production. Chinese suppliers have achieved a very high level. In 2021, the number of organizations in China granted ISO 9001 certification was 426,716, equivalent to 42% of the global total. The number for India is only 36,505, the US is 25,561.

But now, this overwhelming success story is becoming Apple’s biggest weakness. The company is too dependent on China, as the country tightens its grip on the technology industry and is looking to separate from the West. More than 95% of iPhones, AirPods, Mac computers and iPads are made in China. This market also contributes up to 20% of Apple’s revenue in 2021.

Rival Samsung has recently drastically reduced its operations in China, and the past few years have been stressful The tension in US-China relations is increasingly escalating. But Apple continues to invest in China, strengthening its relationship with the country.

As a result, Cook and his company are now under tremendous pressure. Both investors and US politicians are urging Apple to move away from China and step up its diversification strategy. Currently, Apple also has a number of production lines in Vietnam and India.

Apple declined to comment when contacted by the Financial Times. However, industry experts concluded that the iPhone maker did not have much “back way” and no solution could be implemented in the short term. Because what China provides Apple is not just cheap labor, but a comprehensive ecosystem accumulated over the years.

Consult the Financial Times

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