Outsourcing and Vertical Integration at Apple

At a dinner for Silicon Valley’s luminaries in February of 2011, U.S. President Barack
Obama asked Steve Jobs of Apple, “What would it take to make iPhones in the United States?”
Steve Jobs replied, “Those jobs aren’t coming back.” Apple’s management had concluded that
overseas factories provided superior scale, flexibility, diligence, and access to industrial
skills—“Made in the U.S.A.” just did not make sense for Apple anymore.

As an example of the superior responsiveness of Chinese factories to Apple’s needs, an

executive described a recent event when Apple wanted to revamp its iPhone manufacturing
just weeks before it was scheduled for delivery to stores. At the last minute, Apple had
redesigned the screen, and new screens arrived at the Chinese factory at midnight. Fortunately,
the 8,000 workers slept in dormitories at the factory—they were woken, given a cookie and a
cup of tea, and were at work fitting glass screens into their bevelled frames within 30 minutes.
Soon the plant was producing 10,000 iPhones per day. The executive commented, “The speed
and flexibility is breath-taking. There’s no American plant that can match that.”

“Foxconn City,” a complex where the iPhone is assembled, has 230,000 employees,
many of whom work 6 days a week and up to 12 hours a day. It is owned by Foxconn
Technology, which has dozens of factories in Asia, Eastern Europe, Mexico, and Brazil. It is
estimated that Foxconn assembles 40% of the world’s consumer electronics, and boasts a
customer list that includes Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia,
Samsung, and Sony, in addition to Apple. Foxconn can hire thousands of engineers overnight
and put them up in dorms—something no American firm could do. Nearly 8,700 industrial
engineers were needed to oversee the 200,000 assembly-line workers required to manufacture
iPhones. Apple’s analysts estimated that it could take 9 months to find that many qualified
engineers in the United States. It only took 15 days in China. Moreover, China’s advantage
was not only in assembly; it offered advantages across the entire supply chain. As noted by an
Apple executive, “The entire supply chain is in China now. You need a thousand rubber
gaskets? That’s the factory next door. You need a million screws? That factory is a block away.
You need that screw made a little bit different? It will take three hours.” Of Apple’s 64,000
employees, nearly one-third are outside of the United States. In response to criticisms about
failing to support employment in its home country, Apple executives responded, “We sell
iPhones in over a hundred countries. . . . Our only obligation is making the best product
possible.”

Apple is known to maintain one of the best-managed supply-chains in the world. Using
its stature and global reach, the tech giant is able to demand high-quality products and impose
stricter terms on its suppliers. When one of Apple's Chinese suppliers of "tactic engines" for
the iPhone 7 proved unreliable, for example, the company quickly procured them
from the Japanese firm Nidec Corp. Apple has hundreds of such suppliers willing to abide by
the terms Apple sets forth. What's more, by outsourcing its supply-chain and assembly
operations, Apple can do what it does best — concentrate on designing great products that offer
rich functionality and are easy-to-use. The top eleven suppliers are, Analog Devices (ADI)-
capacitive touchscreen controllers for the iPhones and the Apple watch; Glu Mobile (GLUU)-
major provider of iOS apps and mobile games; Jabil Circuit (JBL)- phone casings; Micron
Technology (MU)- memory modules like DRAM, LPDDR3, and LPDDR2 for Apple devices;
Murata Manufacturing Ltd.- ceramic capacitors; Nidec- smartphone vibration motors &
taptic engine for Apple watch; Qualcomm (QCOM)- Envelope Power Tracker, Baseband
Processor, Power Management module and GSM/CDMA Receiver and Transceiver;

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Samsung- flash memory, the mobile DRAM and the application processors;
STMicroelectronics (STM)- low-powered, three-axis gyroscope and accelerometer; Texas
Instruments (TXN)- amplification system; and Taiwan Semiconductor Manufacturing Co.
(TSMC)- A13 processor used in Apple’s current devices.

Apple selectively invests in supplier organizations, with a view to create a market for
its critical inputs. For example, in 2017, it invested $390 million in one of its vertical-cavity
surface-emitting laser (VCSEL- A key hardware component inside of the TrueDepth camera,
used for iPhone X) suppliers, Finisar. That investment, Apple said, will allow Finisar to
"transform a long-shuttered 700,000-square-foot manufacturing plant in Sherman, Texas, into
the high-tech VCSEL capital of the US." Further, in 2018, Apple spent $60 billion with 9,000
American component suppliers, as a part of Apple’s Advanced Manufacturing Fund.

Although Apple epitomizes the opportunities for strategic outsourcing, Apple is also—
paradoxically perhaps—more vertically integrated than most computer or smartphone firms.
Apple’s decision to produce its own hardware and software—and tie them tightly together and
sell them its own retail stores—was widely known and hotly debated. However, the vertical
integration did not end there. Apple also spends billions of dollars buying production
equipment that is used to outfit new and existing Asian factories that will be run by others (an
example of quasi vertical integration), and then requires those factories to commit to producing
for Apple exclusively. By providing the upfront investment, Apple removes most of the risk
for its suppliers in investing in superior technology or scale. For decades, the computer and
mobile phone industries have been characterized by commoditization and rapid cost
reduction—suppliers had to work hard to reduce costs to win competitive bids, and
standardized production facilities trumped specialized facilities as they enabled the suppliers
to smooth out the volatility in scale by working with multiple buyers. This meant that most
suppliers to the computer and phone industry could produce cost-efficient hardware, but not
“insanely great” hardware. Apple’s strategy of paying upfront for both the technology and
capacity enabled it to induce its suppliers to make specialized investments in technologies that
were well beyond the industry standard, and to hold excess capacity that would enable rapid
scaling. The net result is that Apple ends up with superior flexibility and technological
sophistication that its competitors cannot match.

Seeming to acknowledge the advantages of Apple’s strategy of controlling device

design and production, Microsoft announced on June 18, 2012, that it too would design and
produce its own tablet, the Surface. It also launched its own chain of dedicated Microsoft retail
stores that looked remarkably similar to Apple stores. The success of this strategy is far from
assured, however. Although Microsoft can imitate some of the individual integration strategies
of Apple, it lacks both the tightly woven ecosystem that Apple has developed around those
strategies, and its decades of experience in implementing them.

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Figure 1. The iPhone Supply Chain

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