Apple’s Rotten Core Print E-mail
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Written by Mike Buetow   
Wednesday, 07 July 2010 16:28

Apple is now the largest tech company in the world.

Think about that for a moment. The same company that based its GUI on Xerox’s, that never topped about 10% market share in its core PC line, that had to take $150 million from a major competitor just to survive, that was almost taken over by Sun Microsystems, and that doesn’t actually build its products, is now bigger than IBM, Sony, Samsung and even mighty Microsoft.

Technicalities in that statement abound. Apple is largest in market capitalization, not revenues. In fact, it is considerably smaller than its primary supplier.
And that increasingly awkward relationship is the focus of this month’s Caveat Lector.

Time was, Apple built just about everything in-house. Founders Steve Jobs, Steve Wozniak and Ronald Wayne put together the company’s first PCs by hand. Later, the company built its computers on lines in California, Colorado, Ireland and Singapore. In 1996, that changed. Under then-CEO Gil Amelio, Apple sold its production plant in Fountain, CO, to SCI Systems (now Sanmina-SCI), launching a tide stemmed only temporarily when Steve Jobs returned to the company.

Apple was hardly first to outsource, and even once it started, it took the company years to fully shed its factories. But while H-P, IBM and other major electronics outsourcers maintain internal lines, Apple has taken advantage of the concept almost like no other.

Still, like many of its competitors, Apple eventually moved production to a Taipei-based contractor named Foxconn. From time to time, that decision has caused Apple some discomfort. (A dozen or more workers committing suicide by throwing themselves off of buildings or through other, equally effective ways will do that.)
In their wake, everyone from bloggers to, of course Comedy Central has, naturally, bit into Apple (John Stewart called Jobs and his minions “Appholes”). Given the fury, it’s no surprise Jobs has since come out in favor of editorial “oversight.”

But here’s where things really became, well, weird. Some suggested the deaths at Foxconn, while tragic, were actually insignificant when taken in the context of the overall Chinese suicide rate. Problem is, none of Foxconn’s electronics manufacturing peers in China – Huawei, Flextronics, Sanmina, and so on – seem to have this predicament.

By its own admission, Apple’s suppliers have a 65% compliance rate with the company’s Corporate Social Responsibility practices. In manufacturing terms, that’s a pretty lousy yield. So why doesn’t the company bolt for calmer waters?

Insiders have told me Apple not only sources the material, but actually owns at least some of the lines on which Foxconn builds its products, with the latter paid only for each good assembly produced. If that’s the case, Apple is far more tied to the problems at Foxconn than has been previously disclosed. (Apple did not respond to requests for comment.) And if it’s true, it may explain why Apple is so loathe to move any of its programs to other, shall we say “less controversial” EMS companies, despite the fact its margins suggest it could easily afford to do so.

Weirder still were reports that Foxconn might move production back to Taiwan. One commenter went so far as to suggest a fed-up Terry Gou, Foxconn’s chairman, might either replace workers with robots or leave altogether. Others posed similar notions.

Two fundamental problems exist with this line of reasoning (three, if you factor in that a scaled-up lights-out electronics manufacturing operation has never existed).
First, no other country, save for India, offers the population China does. Foxconn’s model is built on having access to hundreds of thousands of workers in company towns. Where else in the world is that possible? What other government would even allow it? Taiwan, for example, has neither the space, the population nor the wage rates necessary to pull this off, even if it wanted to.

Second, Foxconn has established complete supply chains in or near its campuses. It’s one thing to move a factory. EMS companies do this all the time, and (with some notable exceptions) have actually become fairly good at it. But relocating an entire supply chain takes time and commitments. Foxconn may be the largest EMS player in China, but it’s not the only one, and in just a handful of cities those chains can feed 65% or so of all electronics manufacturing in the world. Simply put, there are good reasons everyone is in China right now and not, for example, India.

For better or worse, Foxconn and China are bound together. And for better or worse, it would appear Apple is, too.

Friends of Jeff redux. Updating last month’s column, Juki, Speedline and Asymtek recently have signed on to Jeff Mogensen’s Let’s Pick a Fight with Cancer equipment auction. For more information, visit

Last Updated on Monday, 02 August 2010 21:41


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