Asymco on owning factories

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    Posted: 15 December 2010 11:29 AM

    Premiere prognosticator Horace Dediu http://www.asymco.com/2010/12/15/apple-factories/

    The heart of the matter:  By owning factories, Apple can directly ramp up production. 

    As for myself, I can vaguely see this, but I’d like to hear more.

         
  • Posted: 15 December 2010 11:38 AM #1

    Owing option rights for production is cheaper and more flexible than owing plant.

         
  • Posted: 15 December 2010 11:35 PM #2

    It would be nice if we could bring some manufacturing jobs home.  I have been worried about the Chinese economy for some time, and am also concerned that the Chinese government can move on a whim to Apple’s (and other company’s) detriment.  Also it is very difficult to build a manufacturing capability of this magnitude from scratch successfully.  We also have the problem that most of the components are also manufactured overseas.

    Perhaps if Apple started with a single new product…?

    By the way, if AFB members are interested in a good take on the Chinese economy, see:

    http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/11/23/shadow-over-asia.aspx

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    Posted: 15 December 2010 11:56 PM #3

    It’s a good question to be asking as Apple’s revenues soar ever higher.  Yeah, yeah, brick and mortar makes for millstones around one’s neck, but let’s not forget, Apple isn’t a conventional company, and it’s always, always looking to have as much control over its destiny as possible.  Hey, Intel makes its own chips for the most part, right?  It’ll be interesting, because Apple will soon become the biggest PC company in history.  How big can a company get without taking more and more core manufacturing functions in-house?

    [ Edited: 16 December 2010 12:01 AM by Mav ]

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  • Posted: 16 December 2010 12:54 AM #4

    My background is insurance.  My last position was as the Chief Underwriting Officer for an insurer that specializes in property-casualty coverages for large multi-national manufacturers.  Many of these were electronic manufacturers.  My biggest concern about my holdings in Apple has always been the dependence on a few manufacturing locations for critical components and limited locations in China for the final assembly of most major products.

    This concern is exacerbated by two facts.  The first is that many of these manufacturing locations are in China or elsewhere with risk to power interruption and/or earthquake.  China is a communist country ruled by a political iron hand that has concerns much larger than its reputation as a contract manufacturer.  Political risk to Apple is significant.  Furthermore, I wonder about the duplicity of the electric grid in Shenzen.

    The second is that Apple has only four products (iPhone, iPad, iPod and iMac computers).  The loss of any of these four products would severely effect the earnings of Apple and the loss of either of the first two would decimate earnings as well as jeopardize the market leadership Apple has carefully crafted for itself.  A major incident that either damaged the plant or interrupted the provision of basic services such as water, electricity or transportation could leave Apple?s earnings in disarray for quarters.  The potential damage to the share price is inestimable.

    The financial size of the risk is such that there may not be adequate insurance capacity available in the marketplace from financially acceptable insurers for some of the hazards presented.

    The creation of parallel manufacturing lines in the US would be very welcome news.  It could conceivably provide jobs to thousands of Americans and it could help to ensure a less interruptible supply line of product.  Also, it could be handled such that new phantom products were begun behind the walls in Shenzen to prevent the early release of data prior to SJobs public unveilings.  Though, frankly, this ability seems to have largely been compromised already.

         
  • Posted: 16 December 2010 09:05 AM #5

    Thre is a WSJ story this morning which has started two new threads.  I believe it belongs here because the gist of the story is that the parts for the iPhone come from many different companies.  To wit:

    Japan:  34%
    Germany:  17%
    South Korea:  13%
    US:  6%
    China:  3.6%
    Others:  27%.

    Although it might be possible to replace Foxconn with an assembly factory here it would do little to solve our trade deficit, shorten product turn around times and the supply chain logistics would be daunting.

    The article is here (hope the link works):

    http://online.wsj.com/article/SB10001424052748704828104576021142902413796.html?mod=rss_asia_whats_news&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+wsj/xml/rss/3_7013+(WSJ.com:+What’s+News+Asia)

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    Posted: 16 December 2010 11:41 AM #6

    I would love to see them manufacture and assemble as much as possible here in the USA. I don’t mean to slight our friends in Europe, Asia, Africa and Oceania, but we need the jobs.

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  • Posted: 16 December 2010 11:50 AM #7

    @Flashman - sure, just show Apple the hundreds of thousands of people in the US willing to work for $125 per month:

    http://www.cultofmac.com/report-apple-to-subsidize-foxconn-workers-to-stop-suicides/45171

    The fact of the matter is, is that general assembly is a highly commoditised service, and therefore does not deserve to be highly paid.  Manufacturing and assembly is not very profitable for both companies, and the employees that they employ.  So when you say you want Apple to use the US to manufacture and assemble Apple products, is this really something that the US (or Western Europe for that matter) should be pushing for?  My personal opinion is no, it’s not.

         
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    Posted: 16 December 2010 12:05 PM #8

    JonathanU - 16 December 2010 03:50 PM

    @Flashman - sure, just show Apple the hundreds of thousands of people in the US willing to work for $125 per month:

    http://www.cultofmac.com/report-apple-to-subsidize-foxconn-workers-to-stop-suicides/45171

    The fact of the matter is, is that general assembly is a highly commoditised service, and therefore does not deserve to be highly paid.  Manufacturing and assembly is not very profitable for both companies, and the employees that they employ.  So when you say you want Apple to use the US to manufacture and assemble Apple products, is this really something that the US (or Western Europe for that matter) should be pushing for?  My personal opinion is no, it’s not.

    No our workers would not do it for $125 per month and they shouldn’t, but something needs to be done put the 1 in 5 back to work. What do you suggest?

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    “Works of art, in my opinion, are the only objects in the material universe to possess internal order, and that is why, though I don’t believe that only art matters, I do believe in Art for Art’s sake.” E. M. Forster

         
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    Posted: 16 December 2010 12:25 PM #9

    JonathanU - 16 December 2010 03:50 PM

    @Flashman - sure, just show Apple the hundreds of thousands of people in the US willing to work for $125 per month:

    http://www.cultofmac.com/report-apple-to-subsidize-foxconn-workers-to-stop-suicides/45171

    The fact of the matter is, is that general assembly is a highly commoditised service, and therefore does not deserve to be highly paid.  Manufacturing and assembly is not very profitable for both companies, and the employees that they employ.  So when you say you want Apple to use the US to manufacture and assemble Apple products, is this really something that the US (or Western Europe for that matter) should be pushing for?  My personal opinion is no, it’s not.

    The labor component of mobile phone manufacturing is very low 2% to 5% of the bill of materials. Most of the assembly is automated. The most labor intensive has usually been the placing of the items in a box.

    To those who suggest that this work is not economical, consider Apple’s retail stores. They employ tens of thousands.

    Is the implied assumption that retail margins, in isolation, are worth the employment of tens of thousands but manufacturing margins aren’t. I think Apple went into retail not because they needed to bump up their return on capital.

    My point is that innovations in production have taken labor far out of the equation for device manufacturing and the strategic value of distributed production may outweigh ROC considerations.  That capital is only generating <1% anyway.

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    Posted: 16 December 2010 12:40 PM #10

    JonathanU - 16 December 2010 03:50 PM

    @Flashman - sure, just show Apple the hundreds of thousands of people in the US willing to work for $125 per month:

    http://www.cultofmac.com/report-apple-to-subsidize-foxconn-workers-to-stop-suicides/45171

    The fact of the matter is, is that general assembly is a highly commoditised service, and therefore does not deserve to be highly paid.  Manufacturing and assembly is not very profitable for both companies, and the employees that they employ.  So when you say you want Apple to use the US to manufacture and assemble Apple products, is this really something that the US (or Western Europe for that matter) should be pushing for?  My personal opinion is no, it’s not.


    Johnathan, manufacturing has become so state of the art that what you are talking about would not apply.  I have seen the pictures of many workers in a line at Foxconn. If that work was done in the US there would be significantly less people. The workers would be monitoring and the supplying would be completely automated. You will just have to trust me on this, I worked 20 years in a very high tech manufacturing facility. I worked maintenance on high speed machinery. The production numbers of my facility would stagger most people. I need to add that the Germans and Italians make the absolute best high speed production machines in the world.

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  • Posted: 16 December 2010 12:55 PM #11

    Great points Horace.

    Labour in manufacturing and assembling of electronics is a tiny component of costs indeed.  And even then it is not a specialised skill and therefore shouldn’t be highly compensated.

    I agree with your points regarding distribution of production, but only to a certain extent.  There are clearly economies of scale that should be enjoyed by a firm like Apple, given the quantity of products they are producing.  However, there are definitely risks with concentrating their means of production in one geography or even in one mega-production facility ala Foxconn.  Some sort of happy medium could, and should, be sought after.  However, isn’t Foxconn doing this to a partial extent by building yet another factory further in to the interior in China?  As for expanding Apple’s geographic manufacturing capacity, there are some cheap, highly efficient manufacturing based economies in Central/Eastern Europe such as Czechoslovakia which could certainly be considered.  The only concern I have about this is that given the vast majority of the components that go into Apple products are churned out in countries based in South East Asia, assembling the goods anywhere other than in SE Asia just doesn’t really make sense?

    It certainly is a conundrum, for which I am wholely lacking in knowledge and expertise!  Alas, all I can take comfort in is that I am sure Apple would have hired the best product sourcing and operationally focussed experts around…

         
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    Posted: 16 December 2010 01:11 PM #12

    Wouldn’t it make sense to build a factory in Brazil to ship products to all of south America? Not to mention tapping into the Brazilian market which is booming. Apple likes control, which it has for the most part with Foxconn, but additional capacity is good when you are expanding.

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  • Posted: 16 December 2010 01:16 PM #13

    On the surface of it, it would make perfect sense to put a factory in Brazil…

    However, I am sure there is more to the Brazilian story than meets the eye.

         
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    Posted: 16 December 2010 01:32 PM #14

    JonathanU - 16 December 2010 04:55 PM

    Great points Horace.

      The only concern I have about this is that given the vast majority of the components that go into Apple products are churned out in countries based in South East Asia, assembling the goods anywhere other than in SE Asia just doesn’t really make sense?

    It certainly is a conundrum, for which I am wholely lacking in knowledge and expertise!  Alas, all I can take comfort in is that I am sure Apple would have hired the best product sourcing and operationally focussed experts around…

    From a comment above:

    Components that go into iPhones are sourced as follows:

    Japan:  34%
    Germany:  17%
    South Korea:  13%
    US:  6%
    China:  3.6%
    Others:  27%.

    These components are usually shipped in bulk on rolls of paper. The assembly machines use them as input much like newspaper companies uses newsprint.

    I just looked this up:

    Nokia operates a total of 15 manufacturing facilities located at Espoo, Oulu and Salo, Finland; Manaus, Brazil; Beijing, Dongguan and Suzhou, China; Farnborough, England; Kom?rom, Hungary; Chennai, India; Reynosa, Mexico; Jucu, Romania and Masan, South Korea

    These plants are fed a similar diet of components and labor that Apple uses in (presumably) one or two plants.

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  • Posted: 16 December 2010 01:48 PM #15

    In an ideal world, I would love Apple to bring everything into the US.  However, since we’re living in reality, Apple is in a business where technology changes so fast, it would be a huge investment in capital and would always have to re-tool for the next big product.  Leave manufacturing facilities to the pros.  As of now, those pros keep shop in Asia for whatever reason.  They are in a much better position to re-configure their plants or expand their plants when needs arise.  It’s an unfortunate reality.  When consumers are willing to pay much more for that shiny gadget, that will be a different story.  Unfortunately, we live in a society where the one controlling factor is how cheap it can be made.

    I am very aware of minimizing my purchases that are made in foreign countries, and prefer (if possible) to spend just a little more to buy something made in the USA knowing I’m keeping jobs here.  It’s a difficult subject, and I don’t want to be running such a well-known company like Apple knowing we have so many US workers out of the job.  Companies are in the business to make money, not do what’s best for their country.