Bringing the iMacs back home

Two years ago, almost to the day, I wrote a post titled It’s time for Apple to look at owning factories again What I argued then was that of all the problems that Apple had the means to fix, production was what needed fixing the most.

Since then we’ve seen evidence of significant investment in manufacturing tooling, where Apple is effectively purchasing the means of production rather than just renting or contracting it out. This capital equipment investment is the equivalent of owning one of the three asset classes that make up a manufacturing operation.

  1. Tooling or capital equipment: The “Capital” at the root of the concept of “Capitalism”.
  2. Skills, talent and knowledge: This is the softer kind of asset that turns out to be harder to replace or buy.
  3. Labour pool: Although considered a commodity even unskilled labor is difficult to obtain if flexible employment is needed in a regulated environment.

It doesn’t stop there. It has also used capital to ensure capacity through pre-orders thereby allowing the skills and labour to be more predictably applied by its suppliers (and preventing competitors from having sufficient supplies). Apple has also taken control of chip design for the vast majority of its CPUs thus building a more bespoke supplier chain.

However, these steps aren’t sufficient to make production “good enough” to meet the demands of a billion customers buying a new product every other year.

Suppliers become competitors

An insidious problem emerges when outsourcing: suppliers tend to become competitors. It happened in the PC industry with Acer vs. Dell. But it’s also happening to Apple. Consider how Samsung’s foreknowledge of Apple’s orders allowed them to anticipate the demand for large screen smartphones. Receiving orders years in advance for memory, screens and CPUs in the hundreds of millions would be a clear indication of demand. Receiving funds with which to build capacity is an enormous help when turning on production for your own versions of the product.

With that knowledge and the capacity built to serve Apple, Samsung was able to go from near zero market share in smartphones to being the largest vendor in two years a feat that Apple itself could not accomplish.

The supplier-turned-competitor is one of the risks of outsourcing production and is at the root of disruption from value chain evolution.

Bringing production back home

Hence it’s gratifying to see that Apple has committed to “in-sourcing” assembly of at least one product. Tim Cook in an interview with Rock Center:

And next year we are going to bring some production to the US on the Mac. We’ve been working on this for a long time, and we were getting closer to it. It will happen in 2013. We’re really proud of it. We could have quickly maybe done just assembly, but it’s broader because we wanted to do something more substantial.

So we’ll literally invest over $100 million. This doesn’t mean that Apple will do it ourselves, but we’ll be working with people, and we’ll be investing our money.

For the first time since the 90s, Apple is taking steps to control the last pieces of the value chain it participates in.

It’s a baby step and perhaps it’s going to remain symbolic, but one can imagine a trajectory for this effort which will pay off as well as retail has paid off ten years after the first Apple store opened.

Horace Dediu is founder and managing director of Asymco, a Helsinki-based app developer/industry analysis advisory firm. You can find his blog here.

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