In 2007, Nokia had 900mn customers. Its market dominance appeared so nice that Forbes ran a canopy story on the corporate asking “Can anybody catch the mobile phone king?” The identical 12 months, Apple launched the iPhone.
Sixteen years and 1.2bn customers later, the story of how the Finnish handset maker obtained blindsided by the iPhone is well-known. Nokia, the story goes, didn’t have sufficient software program savvy to maintain up with visionary Apple co-founder Steve Jobs and design whizz Jony Ive.
However the cellphone’s multitouch, full-screen options weren’t Apple’s solely benefits. The corporate was additionally outmanoeuvring Nokia on {hardware} and manufacturing earlier than the iPhone even went on sale. And it did so by making a considerable wager on China and its manufacturing sector.
Provide chain researcher Kevin O’Marah vividly remembers his confusion when, in mid-2007, Apple vaulted from out of nowhere into the No. 2 spot of the Provide Chain High 25, an annual rating of the world’s best-run company provide chains.
“Everybody was shocked,” he says. “It was like, ‘What? This doesn’t make sense. They’ve a horrible status.’”
Apple and China
Coming Wednesday: Within the second a part of this two-part collection, the FT appears at what avenues the US tech large has to diversify past China
The availability chain rating turned out to be an early indication of a profound shift in operations at Apple, which held the No.1 spot for the subsequent seven years. In that point it turned the world’s most useful firm, whereas putting itself on the centre of geopolitical tensions.
O’Marah started to study that Apple was not likely “outsourcing” manufacturing to China, as generally understood. As a substitute, he realised that Apple was beginning to construct up a provide and manufacturing operation of such complexity, depth and price that the corporate’s fortunes have develop into tied to China in a manner that can’t simply be unwound.
Over the previous decade and a half, Apple has been sending its high product designers and manufacturing design engineers to China, embedding them into suppliers’ services for months at a time.
These Apple workers have performed integral roles co-designing new manufacturing processes, overseeing the trivia of producing till issues have been up and operating, and retaining shut tabs on suppliers to make sure compliance.
Apple has additionally spent billions of {dollars} on customized equipment to construct its units, creating area of interest experience that its rivals didn’t even find out about, not to mention compete with.
It has remodeled the corporate and the nation. “All of the tech competence China has now just isn’t the product of Chinese language tech management drawing in Apple,” O’Marah says. “It’s the product of Apple moving into there and constructing the tech competence.”
These operations performed such a salient position that the unassuming character behind them, chief working officer Tim Prepare dinner, would succeed Steve Jobs as CEO in 2011. It was Prepare dinner who shifted Apple’s manufacturing from the US to China, the place he established unparalleled efficiencies that underpinned Apple’s ascent.
However this extraordinary success story has additionally created Apple’s greatest vulnerability: its dependence on a single nation, China, which underneath President Xi Jinping has grown more and more authoritarian and estranged from the west.
The manufacturing focus is evident for a risk-averse firm extensively lauded for main the world in provide chain brilliance. Greater than 95 per cent of iPhones, AirPods, Macs and iPads are made in China, the place Apple additionally earns a few fifth of its income — $74bn final 12 months. That contrasts sharply with rivals similar to Samsung, which have sharply in the reduction of manufacturing in China.
Even lately, as competitors between Washington and Beijing has escalated sharply, Apple has continued to spend money on China and additional cement its connections with the nation.
The result’s intense political scrutiny of Apple and its relationship with China, the nation most in Washington take into account to be America’s principal rival. Prepare dinner and his firm are actually underneath intense stress from traders and US politicians to “decouple” from China and speed up a diversification technique that already has some merchandise assembled in Vietnam and India.
However interviews with 25 provide chain consultants, together with 9 former Apple executives and engineers, recommend the iPhone maker has few viable paths out and none within the brief time period.
And it’s clear to those that know the corporate properly the place duty lies. “Provide chain all goes again to at least one man: Tim Prepare dinner,” says a former Apple veteran. “This mess is his fault. This isn’t simply ‘the buck stops on the high’, it’s that ‘the buck stops with the man who headed the provision chain.’ And Tim is the grasp of provide chain.”
In a two-part collection, the FT examines Apple’s huge conundrum. The primary half demonstrates how Apple entrenched its operations in China so as to construct essentially the most profitable client product in historical past. Tomorrow, the second half will take a look at whether or not it may well ever disentangle itself.
‘Cash was no object’
Apple was removed from the primary computing firm to offshore manufacturing to China. By the point Prepare dinner was lured to run worldwide operations in 1998, the likes of HP and Compaq have been properly established there.
However Apple took benefit of the alternatives in distinctive methods. As a substitute of choosing parts off the shelf, it used customized elements, designed the manufacturing behind them, and orchestrated their meeting into enormously advanced methods with unprecedented scale and suppleness.
Within the provide chain rankings of 2007, P&G, Toyota and Walmart all had a peer rating rating no less than double that of Apple. However when it got here to a provide chain metric referred to as “stock turns” — a measure of products bought versus inventories — Apple was in a league of its personal.
Prepare dinner had as soon as described stock as “basically evil,” likening electronics to dairy that might spoil in just a few days. The outcomes confirmed this was not a mere aspiration. Apple had 2.5 occasions higher stock turns than Nokia and was 12 occasions higher than Coca-Cola.
It additionally invested closely within the manufacturing course of to construct moats round its manufacturing improvements, whereas rivals have been simply giving provider spec sheets and saying: “construct this.”
“[Apple] have been doing extra capital tools shopping for than anyone I may see on the earth, and but they weren’t proudly owning it themselves — they have been placing it in different individuals’s vegetation,” O’Marah says.
As iPhone manufacturing ramped up, the worth of Apple’s “long-lived property” in China — primarily tools it makes use of within the manufacturing of units — soared from $370mn in 2009 to $7.3bn in 2012.
These “spectacularly vital” investments meant that by 2012, Apple’s equipment in China had develop into extra invaluable than all of Apple’s buildings and retail shops put collectively, in line with Horace Dediu, a former Nokia government who now runs the market intelligence group Asymco.
Such huge sums enabled Apple to give you manufacturing methods that others couldn’t think about. In 2008, for example, it launched a “unibody” MacBook Professional constructed from a single block somewhat than a number of elements, a feat of commercial engineering providing “a degree of precision that’s utterly exceptional on this trade,” Jony Ive stated on the time.
This was achieved utilizing a CNC machine, which permits a designer with a 3D picture file to create advanced elements. These machines had been round for many years however, costing upwards of $500,000 every, have been solely used to construct prototypes.
Three former Apple manufacturing engineers say the corporate bought greater than 10,000 CNC machines, enabling a type of mass manufacturing that Steve Jobs referred to as “an entire new manner of constructing notebooks”.
Quickly Apple was utilizing the identical method for iPhones and iPads. In response to two individuals concerned, Apple made a take care of Fanuc, an automation group, to buy its total pipeline of CNC machines for years to return — after which it scoured the globe for extra.
“There weren’t sufficient CNC machines on the earth to do the machining that we would have liked to do,” one individual says. “You must perceive that beginning in 2009 we have been rising exponentially. We’d go from constructing 10,000 elements a day one 12 months, to 100,000 the subsequent, after which 500,000, after which one million . . . Cash was no object, principally.”
First ideas
With regards to discovering suppliers, Apple follows a rigorous course of.
In response to 5 individuals concerned with Apple’s techniques in China, it’s typical for an Apple engineer from California to fulfill the CEO of a Chinese language elements provider, then pepper them with questions till their technical skill has been exhausted.
The Apple engineer will then be dropped at the subsequent supervisor, after which the subsequent, the place the identical factor occurs till they’ve gone deep into the hierarchy, getting into some windowless convention room within the basement the place the one who really wrote the road of code essential to reply Apple’s questions is positioned.
After hours of interrogation, the Apple engineer will get the corporate to decide to constructing a customized half, in large portions, successfully taking management of the provider’s R&D street map.
One former Apple operations director says the corporate has constantly utilized this strategy, going again to “first ideas” to grasp any hiccups in value, design, and scaling prospects.
“There could be fixed digging, as a result of if you happen to requested sufficient questions, then you possibly can work out what the constraint is — after which you possibly can work out learn how to get via it,” this individual says. “I by no means encountered a degree of element that Apple wasn’t all in favour of.”
This strategy comes immediately from Prepare dinner, says one other former Apple government. The CEO will demand no stone goes unturned even for a rivet costing fractions of a penny per system.
“When you ship him a pitch, he’ll go into web page 30, paragraph 7, and ask to speak in additional particulars,” this individual says. “It’s superb how he can go from high-level to the very particulars, and again.”
These methods have allowed Apple to push suppliers past their perceived capabilities. As Apple grew, its leverage turned ever better: making a part that might be utilized in a whole lot of tens of millions of merchandise was too good to cross up.
Three former Apple veterans say they have been floored by how a lot energy that they had in negotiations. “It might probably actually make you an asshole,” one says. “Individuals can inform you till they’re blue within the face that they’ll’t do what Apple is demanding, however when two persons are each saying ‘no’ to one another, somebody goes to cave — and it’s by no means Apple.”
However a detailed relationship with Apple might be extremely helpful. The 12 months Taiwanese contract producer Foxconn began assembling candy-coloured iMacs in 2000, it earned $3bn in income — half that of Flextronics, a rival. By 2010, Foxconn revenues have been $98bn, greater than its 5 greatest rivals mixed.
Foxconn’s gamble
Apple’s manufacturing ingenuity has been amplified by a hierarchical authorities intent on creating jobs, creating experience and successful the orders of multinational companies.
Provincial governments in China have offered an unlimited array of preferential insurance policies together with vital tax-exemptions, in addition to condo complexes to deal with migrants, warehouses, highways and airports.
In 2009, Beijing orchestrated a staggeringly massive fiscal stimulus. State-controlled banks issued $1.4tn of loans, with no less than half dedicated to infrastructure spending to safe the nation’s restoration after the worldwide monetary disaster.
This coincided with a breakthrough design for the iPhone 4 and the revealing of the primary iPad, each in 2010.
Foxconn gained orders to assemble each merchandise after founder Terry Gou had met with Tim Prepare dinner and instructed him he was underestimating demand, in line with Alan Yeung, a former Foxconn official.
“Terry principally stated, ‘that is sandbagging — your numbers are manner off,” Yeung says.
Gou was so assured that he made a handshake pledge to construct two new campuses — one in Zhengzhou, later often known as “iPhone Metropolis”, and one other in Chengdu, often known as “iPad Metropolis”.
“Gou stated, ‘Foxconn goes to underwrite the funding. I’ll construct two campuses with Chinese language authorities companions. And when your quantity is there, I’m going to construct the merchandise for you,” Yeung says.
He was proper. Annual iPhone shipments almost quadrupled to 93mn from 2009 to 2011, whereas the primary iPad shipped 15mn models in its first 9 months.
By October 2010, Foxconn’s factories in Shenzhen alone had as many as 500,000 staff churning out merchandise on gruelling schedules. When it emerged that 12 months that greater than a dozen workers had died of suicide on the services, Apple suffered worldwide blame amid headlines about “iSlavery.”
Nonetheless, there was no scarcity of staff making use of to Foxconn. The difficulty was retaining them, given the monotony of the work.
Ken Moon, who teaches operations at Wharton, says employee turnover at Chinese language contract producers can exceed 300 per cent, or what quantities to “changing a whole manufacturing facility workforce a number of occasions over, inside a 12 months.”
Apple itself estimates that since 2008 it has skilled no less than 23.6mn staff on their rights — extra individuals than the entire inhabitants of Taiwan.
Past low cost value, what Foxconn provided — at razor-thin margins under 3 per cent — was labour that was plentiful, shut by, and structured to ramp manufacturing up each time wanted, but additionally to taper down, with out Apple incurring prices, when it was not.
China additionally provided labourers with specialised ability units. Prepare dinner, explaining why Apple couldn’t manufacture at scale within the US, as soon as instructed an viewers that if each device and die maker in America have been invited to the auditorium the place he was talking, they “wouldn’t fill the room.” Whereas “in China,” he added, “you would wish a number of cities to fill with device and die makers.”
No manner out
The connection between Apple and Beijing has introduced advantages for each.
In response to three those who labored with Apple and its rivals, different smartphone makers got here underneath super stress to maintain up, however they lacked a playbook. So that they turned to Chinese language suppliers for assist, giving over mental property in change for a speedy response.
“All of them utterly abdicated,” provides Dediu, the top of Asymco and former Nokia government.
Apple, in different phrases, set in movement a collection of occasions that helped Chinese language suppliers win extra orders and advance their understanding of cutting-edge manufacturing. On the similar time, western manufacturing of electronics atrophied.
As we speak, China accounts for 70 per cent of all smartphone manufacturing, in line with Bloomberg Intelligence, and China sports activities a degree of technical sophistication that a number of consultants say they battle to even comprehend. “It’s a extremely, actually highly-evolved ecosystem in China,” says Jay Goldberg, founding father of tech consultancy D/D Advisors.
China’s dominance can partly be quantified. In 2021, the variety of organisations within the nation that had been audited to substantiate finest practices in “high quality administration methods” — ISO certification 9001 — was 426,716, or roughly 42 per cent of the worldwide whole. For India the determine was 36,505; for the US, it was 25,561.
This order of magnitude superiority has reshaped the worldwide economic system, granting China affect rivalled solely by the US. Apple obtained in on the bottom ground and channelled that energy to dominate the tech sector. However now, a reckoning looms.
“For Apple to provide that system up is difficult,” says Goldberg. “You’re not simply saying ‘we’ll construct our vegetation some other place’, it’s [that] the subcontractors and suppliers to that plant are all primarily based in South China.”
If Foxconn, for instance, wants to put in sonic welders — a course of to merge completely different metals or plastics with ultrasonic power — it may well name up any variety of corporations to run the road and rent the labour.
“There’s all these subcontracted, specialty area of interest corporations, and nowhere else does that exist, wherever else on the earth,” Goldberg says.
What China provides just isn’t merely labour, he says, however a whole ecosystem of processes, constructed over a few years. Its topography is tough to explain, however Apple and its Chinese language companions have mastered it.
“This all will get lumped into ‘manufacturing’ however there’s a ability there, and Tim Prepare dinner personifies it,” he says.
Prepare dinner shouldn’t be blamed by politicians for enmeshing Apple’s provide chain operations in China 20 years in the past, says Aaron Friedberg, creator of Getting China Fallacious. Washington was then encouraging firms to interact with China within the hopes that it will inculcate democratic values.
The place Prepare dinner erred, he provides, is by doubling down over the previous decade regardless of mounting proof that Xi was ramping up repression at dwelling and taking a extra combative stance in worldwide affairs.
“The truth that Apple has allowed this to go so far as it did, so long as it did, has created this large downside of disentangling itself,” Friedberg says. “I’ve little doubt they simply want all of this could go away, and so they may return to enterprise as ordinary. As a result of there may be simply no apparent manner out.”
Information visualisation by Chris Campbell and Keith Fray
