I had never questioned my humanity until a family member gave me an interesting book titled So You Think You're Human: A Brief History of Humankind. It forced me to question my assumptions about humanity and what it meant. The book, by Felipe FernŠndez-Armesto, is not about the business world, but I still recommend it to corporate executives in all industries and especially leaders of electronic OEMs and semiconductor companies.
The book came to mind while I was editing a seemingly unrelated article about how consumer electronics and PC giant Apple Inc. (Nasdaq: AAPL) may be considering producing (itself) chipsets for the Macintosh computers and possibly many of its consumer electronics products. This will mean dumping current vendor Intel Corp. (Nasdaq: INTC), opening the door for similar moves by other OEMs (OK, that may be a stretch), and possibility ending the dominance of the X86 architecture that has reigned over the computing market for decades.
Couple this with the take-no-prisoners way Apple has pursued rivals for allegedly violating its patents, the late CEO Steve Jobs's declaration of "thermonuclear war" on Google, and the squeeze it allegedly puts on suppliers to reduce inventory costs, and you get the image of a company really throwing its weight around. Apple's heft is substantial -- not even smartphone and tablet market rival Samsung Electronics relishes a dust-up with the company. Today, Apple is the undisputed no. 1 company that vendors fawn over, for good reasons.
There's a bigger issue here, though, for the industry and for Apple. What I'd like to point out is that Apple got to where it is today because its supply base was willing to work with the company even when it was a bit player in the PC market and during its march up the consumer electronics food chain. Dumping the companies that helped push you up is a bad business strategy that may eventually cost a company a lot more than it might gain. More on this later.
For now, let me provide some additional insight into Apple's role in the electronics supply chain. No other company in the electronics world has to my knowledge grown as rapidly as Apple, and certainly no other has captured investor imagination quite as completely. In just three years, its sales more than tripled to $156.5 billion in fiscal 2012 ended September 29 from $42.9 billion in fiscal 2009. The company's enormous purchasing power (total costs of goods sold in Apple's fiscal 2012 was approximately $88 billion) means it can make or break a vendor. A slice of Apple's enormous semiconductor procurement budget could swell a company's revenue and dramatically jack up its market value. The loss of such a contract could, conversely, drive an enterprise out of business.
Let me translate again what those numbers mean if you are a supplier -- or wish to be a vendor -- to Apple. Even if you are the CEO of Intel, you'd drop everything and run down to Cupertino, Calif., if Apple sent a text message asking to see you. And Intel isn't one of the smallest companies in the electronics market: It is the world's biggest semiconductor supplier by sales with $54 billion in 2011 revenue. If Apple drops Intel, this move will automatically triple the severity of the headache the chipmaker is already experiencing from the lock ARM Ltd. (Nasdaq: ARMHY; London: ARM) seeming has on the mobile handset market.
Apple should rethink this move. The company has no obligations to keep Intel in business, and the semiconductor vendor itself does not have a right to what should prevail in the industry. I am not advocating Apple stick with a particular supplier at the expense of another. However, no single company can handle the dozens of activities involved in the design, production, distribution, sales, and after-sales support of its products. Making companies feel as if they can be easily replaced isn't a fiscally good long-term strategy notwithstanding your company's current position.
No company in this industry reigns forever, and Apple's domination is already under assault in all of its markets, including digital music players, smartphones, and tablet PCs. The numbers will start to shift against the company because it is too tempting a target, and too many companies have their scope set on its fat margins. A recent report noted Samsung beat Apple in smartphone shipment during the third quarter, for example.
As the headline of this blog indicates, no company has an unassailable position in any market. Apple is not invincible. A day will come when it will need to call in some favors for critical supplies or to clinch a share-winning deal. If it remains blind and deaf to the needs of its current suppliers, they'll repay the favors in equal measures.