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Apple & Foxconn: Breaking Up Is Hard to Do

For the sake of argument, let's say {complink 379|Apple Inc.}, after suffering criticism for the actions of one of its business partners, threw down the gauntlet and told {complink 2125|Foxconn Electronics Inc.} it had to change its labor practices.

Let's say Foxconn countered with “Or what?”

If you think the immediate consequence would be Apple taking its business elsewhere, think again. Untangling itself from Foxconn — or any other EMS company — would be tough for even Apple.

In general, EMS-OEM relationships are complicated. A company such as Apple bids out its business to any number of EMS providers. Not only does an OEM want the best possible price, but it's also sharing details of its product design, business strategy, bill of material, end-customer forecasts, and even technology roadmap. These decisions are not made lightly.

The EMS company bidding on such business has to look at a number of things internally. First, does it have the technical capability to make Apple's products? Does it have ample capacity? Does it have relationships with the correct suppliers? If it has a direct relationship with a supplier, it might receive a volume discount. But if Apple manages the supplier relationships, it may have a better discount. If Apple does manage the relationships, it may not want to share the price it gets with its EMS partner, so the partner's cost estimate would be based largely on guesswork.

Assuming those hurdles are cleared, Apple's next question is about confidentiality. EMS companies are not dedicated to one OEM — to hedge their bets, they manufacture for many OEMs. How separate would Apple's lines be from, say, Dell's? Would workers overlap? How are designs, the BOM, and other deliveries transmitted and handled? What suppliers, if any, do Apple and Dell have in common, and is the EMS provider leveraging the combined volume? If so, are the savings being passed on to one or both OEMs? How would the OEM even tell?

Next is the question of scale. If Apple had a massive ramp-up in demand, would the EMS be willing to move manufacturing capacity from, say, Dell to accommodate Apple? Would workers be willing and available? Who would approve the overtime? If Apple had a sudden drop-off in demand, would you lay people off? Would there be labor contracts to honor? How easy or difficult would it be to put people out of work? Would you pass those costs on to the OEM?

Once the OEM and EMS have established a partnership, issues such as customization may come along. Maybe a new manufacturing process is unveiled, and Apple wants the EMS to use it. The EMS has to create a manufacturing line (or lines) to take advantage of this. But there is always a risk involved. What if Apple changed its mind? Would the EMS stick Apple with the cost of adding the lines? Or would it use the new process for other customers? Could the EMS do this, if the process were developed for Apple?

These issues are just skimming the surface of OEM-EMS relationships. Apple's deals with Foxconn are no doubt hundreds of times more complex. And here is the big question: Where would Apple go if Foxconn refused to budge? Sure, there are other EMS companies, but picking up a customer like Apple takes time.

Charlie Barnhart, principal of the EMS consulting firm Charlie Barnhart & Associates, told EBN in an e-mail that it takes just over five quarters — from the first internal talks to the first delivery of product — for the typical OEM to implement a new EMS relationship. “Obviously there is a big range around this average depending on the scale, approach, and complexity of the project and the experiential level of the OEM.”

In the EMS industry, Foxconn is the 800-pound gorilla. It's so big that analysts such as Charlie Barnhart & Associates have created a new category (Goliath Fringe) just to describe it. Foxconn is one of the few companies in the world that might be able to stare down Apple.

If Foxconn saw the light and began to change, you can be sure that the prices of products — not just Apple's — would rise. If Foxconn called Apple's bluff and sent it elsewhere, not only would there be a shortage of Apple products, but its already-premium prices would hit the roof. The idea that outsourcing gives OEMs more flexibility is true only to a certain extent. When you are as enmeshed as Apple is with Foxconn, a breakup wouldn't just hurt the companies — it would hurt everyone.

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15 comments on “Apple & Foxconn: Breaking Up Is Hard to Do

  1. Nemos
    January 31, 2012

    Well said, It is very difficult the Breaking up and both companies will lose at the moment, on the other hand, the other hand maybe it costs too much (bad image of Foxconn affects the Apples sales) if Apple retains the OEM EMS relation with the Foxconn.

  2. Anand
    January 31, 2012

    If Foxconn saw the light and began to change, you can be sure that the prices of products — not just Apple's — would rise.

    @Barbara,  I totally agree with your observation. And this is the last thing we want because market is just recovering from severe downturn and this price rise will definitely hurt the OEM's. I think the best solution for all the OEM is to continue relationship with Foxconn  and may be parallely start looking for alternatives to Foxconn.

  3. prabhakar_deosthali
    January 31, 2012

    In my opinion the majority of the customers of Apple must be unaware of this Foxconn issue which is making rounds in the media.  The customers normally go only by the brand name and do not bother to see what good or bad things are behind that brand. For them the product is more important than the process.

     

    As far as relationship between Apple and Foxconn is concerned  it could be a love-hate relationship – not easy to break.

     

  4. Daniel
    February 1, 2012

    Bolaji, consumers are not concerns with the back end companies. Most of them are aware only about apple and apple products. How many people know that apple is works more or less like an assembling unit or branding factory. They are taking LCD panels, storage units, battery and similar components from trusted third party companies. This true with almost all brands. So from customer point of view, they are not bothered about back end suppliers they bother only about brands.

  5. bolaji ojo
    February 1, 2012

    Jacob, Right. It's not the job of the consumer to know the fine details of a company's supply chain. In large part they don't and many simply don't care.

  6. Barbara Jorgensen
    February 1, 2012

    I agree that the majority of consumers are unaware of the manufacturing practices of electronics companies. This past Christmas, all 10 of my nieces and nephews sported a new Apple product. Although we parents engaged in a discussion about manufacturing moving to Asia in general, I think we'd all privately admit that did not influence our purchasing decision. As Bolaji pointed out in his blog, we are all complicit in what is happening overseas. The question is, are we willing to pay the price of change? I think that is a personal decision–great to debate here–but one I am struggling with right now.

  7. Nemos
    February 1, 2012

    “In my opinion the majority of the customers of Apple must be unaware of this Foxconn issue which is making rounds in the media.”

    Must be unaware ? I want to mention here that the Foxconn issue has to do with human life ………

    Moreover, as much as we act with conscientiousness as a consumer then we form a better business environment.

    I am very aware about issues like this, and I don't want to feel like a sheep .

  8. technos
    February 1, 2012

    “– it would hurt everyone.”

    Who exactly?? Shareholders? Perhaps. Consumers who want the latest Apple product? Not really considering there are viable alternatives/competitors. Chinese factory workers? I hardly feel remorse for them considering American factory workers were forced to deal with the same unemployment. But I question those people who feel like that they can't walk through life without an Apple product in their hands.

  9. Ariella
    February 1, 2012

    But I question those people who feel like that they can't walk through life without an Apple product in their hands.

    I find in this echoes of the exhibits I've seen on the sugar and the slave trade in the 18th Century.  Though there was no slavery in England, the English demand for sugar, certainly, played a role in keeping up the slave trade that was integral to the production of sugar cane.

  10. prabhakar_deosthali
    February 1, 2012

    Nemos!

    I agree with your opinion that we should become conscious of human rights as a consumer .

    But what is the general scenario? I suggest you randomly visit any Apple store and take opinion of the customers visiting . I am sure 9 out of 10 of these customers will be unaware of this issue and would not bother to show any interest even if you try to explain it to them.

  11. Daniel
    February 2, 2012

    Barbara, from customer point of view, they are not bothered about where it is manufactured (other than China) and who all the component suppliers. They are only looking for branded products with less cost and advance features. If apple is planning to move their production unit to Malaysia or Philippines, I don’t think US/European/Asian peoples may bother about it. due to low product cost, if apple is offering a discounted price, customers becomes very happy.

  12. Barbara Jorgensen
    February 2, 2012

    Several readers have asked who is hurt if Apple products cost more. The answer is the consumer and by extension, the supply chain. Here's the logic: China's exports are driven by demand from the US and Europe. For one reason or another–say prices skyrocket–demand drops off. Consumers are not buying enough goods, so manufacturers cut back on their forecasts. Component orders get cancelled, and component makers shutter facorties and/or cut jobs. People without jobs don't buy cars, electronics, white goods or other items. And so it goes. Additionally, say the public boycott's Apple products. The same Chinese workers they are so worried about lose THEIR jobs. Foxconn is first and foremost a business, so that will happen. Can people live without their i-products? Of course they can. They can buy less expensive competing items. But the Apple ecosystem is now so large, Apple's “hurt” will be felt by many.

  13. dalexander
    February 2, 2012

    Excellent post. Your understanding and articulation of the meshing between EMS and client is outstanding. It seems to me you have inadvertently generated a pre qualification list for potential gotchas in a mutually dependent business relationship. This leaves some kind of contingency planning as an absolute necessity. What could you build into a supplier survey that would anticipate these potentially problematic entanglements so a company could run for the hills after the first date. Seems like a question such as , ” do you beat your children regularly?” might help you decide if you want to see that company ever again. I guess I am suggesting that the onsite visit before business is transacted, and some higher values going into any relationship, might save a lot of heartache and sleepless nights.

  14. Barbara Jorgensen
    February 2, 2012

    Thanks, Douglas, and well said. About halfway through my first draft of this, it occurred to me that the whole point of outsourcing was flexibility. In theory, OEMs could move more quickly if they weren't saddled with owning their own factories. It's pretty clear that flexibility is a relative term in outsourcing. Taking a year or more to ramp up a relationship doesn't sound flexible to me, and disengaging is almost as bad. You are right–onsite visits and time spent at the factories would have avoided a lot of grief for Apple.

  15. Barbara Jorgensen
    February 21, 2012

     EBN readers: I'm posting this on behalf of a reader that is having some trouble with our site–Barb

    If you found out your spouse was abusing your child, this would be a difficult situation.  You'd have to consider that it would be extremely difficult to break up.  You'd have to somehow split the house and separating all of your conjoined assets would be messy.  Your spouse knows many of your secrets and vulnerability, and you'd also have to consider whether you could find another partner who could contribute as well as this one does.  There would be costs associated with breaking up too, which would impact how you could take care of your child.  There's also both of your reputations to think about; how would those at work treat you?  It would be best to try to make it work, wouldn't it?

     

    Is Foxconn like abusing a child?  Isn't Foxconn forcing labor and dangerous working conditions abuse?

     

    And your final statement: “A breakup wouldn't just hurt the companies.  It would hurt everyone.”

    Everyone, that is, who lives here.  The 100,000s of students and workers impacted by this, I guess they don't count.

     

    This reply is more elegant in my mind.  I'm writing because the focus on business at the expense of others — and justifying it — seems so narrow-focused to me.  Do you really believe this when you consider all the people on the other side, the ones without choice, without options?

     

    Apple is huge.  They can make changes in the world.  Magazines like yours don't need to rescue them from taking action.  Any number of companies would jump at the opportunity to take Apple's business from Foxconn.  This isn't such a dismal story for Apple or for us.  

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