So You Think Apple Is Invincible…

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 Fernández-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 {complink 379|Apple Inc.} may be considering producing (itself) chipsets for the Macintosh computers and possibly many of its consumer electronics products. This will mean dumping current vendor {complink 2657|Intel Corp.}, 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 {complink 444|ARM Ltd.} 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.

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29 comments on “So You Think Apple Is Invincible…

  1. Anna Young
    November 12, 2012

    Insightful Bolaji and well summed up – “No company in this industry reigns forever” I  agree with you hundred percent.  I suppose Apple's moves to dump Intel Corp might seem strategic. However, I think these are tell-tale signs of PRIDE before a FALL.

  2. SP
    November 12, 2012

    Nicely worded article. Apple, Intel are all big names in the industry. They both have their strengths and weaknesses in terms of industry they cater to. Intel has strong experience and business hold on hardware side. Not sure how Apple would take the risk of keeping away Intel. But yes Apple has the histroy of creating monoply so nothing is impossible for them.

  3. _hm
    November 12, 2012

    Yes, for innovations – Apple is invincible. May be for few years more.

  4. mfbertozzi
    November 13, 2012

    @_hm: good point to outline, but ICT market story has demonstrated other big players have been impacted by leaving off the role. It happened for DEC Digital, despite in the 80s they seemed invincible; in a such way, it happened for IBM. Is innovation the only key for allowing Apple to hold the rank forever?

    November 13, 2012

    I suppose it is only natural for companies like Apple to starting looking at more and more vertical integration.  However this can oftentimes lead to uncompetitive products.  Sometimes it is better to let other more specialized suppliers develop your clever bits.

  6. bolaji ojo
    November 13, 2012

    I understand why they may want to do this. Apple may want to keep as much control over its supply chain as possible, especially the value-added segments. It won't go into manufacturing/assembly because it's basic low-skills work. At the same time, though, if you hollow out the supply chain because you are successful, what happens to the system?

  7. bolaji ojo
    November 13, 2012

    Apple can afford to go into value-added product design and production on its own because it has the resources. As people like to say, though, just because you can doesn't mean you should. There's a reason the industry moved towards specialization and dumped the vertically-integrated manufacturing model. I don't think this is what Apple wants to move towards, though. I believe they would (they are already in certain areas) design their own chips and contract with a foundry like TSMC, GlobalFoundries or Chartered to make the semiconductor.

    That's the company's prerogative but the collective power of the industry is bigger than that of any single enterprise and cutting off suppliers when they've become heavily dependent on an OEM is a bad strategy when that supplier has been a part of your sales growth.

  8. bolaji ojo
    November 13, 2012

    Matteo, We sometimes forget that Apple hasn't even held the crown it has now for that long. It has been at the top of the smartphone market for perhaps three years and already Samsung is challenging it. The company's share of the tablet PC market is going down because so many players want a piece. The competition is going to be relentless and they'll whittle down Apple.

  9. mfbertozzi
    November 13, 2012

    @Bolaji: very great perspective, I have only to say till a recent past (I mean, till the early 2000), ICT market didn't run current speed, then events happened were not so fast as of today. As consequence, 3 years are not at all a long slot, but at current speed rate, 3 years within ICT market is a really long leadership timeframe and sooner or later, another “invincible” is going to come.

  10. ahdand
    November 13, 2012

    Certainly Apple is not invisible these days with their Apple i5 being on the market but their tacticts on different stratergies of the market seems to be faded a bit. Lets hope things will get back to normal on behalf of all the Apple fans.

  11. Wale Bakare
    November 13, 2012

    May be a little bit of market reality check should be done to know what would likely be market outlook in years to come in world of smartphone and perhaps tablet.

    We have been focusing on Samsung, Amazon, and now Windows mobile phone. Another one again, LG, just launched its new phone in UK.

    “The new LG Nexus phone sold out within 30 minutes of appearing on Google's Play store in the UK this morning”

  12. ITempire
    November 13, 2012

    Bolaji, loved the way you warned Apple about its 'non-invincibility'. Surely, long term strategic partners are necessary no matter what your current situation is.

    Nevertheless, Apple's intention of replacing Intel chips with its own cannot be classified as the one to derail the chip-making giant and its friendship. This is part of business. Friendship is another thing and sacrificing your investors' money for friendship is another. It is Intel that needs to learn that how can it ensure that device manufacturers prefer to remain dependant on it.

  13. ITempire
    November 13, 2012

    “It has been at the top of the smartphone market for perhaps three years and already Samsung is challenging it. The company's share of the tablet PC market is going down because so many players want a piece.”

    I am not a big fan of Apple's pricing strategy. If I was a manufacturer, I would love to see my phone in every pocket rather than my pocket filled (with money) with my phone only in the pockets of few. It is not about being successful with the strategy or not, Apple has been successful surely, but the charm of controlling the market share is too attractive if you are not thinking only like a businessman.

  14. Barbara Jorgensen
    November 13, 2012

    The toppling of a market leader has a lot of histroy to back it up. There was a time IBM was king of the world, although not in the consumer market. But IBM still recognized it had made some strategic errors and began its re-invention. The impact on the market was huge: anyone remember Wang? I think the Intel/Apple analysis has a lot of parallels to draw from.

  15. bolaji ojo
    November 13, 2012

    WaqasAltaf, I used the Intel case as an example of some of Apple's more recent actions. This wouldn't be the first supplier to be dumped by Apple in pursuit of its own key interest. That's as it should be but suppliers also invest millions in product development and R&D to get their products to market and the support of key customers is crucial to their success. When companies can be tossed aside by players who do it because they can and don't reward long-term suppliers the entire system is threatened. Sometimes we have to learn how to hang together.

    You are right. Apple has the right to do what it believes is right for its business and Intel has to continue to make itself relevant in the market. When a company gets as big as Apple, however, it can also use its size and purchasing power as a punitive weapon as it seems to be doing in its relationship with Samsung, which has for long supplied displays to the company but which may be in danger of losing that deal.

  16. bolaji ojo
    November 13, 2012

    Barbara, You know how important a strong long-term supplier-OEM relationship can be for companies in the electronics industry. In recent years, though, the “together” spirit has come under challenge as everyone tries to get the most for themselves. The race for the “most” is individual-focused but a supply chain is a together race.

  17. bolaji ojo
    November 13, 2012

    Wale, The reality is quite simple. No single company can continue to maintain market share above 50 percent when the differentiating technology is obviously available to so many other players and when the profit margins the leader enjoys is so plum. What lies ahead for Apple is simple. it can defend current market share and keep a large part of it but it cannot keep all of it.The company's share of the tablet PC market is coming down despite the fact consumers believe the iPad is a superior device. I expect Apple will lose share in both markets to rivals but it will remain a dominant player.

  18. dalexander
    November 13, 2012

    @Bolaji, I have to agree with you that Apple is not forever. If I was Intel, I would already be making my move to lower my cost structures or increase incentives to Apple's competitors. I would do this on the QT, but I think there is a certain arrogance that comes before a fall. Will Apple fall all at once? Unlikely, but supplier and customer loyalty are two sides of the same coin. Once you start etching away at the supplier loyalty side, the whole coin becomes thinner and customers will begin to question Apple's loyalty to them as well. How long will Intel support the processor with firmware modifications if the overall market demand for the processor is drastically reduced. Market demand is one of the key drivers for obsolesence. Ongoing product and customer support is a key driver for customer loyalty.

  19. mfbertozzi
    November 14, 2012

    @WaqasAltaf: ” this is a part of business “, I fully agree with your post and it allows the chance to outline a very recent news; Apple has accepted to leave its maintenance policy and to fit rules from European countries. I believe maintenance is a part of business as well and Apple is not so strong as in the past if they have immediately accepted what Regulators asked (in order to avoid any penalty from UE Antitrust…)

  20. Daniel
    November 14, 2012

    Bolaji, recently Apple made a statement that they have a plan to move to Macintosh chips and that may be a big business loss of Intel. But at the same time they also made some statements with respect to their plan for mobile chips. So I don't think Apples decisions won't hurt much to Intel because they can gain some market through the new mobile chips, but ARM may lose some its business.

  21. bolaji ojo
    November 14, 2012

    Douglas, That's the other angle. What's Intel doing to make sure it remains a relevant player in emerging markets? The company has tried over more than a decade to refine its offerings and while it remains dominant in the computer processor market it is so far less successful in mobile hardware processing market. OEMs don't like monopolies and they are, in my opinion, reluctant to hand Intel a dominant position in wireless handsets.

  22. mfbertozzi
    November 14, 2012

    An additional breaking news as piece of the puzzle to judge how Apple will be invincible in the future: within minutes of its introduction on the web, the Google Nexus 4 has been sold out in Australia and followed by Europe (it was announced just a few hours ago). The competion is becoming really really strong.

  23. bolaji ojo
    November 14, 2012

    I am glad I am not the only price-sensitive earthling!

  24. ITempire
    November 14, 2012

    @ Bolaji

    You reminded about a relationship between Samsung and Apple; Samsung is the LCD supplier. How difficult it must be to shake hands with one and slap from another. Thanks to the controversial patent law.

  25. ITempire
    November 14, 2012

    @ mfbertozzi

    “Apple has accepted to leave its maintenance policy and to fit rules from European countries.”

    What maintenance are you talking about ? The general administrative maintenance or system/application maintenance.

  26. mfbertozzi
    November 15, 2012

    @WaqasAltaf: well, sorry for making mistakes, I was meaning system/application maintenance and the news I have reported was specifically about hardware maintenance.

  27. Anna Young
    November 15, 2012

    I agree the relationship between Samsung and Apple must really be problematic. Apple needs (does it still buy LCDs from Samsung) Samsung components and yet competes with the company in mobile devices. Samsung needs sales of LCDs to Apple and is trying to beat the company hard in other markets. It's an intricate web and the companies aren't making it easy on their procurement and sales teams.

  28. ITempire
    November 15, 2012

    @ Anna

    I like your observation about the conflict situation between procurement and sales team. What is more interesting is that they (Samsung and Apple) sell and buy from each other and yet sue each other in court. Apple is more to blame for this. It must be had when the executives of both companies meet. One would say to other “please provide me with LCD for my product and that too at cheap price. And by the way you copied my design so pay compensation for that too”.

  29. ahdand
    January 26, 2013

    Wale good to see new players coming in. Also HTC is catching up too. I guess they are doing good in Europe too. Anyway true lets give them some time before come in to terms here.

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