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Apple’s Homecoming Game

By David Barnes

Americans are excited about Apple’s homecoming game as a sign of more re-shoring wins to come. During a recent public address, the CEO of Apple announced his intension to create manufacturing jobs in the US next year. Executives at Foxconn and Lenovo made similar comments this month. While I agree that Apple’s homecoming is welcome news, I doubt it will replace the scale of work performed at the first Mac plant in Fremont, California where I supplied some manufacturing tools about thirty years ago. I think the more interesting aspect of the news is that it heralds a shift in strategy. I will present a more thorough discussion of this topic in the next MDR, so here are some quick thoughts on the implications of the homecoming game today.

My thoughts on this were piqued by a question posed over dinner last month in Taiwan by an executive with a Top-4 FPD producer. He asked, “What makes the mobile device business different [than traditional PC/TV]?” After a moment’s reflection, it hit me, “You hold it in your hand, it’s really personal and all the features interact to deliver the experience.” My dinner companion smiled and explained that’s why he expected US brands to bring some manufacturing back home. The inter-dependencies between hardware, firmware and software in touch screen design are well known but adding radios, speakers, batteries and cases adds to the difficulty. There are so many ways to produce a product that lights but not delights. Diverse engineering, manufacturing and marketing skills must be blended carefully and yet projects must proceed rapidly. Co-location with suppliers is one way to achieve such goals but, at some point, brands may choose to protect their hard-won know-how by bringing all the key people in-house.

As I will explain to MDR readers, US firms off-shored production in the personal computer era because PC products weren’t really personal. Sure, you might get attached to a notebook (laptop) or feel like your attached after a two-week business trip, but you don’t caress it, take it into the restroom or even take it to bed like you might your smartphone.

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IDC just updated their connected device forecast for 2016, which I have charted here. It shows dramatic increases for 2Palmtop (two-handed tablets or slates) and Palmtop (one-handed smartphones) shipments. Those two real-personal computer categories will see shipments double over the next four years at a 19 percent CAGR. Meanwhile, shipments of the not-so-personal computers will increase only 18 percent to 2016 and that is only because some notebooks are getting touchscreens. Demand for desktop PC will be flat.

From such forecasts and our own daily experiences, it seems obvious that brand positions will depend on hitting the hardware+firmware+software+cloudware sweetspot. As competition intensifies, yesterday’s smartphone becomes tomorrow’s feature phone, so brands must find ever-so-clever combinations. Such competition can force a shift in operating strategies.

One of the better thought pieces on the shift toward re-shoring can be googled for free: “Restoring American Competitiveness” by Pisano and Shih, HBR; July 2009. These authors published an updated synopsis of the corporate challenge in the March 2012 HBR: “Does America Really Need Manufacturing?” I added their thoughts to mine and created this strategy-quadrant diagram based on the notions of design dependence and process immaturity. As the interdependence of features (design trade-offs) increases, specifying products becomes more difficult. At some point, marketers cannot define or describe product attributes precisely. Design becomes an interactive experiment. As the immaturity (newness) of production processes increases, it becomes difficult to predict costs or schedules. In addition, the process can dictate the product. The limits of OLED resolution are a good example of this in the display industry today. At some point, the process becomes the product.

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If we consider the strategic quadrants, we see that outsourcing operations makes sense if the product market exists in the realm of low dependence and low immaturity (maturity). A brand like Dell or HP could specify monitors, processors and chassis independently and have them made by a variety of OEM, anywhere. Similarly, we see that in-sourcing operations makes sense if the product is revolutionary and requires complex design trade-offs and unproven production methods. Samsung’s in-house effort to create OLED-based products and the essential infrastructure for making them is a great example. In this context, we should empathize with the engineering and marketing teams are both located in Korea so there is better communication if schedules start to slip. Imagine how much more slippage might occur if Samsung tried to outsource everything!

As an interesting aside, I would like to point out that some of the more profitable players in the display game have operated in the quadrant of co-locate or co-ordinate. Suppliers such as Corning or Merck preserve strong technical and financial positions by fielding application engineers or co-locating plants near key panel makers. I think this is also a reasonable explanation for Apple’s success with iOS devices. Rather than outsource operations, Apple has taken a more active role in coordinating contractor’s operations.

The challenge for Apple is how to develop the next wow, gotta have it product. Recent news stories about delays and difficulties packaging even desktop products such as the new iMac indicate Apple’s specifications are running ahead of contractors’ capabilities. It makes sense for some manufacturing to be brought home, where Apple employees can work together on all aspects of design and production. Several industrial analysts estimate that a domestic operation would employ fewer than 500 people, so the homecoming game seems more important from the standpoint of competitive strategy.

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