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29 CASE le OUTSOURCING AND VERTICAL INTEGRATION AT APPLE This case was prepared by Melissa A. Schilling of the School of Business, New York University. At a dinner for Silicon Valley luminaries in "Foxconn City."a complex where the iPhone is as- February 2011. U.S. President Barack Obama asked sembled, has 230.000 employees, many of whom work Steve Jobs of Apple. "What would take to make 6 days a week and up to 12 hours a day. It is owned iPhones in the United States? Jobs replied, "Those by Foscoon Technology, which has donens of lacto jobs aren't coming back." Apple's management had ries in Asia, Eastern Europe, Mexico, and Brazil. It is concluded that overseas factories provided superior estimated that Foxconn assembles 40 of the world's scale flexibility, diligence and access to industrial consumer electronics It boasts a customer list that skills "Made in the U.S.A." just did not make sense includes Amazon. Dell. Hewlett-Packard. Motorola. for Apple anymore Nintendo, Nokia Samsung, and Sons, in addition As an example of the superior responsiveness to Apple. Fosconn can hire thousands of engineers of Chinese factories to Apple's needs, an executive overnight and house them in dorms something no described a recent event when Apple wanted to re- American firm could do. Nearly 8.700 industrial en- vamp its iPhone manufucturing just weeks before gineers were needed to oversee the 200,000 assembly i wus scheduled for delivery to stores. At the last line workers required to manufacture iPhones. Apple's minute. Apple had redesigned the screen, and new analysts estimated that it could take 9 months to find screens arrived at the Chinese factory at midnight. that many qualified engineers in the United States. It Fortunately, the 8.000 workers slept in dormitories only took 15 days in China. Morcover. China's advan- at the factory--they were woken given a cookie and tage was not only in assembly, it also offered advan- a cup of tou, and were at work fitting glass screens lages across the entire supply chain. As noted by an into their beveled frames within 30 minutes Soon Apple executive. The entire supply chain is in China the plant was producing 10.000 iPhones per day. The now You need a thousand rubber gaskets! That's the executive commented. "The speed and flexibility is factory next door. You need a million screws! That breathtaking ... There's no American plant that can factory is a block away. You need that screw made a match that." little bit different? It will take three hours or Apple's 64,000 employees. nearly one-third ure outside of the United States. In response to criticisms about failing to support employment in its home country, Apple executives responded, "We sell iPhones in over a hundred countries. ... Our only obligation is making the best product possible." Although Apple epitomizes the opportunities for strategic outsourcing. it is also paradoxically, perhaps more vertically integrated than most com- puter or smartphone firms Apple's decision to produce its own hardware and software and tie them tightly together, and sell them its own retail stores was widely known and hotly debated. However, the vertical integration did not end there. Apple also spends billions of dollars buying production equip- ment that is used to outfit new and existing Asian factories that will be run by others (an example of quasivertical integration), and then requires those factories to commit to producing for Apple exelu- sively. By providing the upfront investment. Apple removes most of the risk for its suppliers in invest- ing in superior technology or scale. For decades, the computer and mobile phone industries have been characterized by commoditization and rapid cost re- duction. Suppliers had to work hard to reduce costs to win competitive bids, and standardized produc- tion facilities trumped specialized facilities as they enabled suppliers to smooth out volatility in scule by working with multiple buyers. This meant that most suppliers to the computer and phone industry could produce cost-efficient hardware, but not "insanely great" hardware. Apple's strategy of paying upfront for both the technology and capacity enabled it to induce its suppliers to make specialized investments in technologies that were well beyond the in stundard, and to hold excess capacity that enable rapid scaling. The net result is that develops superior flexibility and technologi phistication that its competitors cannot matel Seeming to acknowledge the advantages of strategy of controlling device design and prodi Microsoft announced in 2012 that it too wou sign and produce its own tablet, the Surface launched its own chain of dedicated Microsof stores that looked remarkably similar to Apple Both moves proved challenging at Microsoft: it both the tightly woven ecosystem that Apple 1 veloped around those strategies, and its deca experience in implementing them. In 2013. Mi had to take a S9K-million writedown due spectacular failure of the Surface RT. But Mi stuck with the Surface, and the product ulti grew to account for roughly S5 billion in reve 2017 roughly 2015 of Apple's Muc sales. Mick retail move does not appear to have been cessful. Though Microsoft had roughly 20% number of stores of Apple in 2018 (102 for Mi Nersus 502 for Applc), its sales per square fou estimated to be a small fraction of those at which at $5.546 per square foot was the top in the world. Sources: Dubigg and K Braustier, fllow the U.S. un iPhone Woek. New York Times. January 21, 20 Ouglielmo, Apple Sacret Plan for its Cash Stash. Muy 7. 2012.17 118 13: BIL E. 2018, Surface by the How Microse reinvented the PC: ZDNet, July 26 C 2017. Apple ng i found to be the world's top returile per square foot Mac, July 22 2. Do specialized assets play a role here? If so, how does Apple protect its specialized assets? 3. Why is Apple more vertically integrated than its competitors