Apple's Outsourcing Strategy: China, Clustering, and Cost

Introduction to Apple's Outsourcing Strategy

Many companies outsource large portions of their supply chain for a variety of strategic reasons: to save money, to focus on marketing or design, or simply because production in their industry is concentrated in a specific geographic area. Apple is among the many companies that outsource production, and it does so for several overlapping reasons. Part of the decision relates to strategy: Apple focuses its American operations on tasks for which the United States holds a competitive advantage, and applies the same logic to its production choices. The company's design and marketing functions are largely based in the United States, because talent in those fields is oriented toward Western countries for marketing and toward Silicon Valley specifically for consumer technology design. Apple thus takes advantage of a well-established industry cluster in the region.

Industrial Clustering in Silicon Valley and China

Clustering is a phenomenon in which an industry becomes centered in a particular area (The Economist, 2009). The talent that works in that industry gravitates to the area, and workers can move between companies, facilitating an exchange of ideas. Clusters also tend to foster start-ups, as employees leave larger companies to launch their own businesses. This in turn attracts capital to the area, along with other services essential to the industry's growth. Clusters therefore become centers of competitive advantage, and Silicon Valley is the single most important cluster for technology — especially consumer technology. Apple may be one of the major drivers of this cluster today, but the cluster already existed when Apple was founded, and that environment contributed to the company's early success. Within Silicon Valley, Apple has access to the best talent in software and consumer electronics, as well as a highly refined understanding of trends and other industry dynamics critical to its business.

Apple outsources production to China for many of the same reasons it maintains its design function in Silicon Valley. China has its own technology manufacturing cluster. The companies that assemble Apple products tend to source component parts from manufacturers located in the same region of China, and these clusters typically serve most of the consumer electronics industry. If Apple produced in the United States, it would still need to import component parts from China for domestic assembly. In practice, it is easier and cheaper to ship finished goods than to ship component parts, and logistically the current model makes more sense. Suppliers not based in China are located nearby — in Taiwan or Southeast Asia — which means lead times for ordering are shorter, making the entire production process less risky (Rapoza, 2012).

Cost Advantages and Labor Flexibility in Chinese Manufacturing

Goldman (2012) notes that China also enjoys a significant cost advantage. This is not solely because Chinese workers assembling the devices are paid less — though that is a factor. Operations in China are also more efficient, in part as a function of Chinese labor laws, or the relative lack thereof. Workers at Apple's contractors are housed on-site and can be mobilized quickly to meet surges in demand. They are typically willing to work long hours, particularly when new products are being launched. There is considerably more flexibility with workers in China than there would be with American workers, and the operational efficiency this creates contributes to lower costs as well (Goldman, 2012).

References

Chakrabortty, A. (2012). Apple and the folly of outsourced manufacturing. Sydney Morning Herald.

Chen, B. (2012). The real reason the U.S. doesn't make iPhones: We wouldn't want to. Forbes.

Goldman, D. (2012). Why Apple will never bring manufacturing jobs back to the U.S. CNN.

Rapoza, K. (2012). How much of the iPhone is made in China? Forbes.

The Economist. (2009). Clustering. The Economist.