Dylan Lewis: Evan, any thoughts on why they do this, beyond just the very conventional
cost, because it's cheaper to outsource production to some of these countries where labor's a
little bit cheaper? Evan Niu: I think part of it is that in addition
to the engineering talent thing I was talking about earlier, Tim Cook absolutely hates inventory.
Setting up this model and supply chain, I've read reports where other industry executives
look at Apple supply chain and they’re just blown away. They're like, "Well, we can't
compete with this". You can order a custom built Apple device like, a Mac, or an iPhone
or something. You'll get the tracking information and it literally ships from the factory to
your doorstep, in a matter of days. They build it and they ship it directly to you. That's
the kind of scenario when the purchase transaction goes like that. I mean, Apple does very little
hands on. Apple's not physically handling the product too much if you're ordering like
that and that's kind of a testament, because they still get to book all the revenue and
the sales. It goes from a contract manufacturer, to a
third party shipping company, directly to a customer. With that happening all so quickly,
their inventory turnover times are so insanely high, that it's comparable to fast food restaurants
and stuff like that. Instead of $600 dollar smartphones, and I think that's been a huge
boon to Apple, because that just makes the whole operation a lot more efficient.
It's this huge […] because again, other companies have seen this and they're like,
"We can't do that. We can't set it up this seamlessly and streamline to this point where
is incredibly efficient and direct." Of course, they have to have a lot of inventory for retail
stores and things like that. They're very good in inventory management, they keep it
really lean. Otherwise, having a lot of inventory is not really a good thing, because it just
sits there and risks getting written down, if you can't sell it, and if you have too
much it's just kind of a big pain. That's why Tim Cook has really pursued this path
so aggressively. Lewis: To your point, while I was researching
this show, I came across this stat that the flip to contract manufacturing took the amount
of time that inventory sat on Apple's balance sheet from months to days. You talk about
that inventory turnover and actually, this is something that Vincent Shen alluded to
when he did the consumer goods episode of Industry Focus, talking about industry turnover,
that Apple's got the best in the business. It's because inventory sits on their balance
sheet for such a short amount of time. Niu: Mm-hmm (affirmative) yep.
Lewis: I think beyond that, there's also a little bit more manufacturing flexibility
abroad. I think some of these contract manufacturers are ready to go, and they can get things set
up very quickly. They have the talent in place to within two weeks really be up and running.
Niu: That's another thing. If you had these really big demands and you need to be able
to scale up and down depending on seasonality in these other factors. That's another big
benefit of this contract manufacturing models, because you can just say, "I need X number
of units, go build them." Whereas if you're doing the manufacturing yourself, you also
have to worry about things like excess capacity, capacity utilization. Let's say you need to
ramp down for whatever reason, which makes a lot of sense now with the iPhone just finally
declining for the first time. Just in general, to have that ability to, this lever of being
able to increase production as needed, without really worrying to much about the logistics
of personnel. Like hiring, laying off, which is companies that have a lot of footprint
have to constantly worry about how they're going to manage increasing and decreasing
production. Particularly, when it comes to hiring and laying off workers. Which is a
tough thing to do, and they're kind of outsourcing that responsibility in a way too.
Lewis: Yeah, of course. This approach is not without its own risks, right? For as much
as we praise Apple's operational smarts here, there are some issues with the model. One
of them namely, I think is control, right? We haven't seen a ton of this, but there is
the possibility of quality control being a problem. I think more when you think about
Foxconn and some of the contract manufacturers in Asia, there's always this worry about working
conditions and this is something that has gotten a lot of press in the last couple years.
There's always this concern of working conditions being sub-standard, of being overly demanding,
of overtime being required, things like that. That's definitely one of their risks here.
Niu: Yeah, I definitely agree there. Lewis: One of the other ones that immediately
comes to mind for me is just intellectual property risk too. I think you can't go more
than a couple weeks without seeing online leaked photos of some rumored iPhone design
or configuration. I think that's a byproduct of these contract manufacturing systems. When
you have all these intermediaries within the design and fulfillment, it's just bound to
happen somewhere. Niu: With as global as Apple's business has
become, the supply chain is just too massive. You can't keep it secret. There's just too
many moving parts, there's too many third parties involved. Everyone wants a piece of
it and wants to know. You can easily sell a picture of a leaked iPhone and get paid
a ton of money if you can smuggle it out. You'll risk losing your job, but I mean for
some of these workers there's actually a lot of upside to sneaking these things out. They
know how much appetite the media has for it. Lewis: I wonder how much the company really
minds that that happens. You know? For them-- Niu: Well I know that they've punished workers
that have been caught doing this. It's pretty severe punishment, I don't remember exactly
what it was. Obviously Apple is such a huge contract for them and they have all these
confidentiality agreements, and all these things like that. I do think that Foxconn
does care, they do try to do their best to stop it. Again when you're talking at this
scale, all it takes is one person to get a picture, prototype, or mold or something out.
Then what?