How much longer will contract manufacturers like Foxconn remain in the shadow of the West's tech giants?

By Graeme Burton
01 Aug 2012 View Comments

When Steve Jobs unveiled the first Apple Macintosh in 1983, he boasted that it was a computer “made in America”, produced at an Apple-owned factory in Fremont, California.

Further reading

Fifteen years later, when the first Apple iMacs started rolling off production lines following the return of Jobs as CEO, it was also at an all-American, Apple-owned plant, this time in Elk Grove in Sacramento - just 50 miles away.

But while he was away, his attitude to manufacturing had changed: just one year later, iMac production was transferred to the Far East.

Over the next decade, manufacture of every other Apple product followed the iMac to Asia, not simply to Apple-owned plants, but to contract manufacturers that would do the job on Apple’s behalf.

Changing attitudes

The contrast in attitude was stark. In the 1980s, Jobs had studied “Kaizen”, the Japanese industrial practice of continuous improvement in manufacturing, in a bid to make Apple’s factories as efficient as possible.

In the 1990s, though, his mentor was former Intel CEO Andy Grove, whose attitude to manufacturing was very different, according to Victor Newman, professor of knowledge and innovation management at the business school at the University of Greenwich.

Under Grove, Intel used suppliers to do much of its manufacturing because Grove reasoned that manufacturing wasn’t necessarily what made Intel great, says Newman. “Grove advised Jobs to replicate the Intel strategy,” he says.

When Jobs returned to Apple, costs were slashed from $8.1bn in 1997 to $5.7bn in 1999, primarily through outsourcing, better inventory management, cutting the number of distributors and re-directing sales online. These initiatives were largely masterminded by Tim Cook, Jobs’ successor as Apple CEO.

Today, Apple’s Elk Grove facility is a distribution and contact centre, while the factories it once owned and ran in Ireland and Singapore are long gone. Instead, it relies on Taiwan-based Foxconn, the world’s biggest contract manufacturer, to assemble its products.

In that regard, Apple is little different from many other big-name companies that put their logos on the front of products built by third-party manufacturing specialists.

Quanta, another Taiwanese outsourced manufacturer, produces about one-third of the world’s laptop computers, while, Compal is the world’s second-largest laptop maker - not HP, Dell or any of the other technology companies that rely on other companies to build their products.

So how do Apple, HP, Dell and others outsource their manufacturing, without losing either their own position in the market or their intellectual property?

Aggressive defence

The answer, says Nichola Jenkins, an associate in the commercial and intellectual property unit at law firm Cobbetts, is a combination of aggressive defence of intellectual property of all types with tight control of the supply chain.

“The first thing is to consider what is protectable and what isn’t in terms of patents and designs,” she says. “Then, protect yourself with new patent applications that cover the territories that you are looking to manufacture in, so that the company within that territory cannot produce something similar in the future.”

Furthermore, if a company has a reputation for promiscuously filing patents and aggressively protecting them, that, in itself, also helps ward off the risk of copying, she adds.


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