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
foxconn-factory-in-shenzhen

But the real source of Apple’s success - and a key factor in how it defends its intellectual property - is its tight control of the supply chain right from the supply of components to final delivery. Apple, for example, does not just provide the specifications, but also purchases differentiating components - especially new or unique technology - and tracks their use, too, so that stock is neither wasted, nor siphoned off at any point in the supply chain.

Further reading

And the scale that Apple can bring to bear means that it can buy up stocks of that technology early on when production volumes are low, effectively monopolising its supply and thereby preventing rivals from copying it. For example, when Apple sought to put a special scratch-resistant screen on early iPhones, the supplier, Dow Corning, was only producing it in low volumes from one factory.

And in the late-1990s, Apple bulk-purchased air freight space early to enable it to get iMacs from the Far East to people’s Christmas stockings quickly - denying rivals the opportunity to do likewise because it had gambled on the new machines’ popularity, and bought all the spare air freight capacity at this important time.

“And at the end of a contract or production run, they make sure that they get back all of the stock that hasn’t been sold to prevent it from going where it shouldn’t,” says Jenkins.

Companies that do outsourcing well also ensure that they have strong inspection and audit rights written into their contracts so that they can drop in to a factory at any time and make sure that procedures are being maintained.

Furthermore, contracts routinely have non-compete clauses built into them to prevent an outsourced manufacturer from marketing a similar product both during the contract, and for a period of time after its termination, adds Jenkins.

On your bike

US bicycle maker Schwinn is a classic example of a company that failed to take such precautions when it rushed into an outsourced manufacturing relationship with Taiwan’s Giant in the early 1980s.

Initially, the deal worked well. Schwinn was able to return to the robust profitability that had long eluded it, while Giant was able to ramp up production on the production line that Schwinn engineers had helped to set up.

But when Schwinn sought a second manufacturer on mainland China, Giant’s management felt betrayed and the company started competing directly against Schwinn in its core US market, using all the manufacturing know-how that Schwinn engineers had passed on.

In early 1992, Schwinn fell into Chapter 11 bankruptcy protection and today is little more than a brand in a Canadian conglomerate’s portfolio. Giant, meanwhile, is now one of the world’s biggest bike makers.

In Schwinn’s case, while it had some intellectual property protection wrapped up in the design of its bikes, its major source of competitive advantage was its manufacturing know-how - which it shared all too freely with Giant.

While strict control of the supply chain can prevent components and supplies from falling into the “grey” market, blueprints and designs may still be at risk of corporate espionage.

 

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