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

Part of the due diligence process, therefore, ought to involve an audit of the manufacturer, says Jenkins, all the way down to the level of vetting they do on their staff as part of the recruitment process. “Obviously, specs and blueprints are held on computer systems, which can be quite vulnerable to attack. So if a company has an IT security certification, that’s quite a big comfort,” says Jenkins.

Further reading

Major companies involved in high-tech manufacturing have, for years, audited key suppliers for computer security. Airbus, for example, when it was developing its A380 “super jumbo” put together a security team that would fly around the world to physically check out suppliers - whether they were based in Mumbai, Shanghai, Paris or Seattle.

And Airbus is not alone - although most companies prefer to keep their security audit practices private.

Even then, though, there is little a company can do if a partner is determined to rip-off its intellectual property. American Superconductor Corp (AMSC) found this out when, it claimed, its key customer in China reverse engineered the company’s controller technology and started producing it at a subsidiary company.

While a former member of AMSC’s staff was subsequently jailed for stealing the controller code, implicating the supplier company, a copyright infringement case is currently wending its way through Beijing’s commercial courts.

Not so unique?

But how much intellectual property do the big-name computer brands actually have?

In his last financial conference call in December last year, Jobs asserted that the company’s value was in its know-how - its intellectual property.

“We create our own A4 chip, our own software, our own battery chemistry, our own enclosure, our own everything,” he said, later adding: “We engineer so much of it ourselves. The A4 chip inside it is an Apple creation. We develop a lot of our own components.”

Ironically perhaps, the key components of the Apple A4 chip suggest that Apple’s intellectual property may not be as “all-Apple” as Jobs implied: the A4 is based on an ARM Cortex-A8 CPU core, which is combined with Imagination Technologies’ PowerVR SGX 535 graphics processor, and the chip is built by Samsung using its 45-nanometer silicon chip fabrication process.

Other key components of Apple’s success have come from products and technologies that the company has uncovered and been imaginative enough to put to good use in mass-market products of unique design - staying one step ahead of the companies that seek to copy it.

The success of Apple’s control over its whole supply chain is reflected by the delayed launch of the new iPad in China, held up by a trademark dispute. Despite the clamour for the new product, no units found their way from the factory into the grey market, and unauthorised imports were kept to a minimum.

But what would happen if the contract manufacturers should turn?

Already, Foxconn has started producing its own range of fanless PCs, dubbed Nano PCs, and has long produced its own-brand range of PC cases and motherboards. It also holds a growing stockpile of patents, numbering in excess of 25,000.

Furthermore, while Foxconn’s profit margins are slim - just 2.5 per cent in its last financial year - Apple’s are in excess of 30 per cent. In fact, Foxconn’s margins have declined over the past decade, the more work that it has done for Apple.

Other contract manufacturers struggle with similarly razor-thin margins. Indeed, one of the first casualties of Nokia’s sudden decline was the demise of Elcoteq, one of its contract manufacturers, when Nokia turned to cheaper manufacturers.

Who would therefore blame them if they were to reason that as they do the bulk of the hard work, and shoulder the risk of changing consumer demand, they ought to enjoy a greater share of the profits, too - and act accordingly?


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