Technology

Apple's Chinese Supply Lines

By Bruce EinhornJanuary 08, 2007
The company farms out iPod production to Taiwanese-owned plants on the mainland, and it's a
mihty demandin customer
!s any !pple "omputer #!!P$% fan can tell you, the pac&ain of a new iPod proudly
announces that the wildly successful music and 'ideo players are desined in "alifornia (y
!pple) But most iPod owners don't really care where or (y whom the adets are made*which
is +ust what !pple wants) ,on ,ai Precision, !suste& "omputer, and -n'entec !ppliances, the
Taiwanese electronics companies that assem(le millions of iPods in "hinese factories, aren't
e.actly household names)
-n'estors loo&in to cash in on the iPod's popularity, thouh, would do well to et to &now these
companies) That's (ecause !pple doesn't ma&e any iPods on its own) /ather, it outsources all
production to the Taiwanese*and they ha'e done 0uite well as a result, than& you 'ery much)
1-n'estors want to &eep their eyes on the supply chain, (ecause !pple outsources e'erythin to
companies in 2reater "hina,1 says Tony Tsen, an analyst with 3errill $ynch #3E/% in Taipei)
$ess /eliant
"onsider -n'entec !ppliances) This su(sidiary of Taipei computer ma&er -n'entec ma&es a rane
of adets, includin 2P4 systems for TomTom #T35!6%, the 7utch specialist in car na'iation
e0uipment) But the (ul& of -n'entec !ppliances' income comes from its production of 'ideo
iPods for !pple) -n'entec !ppliances, which had sales of 89): (illion in 200;, depends on !pple
production for a(out :0< of its re'enue)
The (ier, more di'ersified Taiwanese companies are less reliant on !pple) 4till, assem(ly of
iPods is an important (usiness for ,on ,ai, the world's larest electronics outsourcer #and the
=o) 2 ran&ed company in the most recent Business>ee& -T ?00 ran&ins*see them here%)
,on ,ai, which operates under the trade name of 6o.conn, manufactures cell phones for =o&ia
#=5@%, ame consoles for 4ony #4=E%, and P" monitors for ,ewlett Pac&ard #,PA%) The
company produces the iPod =ano for !pple, and that (usiness accounts for ;< of its total sales,
which reached 829 (illion in 200;) 3any analysts thin& 6o.conn will (e the manufacturer for the
much anticipated iPod phone, which !pple may announce at 3acworld this wee&)
4trict 4tandards
"ompared with other B)4) computer ma&ers, !pple is notorious in the Taiwanese electronics
industry as a difficult customer) >ith their near-o(sessi'e concern a(out secrecy and 0uality,
4te'e Jo(s C "o) ma&e life especially hard for their suppliers)
-t's not uncommon, for instance, to hear stories of finished iPods ettin re+ected (y !pple
(ecause they don't meet its standards) 1-n terms of 0uality, ser'ice, and secrecy,1 !pple's
re0uirements are 1hiher and stricter than anyone else's,1 says ,enry @in, an analyst in Taipei
with 2oldman 4achs #24%)
4till, Taiwanese companies li&e wor&in for !pple) Typically, !pple contracts with only one
Taiwanese supplier for each type of iPod) ,on ,ai, for instance, ma&es the =ano while !suste&
ma&es the 4huffle) #!n e.ception is the Dideo iPodE !pple now has two suppliers, followin its
decision last year to i'e some of the (usiness to Auanta "omputer in addition to -n'entec
!ppliances)%
3oreo'er, the iPod's popularity ensures that orders &eep comin in) !nd at a time when
Taiwanese computer ma&ers are strulin to cope with e'er-shrin&in profit marins, the iPod
pro'ides some welcome relief) !ccordin to Byron >u, 4henFhen-(ased head of "hina research
for i4uppli, Taiwanese manufacturers ma&e only 2< marins on computers) 3arins for iPods
are at least dou(le that, says >u)
4udden 4crutiny
>hile !pple would prefer that its Taiwanese suppliers &eep a low profile, ,on ,ai une.pectedly
found itself in the spotliht last summer followin reports in the >estern and "hinese media
a(out a(uses at its "hinese factories) ,on ,ai denied any wrondoin, and !pple announced that
an in'estiation found that conditions were enerally satisfactory, althouh the company did say
that it had unco'ered 'iolations reardin o'ertime pay and housin for ,on ,ai factory
wor&ers) #see Business>ee&)com, 8G?8G0:, 1!pple !nswers 14weatshop1 "laims1%)
4ome people (elie'e that the sudden attention to la(or conditions at iPod plants in "hina miht
help the Taiwanese (y i'in them some le'erae with !pple) -f !pple wants manufacturers to
impro'e conditions, this loic oes, then the !mericans ha'e to pro'ide more wile room with
marins)
1-f companies are a(le to come up with a process to increase o'erall output without the need for
more o'ertime la(or, then they can et a (etter deal from !pple,1 says one Taipei-(ased analyst
for a >estern in'estment (an& who cannot (e named (ecause of (an& policy) 1!pple miht i'e
the company more resources for doin the same +o()1
>u of i4uppli isn't holdin his (reath, thouh) 1- don't thin& the H,on ,ai contro'ersyI can
chane the rules too much,1 he says) >hen it comes to relations (etween !pple and its suppliers,
!pple still has the (i ad'antae) 4ays >uJ 1!pple is the (i shot)1