New Apple CEO Tim Cook will make no changes to its outsourcing recipe.
That’s my take, based on an assessment of the iPhone maker’s balance sheet.
Cook, of course, has been named to succeed Steve Jobs, who has been fighting a particularly deadly form of cancer.
Foxconn is telling reporters the change at the top won’t impact the companies’ relationship. I couldn’t agree more. It can’t. Much like the US-China relationship, Apple needs Foxconn, and Foxconn needs Apple. Apple carries some $11 billion worth of outstanding off-balance sheet commitments for outsourced manufacturing and components, plus another $1.6 billion committed to manufacturing equipment, presumably for the Foxconn-run plants.
Why would Apple commit all that cash to equipment purchases, when it does not have the internal capacity to build product itself? Because it owns the machines in the Foxconn plant. Although Foxconn has moved much of its Shenzhen campus operations inland to take advantage of lower labor costs, rumor has it the site remains open solely for the benefit of Apple. Apple is said to pay Foxconn roughly $6 for every finished working assembly.
With demand for Apple’s iPads, iPhones, Macs and iPods cresting, it couldn’t leave if it wanted to. If anything, Foxconn is in better position to absorb the loss of Apple than the other way around.
I’ll be at Charlie Barnhart Associates’ Outsourcing Navigator Council meeting next week in Chicago. Old friends Eric Miscoll and Jennifer Read have invited me to moderate a panel looking at the future of outsourcing.
Among my panelists are executives from Plexus, Creation Technologies, Morey Corp., Eaton Corp. and host Tellabs. I’m really looking forward to it, and hope to have some good notes to share with you next week.
The pundits are out and speculating that, in the wake of a dozen worker suicides, higher wages and reams of bad press, Foxconn might relocate from China.
AppleInsider thinks Foxconn might move production back to Taiwan. John Dvorak suggests a fed-up Terry Gou might either replace workers with robots or leave altogether. Others pose similar notions.
Two fundamental problems exist with this line of reasoning (three, if you factor in that a scaled-up lights-out electronics manufacturing operation has never existed).
1. No other country, save for India, offers the population China does. Foxconn’s model is built on having access to hundreds of thousands of workers in company towns. Where else in the world is that possible? What other government would even allow it? Taiwan, for example, has neither the space, the population nor the wage rates necessary to pull this off, even if it wanted to.
2. Foxconn has established complete supply chains in or near its campuses. It’s one thing to move a factory. EMS companies do this all the time, and (with some notable exceptions) have actually become fairly good at it. But relocating an entire supply chain takes time and commitments. Foxconn may be the largest EMS player in China, but it’s not the only one, and in just a handful of cities those chains can feed the 75% or so of all electronics manufacturing in the world. Simply put, there are good reasons everyone is in China right now and not, for example, India.
For better or worse, Foxconn and China are bound together.
Good news for Top Tier contract assemblers came today in the form of Nokia’s announcement it would begin outsourcing again, a year after pulling everything in house.
Just another sign that the market is recovering.
Nokia announced last July it would bring all its electronics assembly production in house as falling demand led to excess capacities at its factories.
Foxconn, BYD, Jabil and Elcoteq were Nokia’s primary EMS suppliers in 2008, when it outsourced a reported 17% of its manufacturing.
Contracting assembly certainly is nothing new around these parts. Semiconductor design firms routinely outsource waber fab and packaging. OEMs have sent out everything from systems design to circuit board layout to component assembly and test. Indeed, our sister magazine, CIRCUITS ASSEMBLY, has covered the electronics manufacturing services industry for 20 years.
But a new deal between Ultra Clean Holdings and Orbotech puts a slightly new twist on an old paradigm.
Under the agreement, Orbotech will outsource production of certain AOI machines to Ultra Clean. Given that designing and building AOIs is considered to be Orbotech’s core competency, it would appear that the OEM is rethinking even that part of its business model.
Are process equipment makers next to follow end-product OEMs like Cisco and IBM into full-scale outsourcing?