than hardware. The “Intel Inside” platform strategy to extract high profits
extended from desktop computers to
notebook PCs with the launch of integrated chipsets. 3
Was this horizontally disintegrated structure stable? No. Companies
sought opportunities to capture greater profits, not only by specializing in
focused technologies but also by bundling products and services. In particular, Microsoft strengthened its market
power by bundling its operating system with applications software, Web
browser, and networked services. In
this competitive landscape, IBM withdrew from hardware by selling its PC
division to Lenovo, and struck out for
new territory in business services.
A similar cycle of moving from vertical integration to horizontal disintegration and back again to reintegration
is evident in the evolution of Apple to
become the world’s most valuable technology company in terms of stock market value in May 2010.1 In the 1980s,
Apple Computers was a vertically integrated firm with its own in-house design and factories. The troubles in the
1990s culminated in Apple’s decision
to outsource final assembly to SCI Systems in 1996, laying the groundwork
for modular thinking. The iPod is a prototypical modular product, enabling
Apple to mix and match preexisting
components. By leading in product innovation and design, but without doing
any manufacturing, Apple pocketed
$80 in gross profit for each 30GB iPod
sold at $299.2 The ongoing transformation of Apple Inc., bundling the iPod,
i Tunes, iPhone, and iPad, is a dramatic
example of a company that has been
able to reinvent itself by taking advantage of global supply chains. Innovative companies such as Apple have the
power to reshape the boundaries of the
industries in which they operate.
Thus, we know that value migrates
from the final product manufacturer to
component suppliers as a result of the
former’s outsourcing decisions and
the pursuit of platforms by the latter.
However, this could be reversed or circumvented if the product manufacturer regains control of its supply chain by
reshaping its industry and developing
an ecosystem of providers engaged in
complementary innovation.
Important though this story is,
there is a less well-known story behind
this one, focused around the no-brand
supply companies that actually make
these products.
A Bit of history: The Rise
and Rise of Large Factories
In the 19th century, improvements in
transportation (especially railroads)
and communication (such as telegraphs) led to the development of mass
markets. By the early 20th century, such
markets demanded large volumes of
standardized products, exemplified by
Ford’s Model T, produced in large vertically integrated factories. Fast-forward
into the early 21st century, and we see
the current wave of improvements in
transportation (this time in container
shipping) and communication (this
time with digital technology) have had
a similar impact on the size of factory
operations. 4 We see the rise of large
horizontally integrated production factories in low-cost locations supplying
products and services to the world.
Consider the case of athletic shoemaking. Several powerful brand owners exist in an oligopolistic market.
But today, the largest footwear manufacturer in the world is not one of the
brand owners such as Nike or Adidas,
but Pou Chen Group. Its shoemaking
subsidiary, Yue Yuen Industrial Ltd.,
has a sales turnover of $5.8 billion,
employs around 300,000 workers, and
churns out 186 million pairs of shoes
per annum. That is, this company
makes one in every six pairs of athletic
shoes sold in the world.
Another good example is in laptop
computers. In this market, Quanta
under what
circumstances do
value-adding
activities migrate
from the final product
manufacturer
to a component
manufacturer?
Computer is the world’s largest manufacturer. One in every three laptops is
made by Quanta. Its factories make laptop computers for brand owners ranging from Apple, Compaq, Dell, Fujitsu,
HP, Lenovo, Sharp, Sony, and Toshiba.
One thing it does not do is produce
its own brand of computers. Quanta
Computer is the largest of the Taiwanese personal computer manufacturers,
whose combined output accounts for
over 90% of worldwide market share.
Similarly, Hon Hai Precision Industry Co. (Foxconn) heads the league
table of electronic manufacturing service (EMS) providers, which include
such firms as Flextronics, Jabil Circuit,
Celestica, and Sanmina SCI. Having
achieved a very rapid growth, FoxConn
employs nearly one million workers
mostly in China to assemble Apple’s
iPod, iPhone and iPad, cellphones for
Nokia and Motorola, Nintendo’s video
game consoles, and Sony’s PlayStation,
among other things.
“Behind-the-Scenes Champions”
Profit from Size and Diversification
These companies—Pou Chen, Quanta,
Foxconn—are no-brand manufacturing firms that supply retailers or brand-owning firms, some with no factories.
They are called CM (contract manufacturers) or ODM (original design manufacturers) if they undertake design as
well as the manufacture of products
for sale under the client’s brand. The
brand owners may command and
drive power in global supply chains,
but the behind-the-scene supply firms
have not been totally powerless. The
most obvious source of bargaining
power for these no-brand suppliers
is the sheer size of the operation. For
example, Quanta Computer supplies
nine out of the world’s top 10 notebook
PC brands. As such, it exercises power
by being discriminating among these
clients, setting up dedicated business
units with product development and
mass production capacity for some of
the best (but not all) clients.
A small number of ODMs, such as
Acer and Lenovo, transitioned to selling products with their own brand.
However, turning your corporate client into a competitor is a risky move,
as Lenovo initially found out with IBM
when it terminated its contract with
Lenovo. As an alternative strategy,