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,