Case Study of Apple's Global Supply Chain

International Trade and Finance

Multinational Corporations are businesses that at one given time operate in more than one country. They generally have factories and offices in different countries and a centralized headquarters in another. Apple is a multinational corporation that produces complex consumer products. This piece of writing will study, one of Apples most popular products the iPhone. The Supply-Chain Council defined a supply chain as “the effort involved in producing and delivering a final product from the supplier’s supplier to the customers customer” (Kranz 1996). Apples global supply chain has been stated to be one of the most innovative supply chains to transpire in the last three decades. (Lockamy 2017). 

Apple has been regarded as having a competitive advantage above its competition and this is not simply because of its marketing and exceptional design, it is because of its domination of the advanced consumer supply chain. The iPhone’s design process takes place at apples headquarters ‘Apple Park’ in Cupertino, California. Previously they had their own separate unit in Valley Green Drive California. The move allowed CEOs to work more closely with the design team. (Cult of Mac, 2015).

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A major part of Apples global supply chain is its use of numerous suppliers for the same component. Apple have a extensive network of third-party suppliers in its supply chain. In total apple has 785 suppliers in 31 countries worldwide. 341 suppliers are situated in china.   According to Apple’s 2015 supplier list’ 97% of its supply chain is accounted for by its top 200 suppliers (Apple.com, 2019). This would mean that 585 of Apple’s suppliers account for the remaining 3% of its supply chain, providing it with a significant degree of latent capacity.  (Aicd.companydirectors.com.au, 2015). Mike Fawkes, the former supply chain chief at Hewlett-Packard, stated “because of its volume – and occasional ruthlessness- Apple gets big discounts on parts, manufacturing capacity, and air freight.” (Satariano and Burrows, 2011). One of the key advantages to apple having multiple suppliers for the same component is that they can mitigate supply chain delays and disruptions, allowing it to maintain gross margins. Apple can also encourage lower supply costs as multiple suppliers compete for its businesses

(Econlife.com, 2019)

The manufacturing stage of the supply chain takes place in a centralized location in Zhengzhou China. The materials and components for the various suppliers are shipped via air to the factory in china, aiming to save time and money.  The factory is run by Foxconn, a multinational electronic manufacturer. There are 94 production lines at the Chinese manufacturing site. It takes about 400 steps to construct the iPhone, which includes soldering, drilling and polishing. The factory can produce up to 500,000 iPhone a day.  (Nytimes.com, 2019)

The distribution stage either involves products being directly shipped to the consumer via FedEx or UPS or being sent to Apples main central warehouse facility in Elk Grove California, and products will be supplied from there.

To become more environmentally friendly, the final stage of Apples global supply chain is return; This is either trading in an old iPhone or an old product being recycled. If a consumer wants to recycle an old product there is an opportunity to do this by sending/ returning the product back to the apple store or sending it to dedicated recycling facilities. Each country has slightly different return procedures, but the recycling takes place within the country of return. (Apple (United Kingdom), 2019)

This diagram shows Apples five key stages in their global supply chain.

(Smbp.uwaterloo.ca, 2019)

Comparative advantage theory

The Comparative advantage theory is popularly attributed with the 19th century economist David Ricardo. The theory developed from Adam Smith’s Absolute Advantage Theory, which claims that countries should only produce goods that they have an absolute advantage in.  His theory failed to explain, what happens when a nation had an absolute advantage in the production of all goods (Intelligent Economist, 2019).  The Comparative Advantage Theory aims to overcome this issue, the theory refers to an economy’s ability to generate goods and services at a lower opportunity cost than of trade partners. A comparative advantage gives an organisation the ability to sell goods and services at a lower price than its competitors.

Ricardo stated that “A country will export products that it can produce at low opportunity costs and import products that it would otherwise produce at high opportunity costs”. (Pugel 2016). Apple Imports its components from all over the globe, for example the iPhone capacitive touchscreen controllers are sourced from Massachusetts, while the casing is imported from Huangpu China. (Apple.com, 2019). Apple using suppliers form all over the world, supports Ricardo’s Comparative advantage theory.  Purchasing products from all over the globe, suggest Apple are getting them for the lowest price possible and that the country of import has the lowest opportunity cost of that component.

The theory argues that “those who have natural or learned absolute advantage can do even better for themselves by focusing on those skills and buying other goods and services from those who produce them at relatively low costs”. According to Ricardo, “nations specialise in industries where they have lower opportunity cost and trade based on these comparative advantages all the countries enjoy gains from international trade” (Gyi, 2016). The United states could have produced the components for the iPhone themselves, however with regard to the global supply chain, their strongest skill is the design stage. Therefore, using their absolute advantage, it is more beneficial to them to import the components from all over the world. Furthermore, the iPhone is manufactured in China, Apple could have used just Chinese suppliers to avoid large transportation coasts. However, Apple have chosen to use suppliers from all over the globe to produce the iPhone. Apples deciding to use various suppliers, supports the comparative advantage theory. In order to sell the iPhone at a reasonable cost and still make a large profit, Apple needs to pay as little as possible for each component; this involves purchasing from countries that have lower costs than any other country.

The iPhones manufacturing stage takes place in a factory in China. In 2012 a report  stated that many of its workers earn less than $17 a day (EDITORS, 2012). The graph below illustrates the minimum wages from different countries around the world. Chinas wages might not be the lowest but compared to an American factory wage there is a considerable difference. The average United States factory employee gets paid $12.04 per hour.  (Indeed.com, 2019). The theory explains the reason why a country might produce and export something that its citizens don’t seem very skilled at producing when compared directly to the citizens of another country.  Comparative advantage theorists state that citizens of the importing country (USA) must be even better at producing something else, making it worth it for them to pay the have the work done by the exporting country. Ricardo states that “the citizens of each country are better off specializing in producing only the goods at which they have comparative advantage, even if one country has an absolute advantage at producing each item” (The Library of Economics and Liberty, 2019).  This is true in Apple’s case; The United States are more skilled at designing the iPhone, hence why it is located in U.S, whereas China can manufacture the phone at a cheaper price than the U.S giving them an comparative advantage.

(Business Insider, 2019)

However, this theory fails to explain why Apples recycling takes place in multiple locations all over the world, rather than the country who have the lowest opportunity cost. The comparative advantage theory main arguments is ‘that one economy will have the ability to generate good and services at a lower opportunity cost that of any trade partner’. Surely according to this theory one country must have the ability to recycle products at a lower opportunity cost than another. Therefore, this theory fails to explain why each country that supplies Apple products also recycles their own products.

Technology based theory

Earlier theories such as the relative factor endowment, assumed that the techniques of production were fixed and given, however these assumptions can only be valid in a static system. The recent changes in technology have significant effects on production and trade.

Raymond Vernon created the product cycle model; the theory is founded upon experience of the U.S market. The model explains that a product is initially produced and exported by the innovating country but finally it ends up as an importing country of the same product or same differentiated variety of that product. in Apples case, this is true as they now import the iPhone from China back to America.  In 1960 Vernon found that a large proportion of the world’s new products came for the United States. He concluded that the U.S was the first to introduce technological driver products. The product cycle model claims that the factor requirements of a product changes over time, so that there is a cycle in the production of it.

The Product cycle model emphasizes the need for product standardization. When a product is first introduced, it generally requires a highly skilled labour force to produce the item.  When Apple first introduced products, the design team and the labour force were based in the United states and it took Apple a lot longer to produce an item, compared to when Apple produce a new product now. The manufacturing factory in China employ 350,000 workers, in the United Sates there are only 83 cities that have the same population as Foxconn number of employees. This shows that the number of possible employees is not enough to cover apples needs. (Pino, 2018)

The theory explains when a Product is in it introduction stage, it is always more likely to be introduced in a developed nation, this is due to the fact that more high-income consumers are able to buy and are willing to experiment with new, expensive products. This is true for the iPhone, for example the iPhone X was first realised in the US on the 3rd November and the it was not realised in Malaysia till November 24th.  (Apple Newsroom, 2017)

Vernon argues that when the product matures and acquires mass acceptance, then it will become standardized and can be produced by mass production techniques and a less skilled labour force.  It can be argued that the workers on the production stage of the iPhone are a less skilled labour force compared to the workers on the design team. Foxconn Is the main factory where the iPhone is produced, it has 94 production lines and they are able to produce 500,000 iPhones a day. They can roughly employ 350,000 workers, many of these workers are paid $1.90 an hour (Nytimes.com.2019). Due to these high figures and the low salaries it suggests they are not as skilled as the workers in the design team otherwise the wages would reflect their skill level. Foxconn operating a production line system indicates that the iPhone has been standardized, therefore agreeing with the product life model. In comparison, the design team is located in California, to work on such a team, applicants have to go through six different recruitment stages, four of them being interviews (Jacobs, 2018). This suggests that Apple will only employ highly skilled workers for the design team and that’s why it is located where highly skilled workers are based.

The theory believes due to comparative advantage over time, the product shifts form the advanced nation that originally introduced it to less advanced nations, where the labour is relatively cheap, the innovating country ends up as net importer of the product.  Apple sources its iPhones components from all over the globe one of these locations is Laguna in the Philippines. It can be claimed that the Philippines is not an advanced nation and the labour to produce the component is expected to be relatively cheap; therefore, agreeing with the theory. However, Apple started using the Chinese manufacture Foxconn in 2000, the first iPhone was not produced until 2006, meaning Apple had already been using Foxconn for six years, prior to the introduction of the iPhone; Consequently, China has always been exporting the iPhone. This proves that Apple have always used less advanced nation to produce their iPhone, suggesting that Apples global supply chain does not fit with the product cycle model.

An issue with the product cycle model is that it is based upon assumptions, these are: “The producers in capital-rich countries initially introduce new products”. For the iPhone this assumption is true because The United States Is a capital rich country and they introduce the product. However, lower income countries like Mexico and Brazil have been adapting new products. The second assumption is that the innovating firms have some real or imagined monopolistic advantage. The third assumption is that “the need and opportunities of the domestics market stimulate the innovation of new product”. (Mulder, 2019) These assumptions make it difficult to use the model for smaller companies that are not based in capital rich nations

In conclusion Apple’s global supply chain fits with some of the main ideas of both the Comparative Advantage theory and the Technology based theory. However there are parts of the global supply chain that neither theory can explain.

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