Horace Dediu in his post, Invaluable:
To earn profit is hard, to do so in an outsized way is very hard and to do so with consistency shows a defensibility of market access that is rarest of all. The only cases where this typical is in a monopoly or protected market situation (aka cronyism.) Apple’s lack of market monopoly coupled with a (near-) monopoly in profits can only be explained by disproportionate value creation.
The mystery then is how is it possible to build a monopoly in value creation.
This is a prime example of the “simple, but not easy” adage. Apple’s winning strategy is:
- Make something of higher quality than their competitors.
- Make it more efficiently than competitors.
Credit often goes to Cook for Apple’s logistics, but what often goes overlooked is the efficiency of Ive’s hardware designs. Everyone notes the aesthetic details, but the manufacturing processes he and his team has created are probably more valuable than the external appeal of the hardware.
My grandfather was a machinist, one of the old-style tradesmen who learned empirically rather than academically. He and his team worked on some of the first ejection seats and later the missile bay doors on planes like the F–111. He’d be given a design by the engineers and asked how to make the pieces they needed, because often they lacked the industrial background to plan out processes.
Modern designers of Ive’s calibre are trained about how to make things — how to chose materials and processes — as well as how to make them look pretty. The unibody manufacturing process of current Macs was original to Apple, and they were in fact granted patents for it. Because the cases are made of a single piece, with intrinsic structural support elements, they use fewer parts overall than piece-made cases, which means fewer external part costs, lower material costs, and fewer assembly processes, all of which keep operating costs lower. Added benefits are better structural rigidity, lower weight, and recyclable waste. They’re made with mostly automated machining operations, which again lowers manufacturing costs, and greatly increases the average quality of the pieces with tighter tolerances and vastly fewer flaws.
Jobs was mainly responsible for Ives’ current prominence, and like so many things he was involved in, you can see the seeds of his idea decades before they came to fruition. The manufacturing facility at NeXT was one of the first automated assembly lines for technology products.
While Apple’s manufacturing in the last decade or more has predominantly been in China, I think the Mac Pro production facility is their test bed for moving more processes closer to home. There is huge value in having production close to the designers. Iteration takes far less time, you can talk directly to the people making the parts, and you can see for yourself where bottlenecks or unnecessary steps in the manufacturing process occur.
Time and time again, makers featured in forums like The New Disruptors have cited the benefits of working in proximity to manufacturers. Being able to produce at scale is the main reason given for choosing an overseas production facility, even when in other respects it’s far from ideal for refining the design.
You can be sure that if relative amateurs in the field know this, Cook, Ives, and others involved in design and manufacturing at Apple are keenly aware of the potential benefit of moving critical parts of its production closer to its base of operations.
Look for the Texas and planned Arizona facilites to take on more importance. I don’t expect to see any expansion in the Bay Area due to inflated land costs and high costs of living, but there will be new sites in US states with inexpensive land, favorable taxes, and lots of solar and other renewable energy available.
With the Texas plant refining a new case process, and the Arizona one to produce glass, Apple is strategically taking on critical parts of manufacturing the iPhone and iPad, which make up a disproportionate amount of its current profits. Experimentation here will also yield dividends in any new products they might want to create, lower the chances of “secret” projects leaking, and possibly present lessons for refining manufacturing in their overseas facilities as well.