Apple's secret iPad advantage: The supply chain

Apple's secret iPad advantage: The supply chain

Summary: How is it that Apple is able to beat every single tablet vendor on price? Their secret sauce: The supply chain.

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How is it that Apple is able to beat every single tablet vendor on price? Their secret sauce: The supply chain.

The word is out. That cool Android-based iPad killer coming out from Motorola? The XOOM? It's going to set you back eight Franklins if you want to buy one. That's $800.00, 9,566 pesos, 881,000 won or 5,275 yuan, for those of you keeping track.

Motorola may have made an ode and a bit of a tweak in the eye to Apple's classic 1984 Macintosh commercial with their Superbowl XLV ad, and surely emulation is the sincerest form of flattery, but emulation doesn't get you customers -- at the end of the day, it's all about costs, and how that translates to direct pricing to consumers.

The Motorola XOOM is indeed an impressive device. Dual-cores, 1GB RAM, 32GB of flash storage, front and rear cameras, a 10.1" high-resolution display, integrated 3G and 4G-ready and expansion ports galore.

If you look at it compared to the current iPad, with its single-core processor, 256MB of RAM, 16GB of flash storage and 9.7" XGA display (base model) it is indeed a killer device. The problem, however, is that Apple isn't standing still.

Also Read: If it's really priced at $800, Motorola's Xoom won't stand a chance against iPad

We really don't know what is going to be in the next iPad, although we can make some educated guesses. However, I think we can be fairly certain that it will be announced soon, and that it will have a feature set that will allow it to be competitive with any Android 3 tablet due for near-term release, but most importantly, the base model will not exceed $500.00 in price.

This is something that no matter how hard they try, none of the other Tier 1 consumer electronics manufacturers are able to do. It's probably flat-out impossible.

As I discussed in an earlier piece, "Next-Gen Android tablets can't hang with iPad on price", Apple has set the bar at $500.00 for an entry-level 10" Wi-Fi tablet device. So far, there are no products scheduled for release by a Tier 1 manufacturer that even come close to this price point.

How is Apple able to do this where nobody else can? It has to do with buying up the entire supply chain and being able to leverage quantity 10 Million+ manufacturing orders in advance with its partners in China like FoxConn and with semiconductor component suppliers such as LG, Samsung and Philips.

When you have 50 billion dollars in liquid assets, you can pretty much guarantee huge volume pricing discounts at that scale, as well as make those components scarce and expensive for your competitors to buy.

This ability to leverage economies of scale and large component pre-orders, enabling Apple to own all of its own inventory in advance of a major product release is something the company has been doing going back to 2001, when the first iPods were being manufactured.

This is a lead that will be very, very difficult for other Tier 1 manufacturers to be able to close the gap on, and why as nice as other products like the XOOM might end up being, in terms of being able to deliver the customer value at the price points they want to pay, they can't even come close.

In the summer of 2010, semiconductor research firm iSuppli predicted that by the same time in 2011, Apple will be the second-largest purchaser of semiconductor components in the entire world, falling just behind Samsung, the current world leader. By 2012, it will pass both Samsung and Hewlett-Packard as the world's largest purchaser of semiconductor technology.

Next: Apple's Strategic Investments in Semiconductors »

Guaranteeing huge quantities of pre-sold components and managing a massive supply chain are only part of what Apple's "secret sauce" is, however.

The company made a number of strategic investments that give them considerable advantages over every other consumer electronics firm, which is that they have full ownership of its entire technology platform stack, all the way up from its software (iOS) to the SoC (System on a Chip) PoP (Package on a Package) hardware with their A4, which was designed internally at Apple by its P.A. Semi subsidiary and farmed out to Samsung for volume manufacturing.

To ensure that these huge demands for chips in their products are being met, Apple is rumored to be making considerable investments in semiconductor manufacturing equipment itself, which is being installed in partner factories with the sole purpose of making chip components for Apple products.

So the question remains -- can anyone beat or even tie Apple at the supply chain game? Certainly, we haven't seen what's up Hewlett-Packard's sleeve yet with their own tablet plans, which are to be announced on February 9.

Samsung hasn't committed to a large form factor tablet yet, but even if they do, like Motorola, their offerings seem to be currently tied to the mobile carriers, which handicaps their component cost considerably, and they don't have the political luxury of being able partner with China to be able to leverage component costs from other manufacturers. LG? Same deal.

Toshiba? Sharp? Sony? No chance in hell of being able to compete with Chinese and Korean OEM/ODMs on price.

What of Taiwan's HTC? While clearly capable of making very nice smartphones and other devices inexpensively, it doesn't have direct sales capability nor a reseller channel in retail that isn't fully dependent on the carriers like its Korean counterparts. When I can get a 10" HTC Android 3 tablet in Wal-Mart and Best Buy that doesn't require a 3G or 4G data plan for $400, let's talk.

And our Canadian friends at RIM? While the company still wields a pretty mighty sword in terms of their Asian manufacturing relationships, Let's just say that I'm not expecting the 7" BlackBerry PlayBook to be even close to iPad 2 territory in terms of price and overall customer value, which includes the huge App Store software ecosystem that is nothing to scoff at.

There is however, another player which has so far remained silent, which may have what it takes to launch a true competitor to the iPad, in both specs and price -- Amazon.

It's no secret that the company is preparing its own App Store for Android, and that it may be biding its time in preparing a device that has the right combination of software and features, shoring up its relationships in Asia, rather than go early to market like Samsung and some of the others that already tried and failed to capture iPad market share.

And if we know anything about Amazon and how they've been able to effectively control the ebook reader market, they know how to leverage manufacturing to drive prices down and push competitors out of their own space -- and they have plenty of cash to do it with.

A Dual-Core 10" Amazon Kindle Tablet running Android 3 for $500 or less? I think it's doable, although it will be a significant challenge for the online retailer giant.

Will anyone be able to compete with Apple in the short or long term to leverage the supply chain in order to produce devices with comparable customer value? Talk Back and Let Me Know.

Topics: iPad, Apple, Enterprise Software, Mobility, Software

About

Jason Perlow, Sr. Technology Editor at ZDNet, is a technologist with over two decades of experience integrating large heterogeneous multi-vendor computing environments in Fortune 500 companies. Jason is currently a Partner Technology Strategist with Microsoft Corp. His expressed views do not necessarily represent those of his employer.

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  • RE: Apple's secret iPad advantage: The supply chain

    I'm in the market for a tablet, but I have two basic requirements: 1 - not produced by Apple, 2 - not tied to a wireless carrier. I'm willing to pay more than the iPad, but not $300 more.
    roteague
    • Irrational and counter-productive

      @roteague: "I'm in the market for a tablet, but I have two basic requirements: 1 - not produced by Apple..."

      Your attitude is just sad. If you find a product that, in your estimation, is better than Apple's, then by all means, buy it and enjoy it. But to deny yourself the pleasure of a product simply because you hate Apple is both irrational and counter-productive.
      Falkirk
      • RE: Apple's secret iPad advantage: The supply chain

        @Falkirk "But to deny yourself the pleasure of a product simply because you hate Apple is both irrational and counter-productive."

        Not really. If you dislike a company and the way they do business it would be irrational to support them by purchasing their products, don't you think?
        cjames@...
      • "taking a stance" and "voting with your wallet"

        @Falkirk
        roteaue obviously dislikes Apple for his own reasons, but not wanting to buy their products does not mean he's being irrational and counter-productive - it means he's taking a stance and voting with his wallet. It would make no sense for him to support a company that he doesn't like by going and buying one of their products - it would be completely hypocritical.
        NetAdmin1178
      • RE: Apple's secret iPad advantage: The supply chain

        @Falkirk I love Apples designs but I never liked their products enough to keep one and tried them all numerous times. It's just never sticks. That's why I become Android fan-boy I guess. Did I say I love Apple designs?
        droidin.net
      • You judge too fast

        @Falkirk

        roteague didn't say why he has eliminated Apple, but there are some plenty valid reasons. I've had an iPod and an Airport Express. I loved my iPod, but every later generation of iTunes on Windows has become more bloated and painful to use. The Airport Express is a PITA to configure correctly unless you are using a Mac.

        In my opinion, unless you have an all and only Apple home, their products while nice, aren't worth the heartburn.
        colinnwn
      • Why sad.

        @Falkirk
        I would fall into the same category. An iPad is a useless device for me because I run Linux which makes it a useless device but on a philosophical level, I refuse to give in to Job's control freak megalomania. These two items above make Apple, by default, a vastly inferior device without even looking at the tech specs. There are tons of stories about Apple doing really anti-consumer type things with you "leased" equipment from them, and if he, I or others decide that makes the Apple product line inferior and a refuse to purchase, it isn't sad, it's actually what may eventually tip the balance and eventually reduce Apple's arrogance.

        TripleII
        TripleII-21189418044173169409978279405827
      • RE: Apple's secret iPad advantage: The supply chain

        @Falkirk
        I disagree completely.
        Kudos to roteague for not caving in to the hype and sticking to his guns and getting what he wants and not what Apple tells him he needs.

        It's funny...Apple is no longer the underdog company that was battling the giant IBM in 1984. Apple is now the evil empire...that has been obvious for a few years now. They are controlling supply lines, intentionally and very hostile-like driving up costs of competitors and causing them to charge more for their products, which may very well be better than the ipad, but can't compete because they cost too much.

        The only winner here is Apple. Consumers lose in this deal...no matter what you Mac Fanboys say.
        Xander_Crews
      • RE: Apple's secret iPad advantage: The supply chain

        @Falkirk Outsourcing not good for America:<a href="http://www.economicpopulist.org/content/outsourcing-not-good-america" target="_blank" rel="nofollow"><a href="http://www.economicpopulist.org/content/outsourcing-not-good-america" target="_blank" rel="nofollow">http://www.economicpopulist.org/content/outsourcing-not-good-america</a></a>

        All you piddly brained iCrAppleholics think like corporations (like the mealy mouthed moron who wrote this PoS). No national pride in your country and building an economy completely dependent on foreign produced goods. What's so idiotic, is that over time, by not supporting the American economy with JOBS like Apple does, you are killing your very own customer base. Try to get that through one of your thick skulls is utterly impossible.<br>Shanghai one of over a dozen Chinese Cities along with numerous other economic zones learning what Capitalism is all about:<br><a href="http://www.youtube.com/watch?v=RhVxr8vpZn0" target="_blank" rel="nofollow">http://www.youtube.com/watch?v=RhVxr8vpZn0</a><br><br>Jason and your ilk do not understand how serious this problem is. Two years after the meltdown and still no jobs are being created as fallout from the Massive Corporate Greed and political catastrophe we call our government, continues to spend us and our children deeper into debt. Meanwhile many countries in Europe understood that if you don't protect your jobs in your own country, you kill the very consumers you hope will even be able to buy your products. Study what Germany has done in being a boom economy instead of a bust like America is in after the greatest global recession the world has ever seen? They are one of the few country in the World that hasn't moved all their manufacturing to China!<br><br>Apple owns no factories of their own. They use fewer quality parts and have less features, like cameras sd card slots, hdmi connection, faster Bluetooth, faster wifi radios on phones that don't make calls and iFads that deliver half of what the competition provides. But they are still just a niche smartphone supplier in a country where nearly half of the smartphones sold last quarter are Androids and Google grew that market share at breakneck speed. What makes any of you idiots think it's going to be any different with the iFad when it's competition really gets rolling with slates?<br><br>CrApple's supply is dependent on other companies to be as successful as you. The moment you don't make any of your own parts, let alone make any of them in your own country, you are in danger of going under and having your bubble burst. That's what the greedy bass tards at Apple and fools like Jason don't get. Germany and their economy is booming because they understood this and instead of shipping all key manufacturing overseas, they worked to keep the jobs at home. Consequently they are still providing goods/exports to even China at a far greater rate than is coming into Germany because of strict price controls that our politicians aren't gutsy enough to support fearing losing corporate money and support for their re-election!<br><br>Meanwhile China keeps pulling our chains with cheaper labor that gets the factories built over there for when they do start allowing greater wages to keep it's economy booming. That's happening right now as they spend themselves into a boom economy, because they have the job creation to back it up!<br><br>Seven of the tallest top 10 Super Towers are in China today. Their middle classes are growing at rates unheard of in any civilizations history. They are providing jobs to an ever growing class of consumers with the income to now buy the products they make themselves. Millionaires are created by the hour at the fastest rate of any global economy in the history of mankind and you idiots still believe China's just a bunch of peasants imprisoned in labor camps to make our products from CrApple!!!<br><br>Got news for you..... Germany has the right idea, that we failed to learn and understand. It's called trade balance and if you rely on the opposite, sooner or later it's going to come back and bite you. But corporate America and our government has failed to learn this and let their greed and stupidity KILL OUR FUTURE!<br><br><a href="http://www.bbc.co.uk/news/business-11396874" target="_blank" rel="nofollow"><a href="http://www.bbc.co.uk/news/business-11396874" target="_blank" rel="nofollow">http://www.bbc.co.uk/news/business-11396874</a></a><br><br>btw... look at Jason's supplier list. What manufacturers on it, are actually creating jobs in America or are they just based in America? haha.... Motorola gets most of their parts supplies from China, Taiwan and S. Korea. Three countries that have learned about how to manage a better capitalistic society better than our own. Keep more jobs at home than you export and you too can be a booming economy rather than one that's still going BUST! ...or you'll die and your children will end up owing their salaries to foreigners. CrApple doesn't get it, but they are a greedy arrogant global machine building consumer markets to make up for our loss when we're gone! It's coming....... the day China becomes the number one Global economy over ours!
        i2fun@...
        • Re: i2fun@

          @i2fun. I realize this comment isn't fully relating to the Apple debate that u engaged in with your comment, but from reading your comment, I see u seem to have a sharp mind for systems and a concern for American welfare. Why not use that mind to study a system of truth, known as the Bible, that would truly benefit all of America (except for people too wicked to give up their selfish desires to live for the selfless benefit of others) if properly understood and lived out and taught to the people of America. It is no coincedence that when America was founded onthe principles of the Bible through the Puritans and eventually the Framers, almost all of whom were Bible believing Christians or at least Deists who respected and encouraged the teachings of the Scriptures, that America prospered and that since the Bible has been disrespected and dismissed especially in the last 40 years as not truth from the God of reason and light, America has gone downhill financially, morally,and ethically. If we had men of truth with sharp minds capabable of showing forth the system of truth in the Bible, which decries greed, corrupt politicians, not providing for the members of one's own household (which principle I think could be extended to not taking care of your own countrymen and instead sending your employment overseas only for the sake of greed) perhaps America could be restored to the blessings and prosperity of God as it was during revivals of adherance to the practices of the Bible that occurred in the 1700sand 1800s, known by some historians as the Great Awakenings. I also love this country and hate to see what is happening to it and wish to God that there were men of sharp minds who would read the Bible, understand it, and preach it to us in America, like Charles Finney or John Wesley or George Whitefield, so that we could turn back to God and America could be a place of prosperity and beauty that glorifies God again, instead of a failing super power falling the way of Rome, etc. & currently producing some of the most wicked and greedy politicians, leaders, and businessmen that may have ever walked planet earth. What a disgrace it is. We need thinking men like u to not waste their time studying politics but to spend their time finding the truth of God's Word that alone has the power to change politicians' hearts. Think of the good u could do America if u were such a man! I wish to God I were a better communicator and of sharper mind to understand the full counsel of God's Word so I could be such a man. God has given u a gift of a good mind: for the sake of the good of this beautiful country which is God's glory to help and prosper, please use it for Him!
          luke_m1948
      • unless its M$

        @Falkirk then its OK to but something as long as it isn't M$!

        would you like another helping of you double standards?
        Ron Bergundy
      • Eat foot much i2fun???

        @i2fun

        http://jobs.apple.com/index.ajs?BID=1&method=mExternal.searchJobs

        Tons of jobs in the US... All created by Apple... Apple recruits college students to work from home and provide Apple's award winning customer service and support (#1 by a massive landslide for the last decade).

        Care to tell me who makes computer chips in the US? Oh.. Gee.. No one?

        Right after 911 happened, I went out and bought a Chevy Silverado (made in Texas). And I started seeing all these schmucks driving around in foreign cars with American flags plaster all over them... Those were the real hypocrites...

        Apple is an American company that employs a ton of Americans. The bulk of Apple support for The US is still in California and Texas as well as the rest of the US (home based agents). Yes, Apple and the rest of the world rely on Asia for computer parts and assembly. That is how they stay in business. Samsung, Sony, toshiba, etc. are NOT American companies and they don't provide the US with tons of Jobs. Dell provides very few US jobs. GM is about the only company selling mostly American made cars. Most of Fords parts/cars are made outside the US. Heck, it's hard to find any company that can sport the made in the USA stamp. But I never expect a computer company to do it.

        Apple is an American success story and something to take national pride in. Hating Apple is as un-American as you can get.
        i8thecat
      • RE: Apple's secret iPad advantage: The supply chain

        @Falkirk
        roteague's argument may be different as just "hating" Apple. I have an iPod - and that's enough. I want the freedom as user that the Android platform is giving me, and that is denied to me from Apple.
        As user I want to use the device the way I want - and not Apple want. And I want to run the software that I want and that suppliers are willing to offer me - and not the software Apple thinks is good for me.

        That's the point.
        lu.ca@...
      • RE: Apple's secret iPad advantage: The supply chain

        @CJames: "If you dislike a company and the way they do business it would be irrational to support them by purchasing their products, don't you think?"

        Agreed. But my guess is - and the responses to my post seem to support this - that most people dislike Apple (Microsoft, Google, etc.) for totally irrational reasons. As I said, sad and counter-productive.
        Falkirk
      • you are missing the point lu.ca

        @lu.ca

        The real choices are actually with Apple, Nor Roid.. Think about it... Apple has all the apps.

        What good is Roid when all the apps you want are for iPhone?

        What is it that you just have "gotta do" with your Roid that you can't do with an iPhone? Root it? (you can do that with an iPhone). Install the apps you want? (Apple has all the apps, and you can still jail break an iPhone).

        Update it (can't do that with a Roid, but you can with an iPhone)...

        So seriously... Who is it that actually gives you something you can use and enjoy? It's not a Roid phone... If you don't have an iPhone, then the real sucker is you.
        i8thecat
      • RE: Apple's secret iPad advantage: The supply chain

        @I8thecat:

        Funny, many of those openings are in Budapest, China, Singapore, Ireland, Belgium, England, Spain, Canada, etc.

        Go ahead and keep your head in the sand, I applaud roteague for holding his principals. Apple's behavior in the labor market is horrid.

        Typed on my MacBook Pro.
        brichter
      • RE: Apple's secret iPad advantage: The supply chain

        @Falkirk

        Apple's tying of products to iTunes may or may not be in violation of anti-trust laws, but it certainly violates my ethical standards, especially when applied to a device I theoretically "own".

        What if you had a Honda but you had to take it to Honda to have any maintenance or upgrades performed, and you could only use Honda-allowed parts and equipment? You'd hate Honda, too.
        man_strosity
      • RE: Apple's secret iPad advantage: The supply chain

        @cjames

        The other companies that you like, you think you know everything about them? They all have chinese connections and probably use some sort of exploited human labor. In that case anything you buy has a chinese connection, you never know what business practices were made. why don't you spare yourself from your self made holy war, and just buy the best product out there.
        m3kw9
      • RE: Apple's secret iPad advantage: The supply chain

        @NetAdmin1178 these people don't like a certain company for certain moral reasons because they want to create a sort of self righteousness for themselves (aka false righteousness). Deep down, every company out there would die to be in Apple's place if they can do the same thing, don't forget all of these companies is ALL about money. They do the fullest extent to what they can get away with to get the most advantage. Any of them that tries to yield and play nice will be wiped out in this cut throat business, as in most competitive business.
        m3kw9
    • RE: Apple's secret iPad advantage: The supply chain

      @roteague
      The reason you're in the market for a tablet is because of APPLE!!! Think back 12 months ago LOL
      Hasam1991