Apple's predatory supply chain

Apple's predatory supply chain

Summary: AMR Research’s Bruce Richardson writes about what he calls "predatory supply chains," situations where manufacturers through exclusive contracts monopolize key inputs leaving competitors high and dry, especially in new growth markets. Richardson introduces the idea with Apple's iPod.

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TOPICS: Apple
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AMR Research’s Bruce Richardson writes about what he calls "predatory supply chains," situations where manufacturers through exclusive contracts monopolize key inputs leaving competitors high and dry, especially in new growth markets.

Richardson introduces the idea with Apple's iPod. He points out the recent wave of reports about Samsung's local competitors alleging that the chip maker was supplying flash memory chips to Apple at half the market price. While the scandal ultimately derailed a proposed $3.8 Billion join-venture between Apple and Samsung, it doesn't look like much of a set-back:

Of all the strategic moves, I like the flash memory story the best. Apple sold one million iPod nanos in the first 17 days after release. Create incredible demand for a new product while blocking competitor access to critical components.

If the flash memory story is true, Apple has built the Predatory Supply Chain. While that advantage won't last forever, it has allowed Apple to build a strong lead over all of the MP3 vendors. 

The predatory supply chain can also be found elsewhere and in other industries, according to Richardson. He points to Dell (predator behavior hastens price war on PCs), Wal-Mart (a predator via information systems and penny-pinching sourcing and logistics strategies), and Toyota (a predator in hybrid-engine cars) as examples.

Richardson asks: "Are the flash memory and hybrid transmission stories once-in-a-lifetime opportunities, or do companies have more frequent market windows where they could produce the next iPod or Prius?"  I'd reason that companies like Apple and Toyota are among the very few with the right mix of design, innovation, timing to seize the many opportunities that are floating out there.

Topic: Apple

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19 comments
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  • Apple isn't new in this... but isn't the concept detrimental to community?

    People should share. Not hoarde.
    HypnoToad
    • Economics

      Apple isn't hoarding, it's guaranteeing supply. If you think Apple is just going to buy these chips to sit on them so no one else can MP3 players, you need to go back and take some economics.
      baggins_z
    • What's stopping these suppliers from making MORE?

      it wold seem that Apple is simply purchasing what she things she
      will need to ensure a steady supply of porduct. What's wrong with
      that?

      Pagan jim
      Laff
      • Full capacity?

        If the suppliers are at full capacity they might have to invest in more equipment and/or a factory.

        And if the cost of equipment and/or a new plant is high than it might be too risky. They need to recoup their inital investment and if demand suddenly goes down, these suppliers would also be stuck with a high overhead since the new equipment /plant would increase fix cost.
        iPad-awan
    • If Apple got all the chips why is Samsung coming out with their own player?

      Samsung has plans, too. They must not have sold all the Flash
      memory to Apple. I think what is really happening is the Asian
      companies are ganging up on Apple on their turf. Apple hasn't
      been as successful in Asia where there is a tendency to buy
      hardware locally rather from abroad.
      MacGeek2121
    • If Apple got all the chips why is Samsung coming out with their own player?

      Samsung has plans, too. They must not have sold all the Flash
      memory to Apple. I think what is really happening is the Asian
      companies are ganging up on Apple on their turf. Apple hasn't
      been as successful in Asia where there is a tendency to buy
      hardware locally rather from abroad.
      MacGeek2121
  • Just anti-free market propaganda

    These hack stories are common, and always hinge on a variety
    of economic falacies. At root, they are just anti-business and
    anti-marketplace. In this specific case, is well known that
    Apple's market is not based on its competitors supply problems.
    But more broadly, there is no such phenomena as monopolizing
    the supply chain. If Apple were to sign a big deal with Samsung
    at a "below market" price, that would reduce Samsung's risk,
    allowing them to invest in increased production and eventually
    lower the prevaliling cost for all buyers. At some point, you have
    to question whether these writers are clueless about basic
    economics, or whether they are just against the free market and
    will make any argument against it that will float.
    Steven Rogers
    • Oh? Really?

      Apple since day ONE has been all about keeping its systems closed to outside production -- or is everyone around here to young to remember when Apple to the clone makers to court and ran them out of business so Apple would get all the profits and could keep prices for their equipment HIGH.

      Until the PC video cards caught up with them Apple products were a great video platform, but that is still just a niche. Apple cut it's own throat on the PC market, and they are still trying the same things they did back in the days of the old IIc.

      Someone trying to create a monopoly is the one who is anti-business and anti-free market. Sure you're not an undercover M$ flak?
      pirate?
      • you seem confused...

        The article and comment were about supplier deals.

        But - if you mean AppleII clones. Where Apple intellectual property was mis-used I think they did indeed try to protect it. However there were still enough enterprising souls who "cloned" Apples and of course PC BIOSes. Apple was a very different & smaller company then.

        These days none of this would be possible in US because of new digital copyright legislation. Nothing to do with Apple per se; primarily the recording industry, but, used by many - Lexmark printer refills anyone?

        How Apple protecting Apple products and IP in a competetive market place is monopolistic or how doing great deals with suppliers in such a market is monopolistic I don't understand. If you don't like iPod go buy a Creative or whatever... if you don't like a Mac... go buy a PC... if..oh yeah end of monopoly product set!
        rafe01
    • interesting interpretation...

      ...I too share your view of some (many?) journalists/writers these days. In this case I simply took the article to indicate that some savvy organisations were leveraging their market-place sucess with good supply deals. Obviously in a supply constrained market the seller is in a good position; so as you say the vendors commercial risk managers figure these are good deals for them too.

      The only issue I would have, and this is why we have legal contraints (how well they work in any given situation is a different debate :-), is for a monopoly or cartel situation to develop downstream which then does have a negative effect both for consumers and suppliers as well as the economy overall. I think this was the poorly articulated concern in the article.
      rafe01
    • The authors are clueless!

      !
      An_Axe_to_Grind
    • Good question

      Also consider the possibility that such journalists may not have all the relevant facts at hand to back up their claims, and may lack sufficient critical thinking skill. They specialize in quick and dirty arguments, not scholarly demonstration. And I pity the person who expects a comparable standard in the discussion threads. Sling mud, not pearls!
      rminto@...
  • Story's Premise is Untrue!

    The iPod isn't #1 because of a lack of competition, this is obvious, there are dozens of competitors, some using the same vendors. They are better because of design and execution. This story is simply Troll bait. Look ah dem bitin'!
    An_Axe_to_Grind
  • Apple took the risk

    They made a commitment for future production based on how they
    projected the product to sell. If the nano didn't sell well then Apple
    would have been left buying a lot of chips they didn't need.

    That is as close to free enterprise as you can get. You design your
    product and then make commitments based on your best estimate
    of how it will sell. If you screw up then you don't make money and
    all the good folks with shares in their IRAs will be rather irritated at
    you. If you do a good job then you get to keep your job.
    Ken_z
  • Apple took the risk

    I liked your response.It was meaningful, correct and short.
    askmd1@...
  • Of course they did

    Well of course Apple tied up supplies of flash memory and worked
    with vendors to receive agressive pricing. That's how business
    works. Businesses make products, predict how many they will sell,
    make purchase commitments at the best prices they can and hope
    to make a profit on the deal... I would remind everyone that Apple
    was far from the first into the digital music game, but also has
    been the only one to hit a home run in the marketplace. They
    design their own opportunities.
    deanoa
  • Hoarding? Silly!

    As has been well stated, corporations are in business to make
    money and controlling costs is a major part of that. I suppose
    the "anti-hoarders" would have trouble with Southwest Airlines
    "hoarding" jet fuel supplies by taking a chance many months ago
    and locking up future supply at the then-current price. Since
    fuel costs jumped, they look like geniuses since they are about
    the only airline making money. If fuel prices had dropped, they
    would be considered foolish. I think a better description would
    be "well considered, bold business people" and my hat is off to
    them--and to Apple for securing the parts supply they needed.
    Bravo.

    Oh, by the way, to the PC shill who complained about Apple
    keeping control of hardware and software, causing "high prices":
    consider that Macs simply work better and longer due to the
    tight integration of the whole system, and they are not more
    expensive for equal features. I priced out a high-end Dell dual,
    dual-core to compare to the new top end Mac G5, and Dell was
    about $2,000 higher, before I even got to I/O ports. Yes, Dell,
    with their bottom-of-the-list Customer Satisfaction ratings,
    compared to Apple at the top of that same list. Gee!
    frabjous
  • Quite late but

    If someone buy me 1.000.000 piece of whatever I do and another just buy 1.000... I "should" offer better price to the first one, since it's kind of paying my whole production cost, revenue and profit... I do appreciate other deals, but no doubt the 1M is my cash cow.

    Is this predatory supply chain?

    Now, I quite disagree when tech/anal-ist include Dell into the tech business, since in my opinion Dell's real deal is supply chain!!
    mabricen
  • Bogus information

    If only Analysts would do their job. Fact: Apple's Flash based iPods use NAND Flash memory. All others use either NOR or DRAM. Samsung devoted their manufacturing to NAND, whereas other manufacturers are manufacturing DRAM and NOR in mass quantities. How this is anti-competitive or predative is anyone's guess. It's business as usual... it's just unfortunate that this journalist/blogger can't tell the difference either. Seems to me that blogging has unleashed a greater amount of FUD and less factual NEWS...
    D W_z