Apple's secret iPad advantage: The supply chain

How is it that Apple is able to beat every single tablet vendor on price? Their secret sauce: The supply chain.
Written by Jason Perlow, Senior Contributing Writer


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 FoxConnand 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.

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