Is Apple Over-Dependent on Asian Suppliers?

Apple is said to be deeply immersed in its dealings with Asian manufacturers, in order to save on costs. But with this business practice, does Apple risk being held hostage by its suppliers?

Thousands line up to apply for work at Foxconn's Zhengzhou facility. The company is doubling its capacity in this plant from the current 200,000 iPhone units per day. (CUTV / MIC Gadget)

A few weeks back, we focused on how Asian manufacturers — particularly those in China — have overtaken the rest of the world in terms of efficiency and flexibility. As such, brand names turn to the likes of Foxconn and Wintek in order to produce anything from cheap components to complete iPhones and iPads.

Amid criticisms over harsh working conditions and factory accidents, the world has subjected Asian manufacturing firms under close scrutiny. By extension, their big clients — like Apple — are also being watched. Apple has gone as far as saying they’re also establishing “supplier responsibility,” and has disclosed the names of 97% of its suppliers around the world.

In most cases, though, the big companies seem to turn a blind eye to the safety violations and deficiencies in labor relations. The reason is cost.

Cutting Costs, Cutting Corners?

A recent CNN editorial tries to take a closer look at how technology firms — particularly Apple — cuts cost. Case in point: the iPhone costs US$ 196 to produce, but the no-contract price is US$ 649, which is also close to the price that U.S. carriers need to pay for each subsidized unit.

In short, Apple makes US$ 453 off each iPhone sold.

During the last three months of 2011, Apple sold 37 million iPhones, 15.4 million iPads, 15.4 million iPods and 5.2 million Mac computers, according to the company’s financial report. That netted Apple $46.3 billion in revenue and $13.1 billion in profit, which is double what Apple made during the same period a year before.

Analysts say that one reason behind this cost-saving is that Apple tries to minimize the number of suppliers it deals with, and prefers to narrow down on a few, or even a single one. IHS iSuppli Analyst Tom Dinges says that the company can then wield more influence this way, given that it’s a big-ticket client.

“They’d rather be a mile deep in a supplier than divide the business up amongst five,” Dinges says.

Holding Apple Hostage?

But with this practice, isn’t Apple opening itself to too much risk? We earlier cited how TechCrunch considers Apple to be the “money” in their supply relationships with Asian companies, although their suppliers essentially “have our all-important tech companies by the scruff of the neck.”

Is Apple relying too much on its suppliers’ “guarantee of millions of products being manufactured at will, and to specs that may change by the hour?”

If supplier relationships fail, the worst that Apple can risk is having to look for another supplier who can produce these millions of iPhones, iPads, Macs and other products at will and at the same quality. Of course, this will hurt them to the tune of millions, even billions of dollars, not to mention manufacturing delays. Maybe this is one reason Apple is holding on to its hoards of cash instead of divesting it as dividends to shareholders. It needs a safety net.

As such, are our Asian manufacturers effectively holding Apple hostage with the Cupertino, CA company being so deeply entrenched in a few major suppliers?