In November of 2012 Supply Chain Matters made the observation that Apple had begun to actively pursue its own supply chain risk mitigation and supply chain segmentation plan. Apple elected to dual source some of its contract manufacturing needs with the use of Pegatron, one of Taiwan’s largest contract manufacturers, as a second assembler of the iPad Mini, along with the iPhone 4.

Today, the Wall Street Journal is reporting (paid subscription or free metered view) the same premise, that Apple has elected to dual source its contract manufacturing needs.  In essence, Apple is exercising its own supply chain segmentation and risk diversification strategy electing to source production and assembly of a low-cost iPhone expected to be offered later this year, along with the current production requirements of the iPad mini. The WSJ declares that this is the end of the monopoly that Foxconn Technology Group has held in the production of the bulk of Apple’s products.

Of more interest, the WSJ reports that Pegatron was willing to accept thinner profit margins in courting Apple’s massive business. Pegatron’s revenues are a mere one-third the size of Foxconn. While Foxconn has been forced to deal with rising tensions concerning supplier responsibility audits related to factory working conditions and wage rates, driving-up its costs to serve Apple, Pegatron has been able to escape much of that visibility, at least up to this point.  There was an explosion incident at a Pegatron subsidiary in December of 2011 that was related to production of Apple components. All of that may change rather quickly in the coming months. In its reporting, the WSJ revealed that Pegatron experienced a challenging learning curve in meeting the volume production requirements of the iPad mini last year and that Foxconn ended up producing the bulk of volume. Those of you with constant supplier management challenges can take some comfort that the leading recognized supply chain also experiences similar challenges.

Also reported was that Foxconn was becoming increasingly frustrated with the growing complexity of Apple’s product designs which were adding to the challenges of high volume production.  We all tend to know that Apple does not tend toward design for supply chain practices, opting instead for the most innovative design and coolest functionality.  In the past, the personality of a Steve Jobs tended to dominate such frictions, but that was before the current explosions in output volumes and need to service broader global distribution channels. The WSJ states that CEO Cook is “placing a higher premium on risk diversification.” The timing is important since other sources across Wall Street equity analysts have noted recent Apple product patent applications pointing to new consumer electronics gadgets such as an iWatch or iPen. If Apple again makes a market splash in innovative but smaller consumer electronics products, its supply chain will need a segmentation strategy to manage volume ramps, changing distribution channels and needs to maintain higher product margins.

We may now know the real reason as to why Foxconn declared in February that it was freezing all further hiring in China. At the time, business media attributed this hiring freeze as an indication of weakening demand for Apple products. Some of that may have been true, given that the next wave of Apple mobile products is due out later this year.  However, WSJ reported that Pegatron now plans to increase its China based workforce by about 40 percent as a result of the enhanced Apple relationship and the need to produce higher volumes of lower-cost iPhones. This is an indication of a workforce shift among contract manufacturers. Market research firm IDC just increased it global forecast for electronic tablet market consumption by an additional 39 million units in 2013.  Much of this, in our view, we be consummated by the attraction of lower-cost tablets.

It will be interesting to track the fortunes of both Pegatron and Foxconn as they each reach a crossroads in business strategy.  Current speculation is that Foxconn could well pursue branding and production of its own line of Apple accessories or other related electronic components as it frees-up dedicated capacity for Apple. Pegratron, on the other hand, has an enhanced learning curve and ramp-up phase in dealing with the challenges of Apple and its product design requirements.

Both should be interesting supply chain team hallway conversations in the months to come.

Bob Ferrari