Apple Inc. (NASDAQ:AAPL) suppliers operate in one of the most lucrative industries in terms of guaranteed market, but this does not come at no cost. Bank of America Corporation (NYSE:BAC)’s Merril Lynch (BAML) has done a critical and fascinating analysis on Apple’s supply chain, by applying Michael Porters’ Five Forces model. The analysis indicate that these companies suffer as much as they gain, due to the influence of Apple Inc. (NASDAQ:AAPL), in many ways.
Michael Porter’s five forces as explained in his famous book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, affect organizations through five different channels, namely the customer, the supplier, substitute products/services, new entrants, and peers within the industry. According to Merrill Lynch’s analysis of these forces on Apple’s supply chain, the research analysts’ verdict is that Apple literally is the subject of each and every decision made by its supply chain companies.
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Merrill Lynch uses 11 companies for the case study, including Foxconn Technology Co., Ltd. (TPE:2354), TPK Holding Co., Ltd. (TPE:3673), AAC Acoustic Technologies Holdings Inc. (HKG:2018), Quanta, Radiant Opto-Electronics Corporation (TPE:6176), and Career, among others. In a scale rating of 1 to 5, with one representing, the weakest and 5 the strongest ability to thwart away Porter’s 5 forces, the company has come with a matrix representing scores by each supplier, for each force.
Force 1: the bargaining power of suppliers
Overall, the companies do not face such a big threat from the bargaining power of suppliers. This is mainly because, just as they are reliant on Apple Inc. (NASDAQ:AAPL) for their sales, so are their suppliers on them. The benefits of supplying the materials required for the manufacture of the various Apple products trickle down to the suppliers of Apple’s suppliers. This is because a business guarantee for their customer, is business guaranteed for them, more or less.
However, the companies do incur manufacturing costs, component costs, and labour costs, in order to come up with the products to supply their customers. Merrill Lynch uses the example of China’s rising labour costs as an emphasis on this force, keeping in mind that a majority of Apple’s suppliers are based within the Asian region.
A majority of the firms are rated at the 70th percentile in terms of competitive edge in this area, with a few making it to the 80th percentile, for instant Quanta.
Force 2: the bargaining power of buyers
Apple Inc. (NASDAQ:AAPL) is the biggest Porter force on its supply chain, as exhibited by its massive influence on its supplier’s revenues. The tech giant purchases accounts for 30% to 50% of the various suppliers’ revenues, which means a simple movement in Apple’s orders, could move a supplier’s revenue materially.
This gives Apple Inc. (NASDAQ:AAPL) a massive advantage over its suppliers, as ilustrated by the low rating of the companies’ competitive edge. The highest ranked is Quanta, AAC, and TPK, each on the 60th percentile, while a majority are on the 50th and 40th percentiles. Apple can easily choose the supplier it deems cheaper than the rest, which results in price competition among the suppliers, to Apple’s benefit.
Force 3: threat of new entrants
Whenever there is a ready market for the supply of goods and services, this eliminates one of the main barriers to entry. Apple Inc. (NASDAQ:AAPL) offers its suppliers a ready market, and it would be easier for any company to offer it the desired components at the expense of an existing vendor, if terms are right. Customer loyalty, as well as initial investment costs are also other forms of barriers to entering this industry. All the suppliers are fairly rated on this aspect by Merrill Lynch at about the 70-80th percentiles.
Force 4: the threat of substitutes
The threat of substitutes is once again pegged to Apple’s revolutionary nature. The company may choose to change the kind of material it uses on its next gen products, which opens the door for substitute products to try their luck. Notably, Merrill Lynch does mention the likely substitutes and how they could happen. for instance, Foxconn Technology Co., Ltd. (TPE:2354) would face a tough decision should Apple Inc. (NASDAQ:AAPL) choose another new material in its next products or another metal casings leader, Catcher, who is well known on higher end metal casings – unibody.
Force 5: industry rivalry
Apple Inc. (NASDAQ:AAPL) suppliers face another threat of competition among themselves, which as we saw earlier, could result in competitive pricing of products and serves, which in the end play to Apple’s advantage. The suppliers here, can also use aspects such as product differentiation, in order to harness price competition. For intsance, Foxconn still remainst to be the largest supplier of Apple iPhones and iPads, Zi-Teng has been catching up rapidly in the past year, and become a second source for the Apple iPhone. Nonetheless, Zi-Teng’s iPhone allocation still remains tiny, despite the level being increased from 5% in to 2011, to about 8% currently.
Generally, Apple Inc. (NASDAQ:AAPL) has an influence on all the five forces as analyzed. The company can determine the level of competition by rationing the allocation amounts from the product it seeks to develop. Additionally, it can determine the behaviour of its suppliers, as the benefits derived from its purchased trickle down to its suppliers’ cost drivers. Furthermore, we have also seen how it can influence the issue of substitute products, as well as the threat of new entrants. This is what makes it the largest Porter force among them all.