Buy the Machines, Own the Factory Floor Without Owning a Factory

“So Apple did something totally novel. It purchased hundreds of millions of dollars of machinery, placed it in the factories of its supply partners, and “tagged” it for Apple use only. “They were doing more capital equipment buying than anybody I could see in the world, and yet they were not owning it themselves—they were putting it in other people’s plants,” O’Marah says. From when the iPod launched in 2001 to when the iPhone went on sale in 2007, the “machinery” that Apple owns—equipment used in supplier operations—quadrupled from $245 million to $1.1 billion. Such capital expenditures stunned O’Marah, yet in the next five years that number would soar to $16 billion. The investments allowed its suppliers to operate at a level they’d otherwise be incapable of. And it gave Apple considerable advantages. Not only did Apple disallow the supplier from using the equipment on rival products, but at any point Apple could drive a truck to the vendor and reclaim the machinery. If Apple wanted to reduce orders at one supplier and favor its rival, “Apple would have the machines shipped to another factory—no question, no discussion,” says a manufacturing design engineer. In fact, around 2011 when Foxconn was attempting to exert leverage based on its dominant role assembling iPhones, Apple engineers showed up at a Foxconn assembly line and began unmounting expensive machinery from the floor, in broad daylight, before transferring it over to Pegatron. It wasn’t necessary to shift a large percentage of orders to the Foxconn rival—just making the point was enough to instill order.”

“Apple’s own balance sheet tells the story: The value of its “machinery, equipment and internal-use software”—namely the instruments placed in third-party factories for production—totaled less than $2 billion in 2009, but then soared beyond $44.5 billion by 2016—more than four times the value of all “land and buildings” owned by Apple—as the company took unprecedented control of its supplier network.”