Was the Apple/Foxconn situation rational?

Apple have been in the news recently after their manufacturing supplier Foxconn was found to use somewhat questionable behaviours towards their employees.  A major reason for these employee abuses was that whenever Apple launched a new product such was the mass surge in demand that it put tremendous pressure on Foxconn, which would then be followed by relative fallow periods.  It has been said that China remains an attractive manufacturing location for large companies in part because companies there can mobilise large employee numbers at relatively short notice.

Of course this has raised ethical questions over whether this inevitably means that the supplier ends up pushing employees further than they should, either ethically or legally.  New research however suggests that from Apples perspective lumping product launches into bursts like this is good practice.

The study was performed by researchers from the University of California, Davis.  They studied 20 years of product launches where the products were part of a two-sided market, where one side is the consumer and the other is the market.  To use an iPhone as an example, the consumers can have the iPhone for doing their thing, whilst on the market side app developers make the games and widgets that help the device realise its potential.

The researchers suggest that both markets must be successful at the same time for either to succeed individually.  To achieve this they suggest companies must overcome certain obstacles, including:

  • Chicken and egg problem—For instance if you want developers to build products for a platform but you don't have many customers, and vice versa you want customers to choose a product on a platform without many applications.
  • Uncertainty in product design and compatibility—For example, should all electric cars use the same battery, one that could be charged at every battery station, or will the market be fragmented among many technologies?
  • Convincing consumers to pay high up-front costs—In return for small and uncertain benefits delivered over time (such as residential solar power).
  • Growth-versus-profitability dilemma—Should a vendor of an e-book technology sacrifice margin and profits in return for a high market share in order to entice publishers toward its technology?

The research team found that companies are better off doing large scale product launches rather than a small launch with the hope that developers will adopt it en masse, therefore allowing it to scale, which is what often happens.

While the common belief is that firms can either have growth or achieve profits in the early launch of a product, “our research is founded on the proposition that growth and profitability need not necessarily operate in conflict,” they say.

“Firms should expand the product line early in order to increase the installed base and induce a higher level of developer participation,” they add.

To do this they suggest building two versions of the same product.  A basic version makes it easy to build a reasonably mass market to then attract developers, whilst the premium product offers the higher profit margin to keep the money men happy.

Of course putting out two products at the same time puts quite a strain on your supply chain, as Apple and Foxconn have only too clearly shown us in recent weeks.


3 thoughts on “Was the Apple/Foxconn situation rational?

  1. Maybe so, but it can't be 'that' difficult to use enough suppliers to flatten out demand a bit so that one of them doesn't have to resort to doing the kind of things Foxconn were found to have done?

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