Haunted Empire: Apple After Steve Jobs

by Yukari Iwatani Kane

  According to one former Foxconn advisor, succession was a particularly difficult challenge in Asian companies because the culture encouraged compliance and uniformity. Executives tried too often to fit in, not stand out.

  “What I worry, really worry,” said the former advisor, “is whether they have the ability to create new things beyond contract manufacturing.”

  Gou needed to redirect Hon Hai before he retired. He had to find a way to minimize the company’s exposure to the ebbs and flows of Apple’s business.

  Some analysts and industry insiders had speculated for some time that Gou could eventually move into other more profitable industries beyond contract manufacturing. The CEO had already expressed a strong interest in mobile applications and cloud-computing technology and was hiring thousands of software engineers. He spent $840 million to acquire a 37.6 percent stake in Sharp’s biggest LCD panel factory and began manufacturing flat-screen televisions that he then sold through partners like RadioShack in China, Vizio in the United States, and Chunghwa Telecom in Taiwan. The company had aspirations of eventually providing content for all of the devices it assembled. Separately, Foxconn was said to be considering selling its own brand of accessories, including those that were compatible with iPhones and iPads. In late 2012, the company acquired a $200 million stake in the high definition portable camera brand GoPro.

  As part of a vision to become a one-stop shop, Foxconn was also revamping its distribution services and retail operations in Asia. At the other end of the supply chain, Gou was investing in highly profitable component businesses like display maker Chimei Innolux.

  Some observers believed that Gou secretly hoped to establish his own electronics brand. Gou’s denials did not end the speculation. For years he had served Apple and other high-tech houses, watching those companies hoard the king’s share of the profits as they tossed him crumbs. If he had decided to keep those billions in profits pouring from his factories and his workers, who could have blamed him?

  Whatever move Gou made next, the days of Apple taking his company for granted were waning. Apple’s near-total reliance on his factories and his cheap labor put the California company in a position of weakness. Over the years Foxconn had made itself more and more indispensable by embedding itself into its partner’s operations. After manufacturing so many millions of iPhones and iPads, Gou’s company had absorbed and internalized Apple’s perfectionism and idiosyncrasies. It was difficult for any of Foxconn’s rivals to mass-produce those devices at the scale and quality and speed Apple demanded. As the balance of power shifted, Foxconn gained the leverage to push back against Apple and negotiate higher prices. When Gou’s team was allowed the discretion to choose parts suppliers, the company gave the business to its own subsidiaries to add to its gains. Working with business partners dictated by Apple, Foxconn pushed aggressively for rebates.

  Tim Cook had once touted the necessity of being aggressive and unreasonable with its suppliers around the world. Was it any surprise that Foxconn had learned that lesson so well?

  The real problem, though, went much deeper.

  Apple’s supply chain was no longer under Apple’s complete control.

  Apple had no factories of its own. Most belonged to Foxconn.

  Apple had no factory labor force of its own. Foxconn had a million workers willing to work for almost nothing as they mounted production lines twenty-four hours a day.

  Apple was losing leverage to dictate. Foxconn was less willing to accept its terms.

  Uncle Terry was gone. To an unsettling degree, Apple’s future was now in the hands of General Terry.

  Apple recognized the danger and was trying to reduce its dependence on Foxconn. The company stepped up its efforts to spread its business among more manufacturers. According to DigiTimes, a Taiwanese industry publication owned by a businessman with close ties to contract manufacturers, Apple planned for a Taiwanese company called Pegatron to eventually make 60–70 percent of its iPads and a small portion of its iPhones.

  In addition to Pegatron, Apple had been working with one of Foxconn’s archrivals—BYD, a well-known Chinese manufacturer of cars and rechargeable batteries. Apple began by ordering BYD batteries for its phones, but its hope was that the Chinese company would take on more and more of the manufacturing. The speculation in the industry was that Apple intended to turn them into another major final assembler.

  To ensure that no company held the kind of sway that Foxconn did, Apple also started parceling out its business in smaller quantities.

  Replacing longtime suppliers wasn’t easy. Apple owned the intellectual property for its devices, but the production expertise belonged to its suppliers. At the end of the relationship, the Foxconns and Pegatrons of the world took that proficiency and put it to work for other customers while Apple had to train another supplier.

  A case in point was Apple’s breakup with AmTran, a Taiwanese company that made monitors for desktops. Several years earlier, Apple decided to end its contract with AmTran and move the job to another Taiwanese company, Quanta, which already made its all-in-one iMacs. Soon, though, Apple realized that Quanta’s workers could not maintain the same level of quality. Apple tried to solve the problem by asking AmTran to share with its competitors the know-how it had acquired in making the monitors. But when Apple sought to bring a team from Quanta into AmTran’s production facilities, they were denied entry. Neither threats nor pleadings worked. They even offered to wear blindfolds, so they didn’t see other clients’ products that were being made in the same facilities. The answer was still no.

  Apple’s justification was that the intellectual property embodied in the monitors was theirs, so they should be allowed to bring in anyone they wanted. AmTran rejected the argument, citing confidentiality reasons. In the end, Apple was forced to work with AmTran for many more months.

  This behavior—trying to force cooperation from a partner it had unceremoniously dumped—only reinforced Apple’s reputation for hubris. Foxconn was far from alone in its grievances against the boorish Americans from California. Apple’s bad reputation was so widespread that it threatened relationships with many suppliers.

  Horror stories about working with Apple abounded in the industry. A familiar pattern soon emerged. Apple seduced suppliers with the promise of a big contract. When the companies opened up their businesses, Apple probed every detail from their technology expertise to their finances and cost structure. Next, auditing teams descended on the suppliers, sweeping through the factories to inspect infrastructure, production capacity, workforce size, and other details. The auditors often included people who had previously worked in the industry. Later, the procurement team would leverage that information to wrangle better prices and terms for Apple.

  The price negotiations never stopped. Under Jobs they had taken place about once a quarter, but under Cook they occurred as frequently as every month. Partners weren’t even allowed to benefit from the association because they were sworn to secrecy and forbidden from publicizing Apple as a customer. Apple’s faithful operations corps had become as ruthless and relentless as Cook had trained them to be.

  Even after a deal had been struck, Apple kept close tabs on production, requiring daily quota projections as far as a month or two out. Operations team members camped out at suppliers’ facilities to make sure the quotas were met. If something went wrong, some of them would get so angry that it would frighten some of the workers. Once, after an accident at Pegatron, an Apple manager from the United States slammed a notepad on a desk in frustration. The workers who witnessed the scene talked about it for days. Some, including Foxconn’s corporate managers, found the cursing so intolerable that they quit.

  Getting on Apple’s preferred supplier list was no guarantee of business because Apple could suddenly switch to a cheaper supplier or a different technology. In Taiwan, one of the recent cautionary tales was of touch panel screen maker TPK. For a long time, the company built screens for iPhones and iPads, turning itself into a glo
bal leader. In 2011, TPK’s expertise with Apple’s products allowed sales to double to more than $4.9 billion from the previous year. But then Apple switched to a thinner screen made by companies such as Sharp Electronics, LG Display, and Toshiba Mobile Display. TPK saw its shares plunge.

  In Japan, even worse stories circulated. The most shocking tale came from a company called Shicoh, which blamed Apple for driving it into bankruptcy. The small company, located in the outskirts of Tokyo, made tiny motors to help focus smartphone cameras. Apple’s operations team had asked the company to build a new clean room and invest in new equipment in preparation for work on the iPhone 4S. The company, already a preferred Apple supplier, took that as a sure sign of a deal and obliged, even seeking additional cash through a public offering to pay for the improvements. But shortly thereafter Apple suddenly cut them off because their financial statements were not strong enough to meet Apple’s criteria. The business collapsed. Apple took the contract to a rival Japanese company, Alpine, which had been secretly building a cutting-edge, automated manufacturing facility for Apple, even as Apple negotiated with Shicoh.

  The potential rewards of working with Apple had once justified putting up with such atrocious tactics. But as sales slowed and the company began divvying up its business into smaller chunks, companies began to wonder if the time had come to send the bully packing.

  “Until about a year ago, the market didn’t pay attention to us unless we were an Apple supplier, but now they see it as a risk,” one Japanese electronics parts supplier told Diamond Weekly, a Japanese business magazine that conducted a three-month investigation into Apple’s suppliers in Japan. The reportage, which listed twenty-seven partner companies, flagged the extreme dependency of Japan’s technology industry on Apple’s business.

  “There is no clear answer for whether suppliers should accept the risk and go after Apple’s business, or pull out once they find themselves overly dependent,” the article concluded. “But Apple’s presence has become too big for Japanese manufacturers. How they deal with this giant in the years to come will determine which suppliers live or die.”

  A similar sentiment was felt in Taiwan. “The benefits at present don’t diminish the fact that Apple has always eaten the meat while the suppliers have only shared the soup,” said Lan Guanming at CTimes, an industry trade monthly. He asserted that Taiwanese suppliers should continue to take good care of Apple, but they should also keep an eye out for better customers.

  In a sign of Apple’s diminishing influence, one executive of a former supplier agreed to meet with a journalist at a hotel lobby in Taipei in the fashionable Xinyi district near the landmark Taipei 101 building. During Apple’s glory days, when Jobs was still CEO, this executive would likely have never spoken to a reporter.

  On a Monday morning, the man showed up dressed in a dark suit despite the sweltering weather outside. After settling down in the lounge with coffee, he discussed the terms of the interview—not overtly, as was typical in the West, but in a veiled way that still provided the assurance that he and his company would remain anonymous.

  Once the conversation began, he spoke more frankly. He explained that Apple categorized its suppliers into three tiers. First-tier partners like Foxconn had more leverage, but the secondary or tertiary suppliers had to be willing to take on a big risk for a potentially small return.

  “It’s better to serve eighty percent of the market,” he said, adding that Apple had an impossibly high standard for quality and interfered too much in their business. “They dictate who can go in and out of their factories.”

  In a refrain that was repeated in the supplier industry across Asia, he also found the foul language that the Apple managers used to be offensive. The rewards of the business were not worth the indignities and the stress.

  In the last weeks of 2012, as Apple’s fortunes showed further signs of fraying, the risks borne by the suppliers mushroomed. Apple’s market share growth in the smartphone market was slowing, while Samsung’s share was soaring, helped in part by an aggressive marketing campaign that cost more than $400 million in the United States alone. Making matters worse, the demand for the iPhone 5 was clearly not meeting projections. The suppliers’ nightmare came true when Apple informed its LCD panel makers that it was slashing its orders by more than half. Already deeply troubled by its struggling television business and fighting for survival, Sharp in particular was devastated. The Japanese display company had an entire plant dedicated to Apple that it had to let go idle.

  Sharp was desperate. The upkeep for the factory cost $100 million per month, a loss they couldn’t afford. When the company’s executives asked Apple if they could start working on the panels for the next-generation iPhone instead, the answer was no. Not only that, but Apple demanded that Sharp spin off the dedicated iPhone factory to shield those assets from the rest of the business in the event of a bankruptcy. “We didn’t realize the strong side effects of doing business exclusively with Apple,” a Sharp executive lamented. “It’s like we bit into a poisoned apple.”

  Until then, the company had been firmly in Apple’s camp; in addition to making iPhone screens, the company shared ownership of an LCD screen factory with Foxconn. Nevertheless, in March 2013, Sharp accepted an offer from Samsung to buy a 3 percent stake in the company for $111 million. The company ignored Gou’s fierce objections and agreed to supply Samsung with screens.

  Orders from Apple recovered within a few months as production for the next iPhone model ramped up, but all the maneuvering now placed Sharp in a delicate situation. The company had potentially put itself in the crossfire of three global powerhouses.

  Foxconn wasn’t immune to Apple’s slowing sales. That spring, the company stopped hiring at its factories and postponed plans to expand its Zhengzhou plant. In the first six months of 2013, its shares plunged nearly 20 percent as investors and analysts worried about where Foxconn’s growth would come from.

  At an eight-hour shareholders’ meeting in June, Gou unveiled plans to strengthen his business by spinning off undervalued divisions and beefing up areas like research and development, software, and intellectual property rights. He also apologized for his company’s poor performance.

  “Please give me some time,” he said. “I work sixteen hours every day and I also work on weekends to plan for the company’s future growth. I won’t let you down. The good day is not far away.”

  From Apple’s perspective, Gou’s statement begged an important question: Where did Apple fit in the General’s plans?

  16

  Velvin

  The jury foreman would not stop talking. In the weeks after the Apple-Samsung verdict, Velvin Hogan granted interviews to at least five news organizations, dishing on how the jury had reached its billion-dollar verdict.

  Hogan told Reuters that he and the other jurors had wanted to make sure that the damages were painful to Samsung but not unreasonable. He told the San Jose Mercury News that the verdict was intended as a billboard-sized warning to corporate copycats. To the Verge, a technology blog, he proclaimed that serving on the jury had been a great honor—the high point of his career.

  “You might even say my life,” he added.

  In the aftermath of most high-profile trials, jurors are reluctant to speak publicly, preferring to return to the quiet of their lives and let the verdict speak for itself. But Hogan welcomed the spotlight, going so far as to join a combative online discussion with Gizmodo readers, patiently fielding their written questions for hours, as well as enduring their insults and innuendos. Many of the participants, clearly outraged by the verdict, suggested that there was no way the jury could have understood the complexities of the case. They took Hogan and his fellow jurors to task for not seizing the opportunity to nullify troublesome aspects of patent law. One called the verdict an “epic fail.” Why hadn’t the jurors made Apple pay for trying to patent a rectangular-shaped phone with rounded corners? Had they simply ignored Samsung’s arguments? How could they possibly have rea
d the judge’s instructions and paid attention to the evidence? Had they even understood the significance of the case? Although the participants steered clear of the word bribe, several pressed Hogan on how much money Apple had paid the jury.

  “Not a dime,” answered Hogan.

  The foreman maintained his composure. He pointed out that it wasn’t the jury’s job to rule on the legitimacy of patent law. He and the other jurors had sworn to follow the law, he said, and they had been faithful to that oath. If Gizmodo’s readers believed the legal system was flawed, he said, then they should work to change the law. His unwavering calm enraged his audience. Noting that Hogan himself worked as an electronics engineer and owned a patent, they wondered how he could claim to be fair and impartial. Wasn’t he passing himself off as an authority? And wasn’t that inherently problematic, especially when arriving at the verdict in a case of such magnitude?

  “Why don’t you try to be honest,” wrote another, “and tell us how your ego really feels?”

  Digging for any pro-Apple bias, several asked if Hogan owned an iPhone. No, he said, pointing out that none of the jurors had owned any Apple devices. This revelation aroused more suspicion. Wasn’t that, someone pointed out, a statistical anomaly? How had the case possibly ended up in the hands of a Silicon Valley jury devoid of iPhones?

  “I just can’t believe much of what you’re saying,” wrote one skeptic. “I think Apple found a way to compensate the jury somehow, but I may be wrong there. However, believing that none [of] the jurors own an Apple product is too much.”

  The grilling went on and on. When one of Hogan’s responses contained a misspelled word, his inquisitors pounced.