As the world's largest publicly traded company, it's a genuine understatement to say tech giant Apple (NASDAQ:AAPL) does a few things quite well.
High- profile topics such as booming iPhone sales or new products like the upcoming Apple Watch typically garner the bulk of the discussion on Apple, and for good reason. However, more staid aspects of Apple's operations, like its uber-efficient supply chain, are in many ways the unsung heroes of this business empire. However, a recent development offered a perfect example to highlight just how effectively Apple dominates its supply chain -- and its suppliers.
Inside Apple's possible Japan Display deal
Recently, Apple was reported to be in advanced discussions regarding possibly financing a new state-of-the-art display fabrication facility for Japan Display.
However, Apple is doing no favors here. In exchange for footing the bill, Apple would likely require priority treatment to receive its own display components over other Japan Display customers. This might not sound like something hugely advantageous or all that insidious. Looking at this deal through the broader context of Apple's supply chain history, though, Japan Display might want to live without this assistance.
From liability to leverage
Apple has a long history of pressing nearly every conceivable advantage within its supply chain to both maximize its own operational efficiency and stymie its competitors, a trait commonly attributed to the company's CEO, Tim Cook.
Cook joined Apple in 1998, when the company still manufactured its own devices in a network of company-owned plants around the world. In a matter of years, the executive had outsourced effectively all Apple's fabrication responsibilities to a budding network of third-party device manufacturers, winnowing Apple's inventory levels down from about 90 days to the vastly lower cost just-in-time model the company uses today. As Apple's turn-of-the-century renaissance took root, the tech giant increasingly began to leverage this growing clout with its supplier and assembly partners.
Depending on your perspective, Apple's treatment of its supply chain partners has ranged from aggressive, if not somewhat amusing, to downright unfair. Actions such as reportedly purchasing all the available freight aviation slots during past holiday seasons probably fall on the more innocuous side of this spectrum. Clearly, this kind of logistical flexibility helps Apple meet demand for its iDevices as seamlessly as possible, but it also prevents its competitors from doing the same. Management has also established an extended history of providing up-front financing or significant lines of credit to suppliers and partners that can leave pieces of Apple's supply chain effectively under its thumb.
Former high-growth suppliers OmniVision Technologies in 2011 and Cirrus Logic in 2013 both saw their financial performance adversely affected in the short term due to what many interpreted as Apple's squeezing their margins behind closed doors. Going one step further, probably the best example of the dark side of Apple's supplier practices is the now-bankrupt GT Advanced Electronics. In November 2013, Apple agreed to finance the construction of a state-of-the-art sapphire production facility for GT Advanced as part of a $578 million sapphire procurement contract. However, GT struggled to provide high-quality sapphire in sufficient supply for Apple's suite of devices, and it was forced to file for bankruptcy protection from what GT's executive team called a "bait-and-switch" deal from Apple less than a year later. Reporting from Reuters on testimony from GT's COO alleged that "Apple offered what would have been GT Advanced's largest sale ever and then changed the terms of the agreement after it was too late for the smaller company to pursue other opportunities." Although both sides stuck to their versions of the story, the resulting court case certainly painted Apple as a less-than-accommodating financier.
Better off alone?
With demand for display panels likely to surge further as the smartphone, tablet, and smart watch industries all expand, positioning itself to capitalize on the growing market seems like a surefire win for Japan Display and its investors. However, Apple can be a tempting but demanding partner, one unafraid to exact real carnage on its supply chain partners if things sour.
For Apple investors, such situations can also be useful reminders that although the world's largest technology company gets much more right than wrong, it isn't afraid to throw its weight around to what some would argue is the detriment of those with whom its does business. Either way, it appears this situation is still evolving, so only time will tell if Japan Display will test the waters with one of the most powerful but also stringent supplier partners anywhere.
Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.