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Spillikins №158. The Invisible War for Components and Production Costs

Last week was totally hectic for me: fascinating news was coming from everywhere and I simply could not manage to process it all but some I am going to convey in the Spillikins. Last week I wrote about twenty pages on what is in store for Windows Phone 7 to clarify certain issues regarding this OS in detail. It is funny that even when a manufacturer officially claims to be leaving a market there are still people who don't believe it so I am sure there will be plenty of critique coming at me. Here is an appetizer for you: Windows Phone 8 will not be available for the 1st and 2nd generations of Windows Phone devices. But I will talk about it in more detail later. As for now, let's get to another issue I find interesting.

The Component War

Most people don't care what parts are used to make their electronic devices, whether it is a multi core processor or a single core oldie. Only hi-tech enthusiasts and some of the youth pay attention to this. A regular user only thinks about the components when his phone seems to be working slower. We usually only care about how it feels: things we can touch and see. That is why the body quality is so important: plastic is light and practical, metal feels cool and solid, glass is exotic but it comes at the price of fragility. Every material has got its upsides and drawbacks and there isn't a single material that could satisfy everyone.

Very few buyers choose a device depending what its body is made of. And though some say that they would never buy a plastic phone they might be driven to a purchase by other features. Materials are an important part of a device image but not primary. The texture, the weight and other aspects are very important for perception of a product and material engineering is extremely important nowadays for electronic devices. It is also very typical of small manufacturers to overlook this vital component: the design of a device is the material in the first place and only then it is the outlines and shapes.

I am not trying to discuss which material is the best here – I needed this rather abstract introduction to remind you how important body materials are and that they are a vital component of any device. It is crucial in terms of a business strategy to control production of body materials such as plastic, aluminum etc. just as production of displays, memory and processors.

Why other manufacturers were not able to create anything like Apple's MacBook Air: thin aluminum body and an attractive price?

The answer is obvious but few people stop for a second to wonder about this. After all, it is not like Apple has control over all aluminum in the world. Apple were just the first to see the potential of such bodies and began to increase their orders. In just a few years Apple became the main partner of Catcher Technology, a company that possess the necessary expertise to manufacture such bodies. Apple's production orders amount to 60% of the company's production capacity. It takes three hours to create just a single body of this quality and, naturally, it is more expensive than a plastic body. On the video below Apple's head designer Jonathan Ive explains how a MacBook Air chassis is created:

Thanks to the production scale these aluminum chassis cost Apple just as much as carbon fiber chassis cost to Sony and just a bit more expensive than plastic chassis for laptops of that price range.

By controlling the resource, aluminum unibody production in this case, Apple left very little space for maneuver for their rivals and ensured low production costs. Other unibody manufacturers can now dictate prices to Apple's rivals who have to pay. But the production capacities are low so they can only use such chassis in flagship products while Apple is using them in mass products. Apple rivals go to great lengths trying to change this situation: Intel created a fashion for ultrabooks and aluminum bodies seem only natural for them but manufacturers are not able to get enough production capacity to satisfy the demand for aluminum bodies. Instead they use the old trick: they make 'aluminum sandwiches' – aluminum sheets cover a plastic chassis. Naturally, this solution is not very elegant though it costs slightly cheaper (applicable to laptops $1000+).

This solution is too expensive to be used in laptops in the below $1000 bracket so manufacturers are forced to use all sorts of plastic there. This is a result of insufficient supply of needed components.

By now you must be wondering: why are they taking it? And if there is a short supply of aluminum bodies all they have to do is buy more CNC machinery and make all the chassis they need. But it's not as simple as that: it takes up to a year to purchase, install and launch CNC equipment. The management also needs time and courage to allocate large funds to such a project. That is why it was so long before Apple got real competition in terms of laptop chassis. Asus purchased the necessary equipment some time ago but it began to work at full capacity just now and Asus UX21 is one of the first representatives of this work. And due to lower production volumes the production costs of these chassis are higher for Asus that for Apple. Besides, Apple is not paying for the equipment thanks to big binding contracts with their partners.

This Apple example can demonstrate how a company can quickly drive rivals out of a market niche and make them seek alternatives. Currently Apple is looking for ways to control essential plastic manufacturing facilities in a similar way. Of, course a total domination of a resource is impossible but they surely can make some kinds of plastic unavailable in necessary volumes for their competitors. It makes me wonder: Why does Apple need so much plastic in 2012-2013?

It is interesting how Apple is pioneering some materials but does not feel like sticking to them. The first iphone had a brilliant aluminum body excellent in many ways. However, iPhone 3G and 3Gs received plastic bodies because the company did not have enough capacity to produce aluminum chassis. Glass chassis of iPhone 4 and 4s is also a result of seeking original materials with sufficient production capacities. And even if the next iPhone features exactly the same body it will not have a big effect on sales though creating some dissent. Once again, although chassis materials have a very important role for the image of a device it is not at all crucial.

All the market features of a material must be backed by sufficient production capacities. Otherwise the success of a product will be limited to availability of its components. That is why Apple and Samsung are investing billions into production of certain components – they want to ensure sufficient supply when it is necessary. And I think it is the only right strategy for mass production companies.

In the past I admired the way Nokia quickly became the biggest consumer of plastic among consumer electrincs companies receiving a number of perks including low production costs. But as the company is going down and its production orders are following the components become more and more expensive for them. It is also a reason why Samsung seems to be so much in love with plastic nowadays although in the past they used metal in their phones extensively. They need to keep the production orders as high as possible to receive the biggest discount so they apply plastic whenever they can (they are using about thirty different sorts of plastic now). By doing so they also cut off their rivals from these components making their production costs higher.

Final consumers only notice this component war when they stop to wonder: how happened that one manufacturer makes this or that product with an aluminum body while others don't? The reason for that is the above mentioned competition for components. And it is not just about the size of a company but also about how innovative their approach is and how well they understand the market. I hope that this brief and somewhat incoherent tale gives you an idea of why manufacturers use this or that material. I find this issue extremely interesting despite it being a rare topic of conversation.

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Nokia Belle is a Perfect Solution to Move to Android

I have not written about Symbian for a long time. It is now labeled simply Nokia Belle. Appropriate devices are outdated, sales decrease every day and even the company itself was unpleasantly surprised with the latest developments. One year ago Stephen Elop declared Symbian ailing and customers unsurprisingly believed him by deserting the platform in droves.

The main goal of Stephen Elop is to boost Windows Phone sales and Nokia is not even the key player there. It looks as if Stephen Elop is still employed by Microsoft and all hist actions clearly benefit Windows Phone at the expense of other OS, including anything Nokia can come up with.

Symbian became a victim of Elop a year ago, but some customers stayed loyal to the brand and began to wait for the upturn in the fortunes of the Finnish manufacturer. Such people usually do not need Windows Phone 7. Some snapped up a Meego smartphone buried by Elop equally fast when he mentioned prior to the sales that this area will not be supported no matter how the model fared.

Now the latest surviving Nokia fans were targeted again. Belle was unveiled amid pompous promotion, but offers nothing more than a lame copy of Android interface.

As far as this update was promised in the 4th quarter of 2011 to receive it in February was not that rewarding. The delays were explained by more work required to make the release stable. Those who made an update already faced with a set of issues and some of them look pretty frightening. I will mention key irritants for users, which cause heavy criticism:

Installed apps disappear from the phone's memory, but OVI Store does not allow to restore all of them, because software offered as part of promotion campaigns is not displayed there (this is how I lost Angry Birds RIO);
Issues with WiFi or EDGE/3G connection do not affect all customers and are believed to be associated with third party apps not yet compatible with Belle;
Adobe Flash does not play all flv files well and the browser may not support flash;
Problems with HD resolution video playback, which worked well in the previous incarnation of Symbian;
Third party headphones may not always be recognized.

Frankly speaking I could have continued on end. In the list of drawback Belle boasts in comparison with Anna we see more than one hundred of items and everyday new unpleasant discoveries are made. We should not forget that Symbian products are no longer supported. The company firing thousands of employees and cutting salaries and benefits for survivors will never support its old devices, especially if the only task now is to make Windows Phone 7 popular. There is nothing surprising here.

You can ignore these problems and pay no attention to thousands of suffering users, but by showing a weak copy of Android the company suggests them where to go. The choice can be different, but it will finally destroy Symbian.

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Motorola vs Apple: Patent War

Patent wars are highly unpredictable and largely rely on lawyers. On February 2 Motorola defeated Apple in the local battle in Germany. According to the court's decision several pieces of technology (including push messages in iCloud) infringe on the patents owned by Motorola. Motorola employees were on cloud nine. The decision will be effective in Germany and will affect iPad 3G, and iPhone. Then Motorola demanded its rival to pay 2.25% from every sold iPhone. This move could have brought Motorola 19$ from every device and make Motorola exceedingly rich. Anyway the court soon repealed the ban, while demands of Motorola were questioned.

To shed some light on the situation I will briefly describe the complaints Motorola has towards Apple in the US. They are related to technology used in Qualcomm processors installed in Apple gadgets. Interestingly, there is a licence agreement between Motorola and Qualcomm and every buyer of Qualcomm chips gets them legally without the need to pay to the rights' holder a second time.

Before Motorola wanted to revoke the right to use Motorola licences components sold to Apple, but Qualcomm gave a negative answer. The market does not work this way and Qualcomm could have broken scores of rules and faced with imminent legal action from different quarters. Then Motorola decided to attack headlong. It seems to me that people who masterminded these actions wanted Google to deal with the issue after the acquisition of Motorola Mobility. This is the only explanation why the current crop of Motorola managers cannot handle the situation professionally. Using the patents underlying the entire telecommunication industry cannot be a viable competitive advantage.

Unfortunately, Motorola did not prepare well to fight with Apple and it is a problem for the struggling manufacturer, which fails to calculate the risks for its own sales. It can always go either way.

Additional reading:

Annual review by Tomy Ahonen starts from the moment when Stephen Elop began the destruction of Symbian and Nokia: useful data, which explains many things

Bankruptcy of Kodak: Only Printer Survive

I always thought that Kodak was one of the founding companies in the photo segment. Ironically, Kodak was the digital pioneer, but lost interest rather fast, which turned out to be a grave mistake. Now the company is a bankrupt and sadly decided to ditch all departments dealing with cameras, camcorders and digital photo frames. The official information was communicated here.

The company will not return to winning ways, but will disappear after a long and painful struggle. I do not feel like describing the details. You would better look at the first Kodak digital camera developed in 1975.

Additional reading:

Forbes. How Kodak failed

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Spillikins №158. The Invisible War for Components and Production Costs

Contents:

The Component War

Nokia Belle is a Perfect Solution to Move to Android

Motorola vs Apple: Patent War

Bankruptcy of Kodak: Only Printer Survive

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