Case 17-1 iPhone An International Company

Case 17-1 iPhone An International Company

What is made in Taiwan, looks really cute, and left many leading European companies with their “nose out of joint” because they were rejected as its partners? Here is another hint: It combines a mobile phone, a widescreen iPod, and an Internet device into a handheld device, with full-screen web browsing, a multi-touch screen, and useful applications, such as Google Maps and wireless streaming of YouTube videos. It is the product that comes with much buzz, that bloggers are calling the “Jesus Phone,” a product that sold by the hundreds of thousands before it was even available on the market. It is the iPhone. With the iPhone, Apple muscled its way into one of the world’s most brutally competitive markets, rattling the cell phone industry’s most dominant players by producing the number one must-have mobile phone on the market. And all this before a single phone ever sold.
The phone is rectangular, and the entire front surface is a touch screen. All of its functions are activated by touch, but when you bring your iPhone to your face, a proximity sensor will turn off the touchscreen so you do not accidentally face dial. The phone, which runs the Mac OS X, is able to download and play both music and movies. The phone brings up full Web sites, rather than oddly formatted versions that most smartphones show. But it works slowly: It does not have third-generation (3G) broadband initially, but the 3G capability is coming soon.
AT&T, America’s largest wireless phone company, with 58 million subscribers, sells the iPhone—and no other carrier will be able to sell it until 2009. Apple worked with Cingular, which is owned by AT&T, to develop breakthrough features like visual voicemail—the ability to see voicemail messages in a list and choose to listen to them in any order, instead of sequentially, as most carriers require today. Apple also worked closely with Yahoo!, the world’s largest e-mail service, with a quarter-billion subscribers worldwide. The iPhone offers free Yahoo! push e-mail (e-mail that is instantly forwarded from the mail server to the e-mail client, such as a PDA), a feature that will hurt BlackBerry, which charges for e-mail. And Apple also had a close development partnership with the world’s dominant search company, Google, offering applications such as Google Maps and streaming YouTube video.
The Winners!
The iPhone is a big hit, and among the companies that benefit the most from its success are a handful of Taiwanese companies known only by a few consumers or investors. Apple does not manufacture most of its products—instead it hires manufacturing specialists: Taiwanese companies with extensive operations in China that assemble Apple’s gadgets based on Apple’s designs. They use parts from many suppliers throughout Asia who are running complex and labor-intensive production lines. Among these companies is Foxconn International Holdings Ltd., the Hong Kong unit of Hon Hai Precision Industry Co., the world’s biggest electronics contract manufacturer by revenue. Hon Hai is in charge of handling the iPhone’s assembly. Catcher Technology Co., which makes stainlessmetal casing increasingly popular for cell phones and notebook personal computers, is supplying iPhone’s casing. Other Taiwanese companies involved in the manufacturing of the iPhone are Primax Electronics Ltd., which makes digital camera modules for cell phones; Entery Industrial Co., a maker of connectors that join other components; and Unimicron Technology Corp., which makes printed circuit boards.
Taiwan’s technology companies have been taking on an ever-bigger role in the manufacturing of the world’s electronics, but with the iPhone, they received an immense boost. Taiwanese technology companies blossomed in the 1990s making notebook PCs for other companies, driving down costs, and delivering orders quickly in part by clustering together producers from across the entire supply chain, first in northern Taiwan and more recently in China. Today, Taiwanese companies, such as Quanta Computer Inc., make more than 80 percent of the notebook PCs sold worldwide by brands such as Dell, Hewlett-Packard, and Apple. However, profit margins for PC manufacturing have narrowed steadily over the years, primarily due to mergers, such as the one between Hewlett-Packard and Compaq, and power was consolidated among a handful of players. Consequently, Taiwanese companies have been branching out into other products, including cell phones, flat-panel televisions, and videogame consoles.
Hon Hai has diversified similarly, growing from a tiny maker of tuning knobs for TV sets to a giant that produces desktop PCs for Dell and PlayStation game consoles for Japan’s Sony Corp., among others. Hon Hai’s Foxconn International unit is one of the world’s largest cell phone makers, with customers such as Motorola and Nokia. Apple was criticized in 2006 after British reports that Hon Hai was underpaying and mistreating the employees making the iPods. Apple found minor violations, which Hon Hai has since remedied. Catcher also experienced rapid growth in recent years as the metal cases it makes have come into fashion.
The Losers?
The iPhone was first introduced in the United States in July 2007, and it entered three European countries in November 2007. In Europe, multinational powerhouses Vodafone, France Telecom, Spain’s Telefónica, and Germany’s Deutsche Telekom’s T-Mobile clamored for the honor to be the iPhone carriers. The stakes were high: The winner would likely sell more than 6 million iPhones over 3 years, and, most likely, half of that would be new service contracts. Speculations that Vodafone would get the deal sent its stock soaring. And then its stock took a dive when it was announced that Vodafone was off the list.
The European countries where the iPhone was launched are the same countries where Apple chose to launch its iTunes music stores: Germany, France, and the United Kingdom. And the winners were Deutsche Telekom’s T-Mobile in Germany, France Telecom’s Orange network in France, and Spain’s Telefónica’s O2 network in the United Kingdom. Each provider is the largest in the three respective countries. However, industry experts believe that it would have been in Apple’s best interest to have more than one operator distribute the phone because the European market is much more fragmented than the market in the United States. Moreover, T-Mobile has little or no presence in Italy, Spain, or France, whereas Vodafone is present in all European markets and beyond.
In the negotiations, one of the main concerns was that Apple’s deals were much more onerous than previous agreements with other handset makers. For example, in the United States, the agreement between Apple and AT&T clearly put Apple in the driving seat, giving it a share of the customer revenue, which was substantial, as the iPhone was priced at $499 for the 4 GB model and $599 for the 8 GB model. In Europe, the iPhone is priced at €450 for the 8 GB model in the three countries.
Unfortunately for European customers, the iPhone runs on the same 2.5G data connection network as U.S. phones, instead of on the faster 3G technology common in Europe, but that should change shortly. And many other changes are to come, including new partnership with cell phone operators, as the iPhone is stepping rapidly into the growth stage of the product life cycle.
iPhone’s prominent position in the European market and elsewhere in the world may be shortlived, as Nokia and Sony Ericcson are developing mobile phones with similar capabilities. Both companies are planning to market them in their highprofile stores in key markets. Nokia, a Finnish mobile phone company that not too long ago sold rubber boots to the Soviet army, will have the phones available in its flagship stores in Helsinki, Moscow, Chicago, New York, Hong Kong, Mexico City, London and Shanghai in the near future.