By Gil Roth | March 7, 2012

An NYT piece on Apple’s CMOs illustrates economies of scale

A few issues ago, I made an off-hand reference to Apple’s new chief executive officer, Tim Cook, as “the man who decided to get rid of Apple’s internal manufacturing operations and go with contract manufacturers.” Space was tight in that editorial, because I had so many “What I’m Reading” items to share, but I should’ve given a little more consideration to what Mr. Cook’s decision meant. On the one hand, it helped Apple become the highest-valued company in the world. On the other hand . . .

In the first article in a great New York Times series on “The iEconomy,” Charles Duhigg and Keith Bradsher wrote a great piece entitled How the U.S. Lost Out on iPhone Work. The article spring-boarded off an encounter between Barack Obama and Steve Jobs in early 2011, where the president asked the CEO, “What would it take to make iPhones in the United States?”

Apparently, Mr. Jobs didn’t directly laugh in the president’s face, but did simply tell him, “Those jobs aren’t coming back.” From there, Messers Duhigg and Bradsher explored the intricacies and the impact of the external manufacturing structure that Mr. Cook implemented, focusing on contract manufacturer FoxConn Technology.

A lot of the criticism of Apple’s use of contract manufacturers centers on abuses and human rights issues related to the workers. But what was truly eye-opening to me about the NYTimes piece was the object lesson it provided about what “economies of scale” can really mean. A former Apple manager says that FoxConn could hire 3,000 people overnight to work in its factory (and live in its dorms). When Apple needed nearly 9,000 engineers in place to oversee 200,000 workers who were assembling iPhones, FoxConn was able to fill those positions in 15 days. The labor pool access is just inconceivable, by western standards. A friend of mine told me it just took her two months to hire one copywriter. In New York City.

Downsides? Sure, there are the aforementioned human rights issues (subsequent iEconomy features focus on those, and they’re harsh). And, as one pharma company told me after scuttling a partnership with a far east manufacturer, “Their ideas of Environment, Health and Safety standards were a lot . . . different than ours.” In our field, we also cite IP worries, quality questions, time differences and other matters when we talk about outsourcing anywhere outside the west.

Consumer electronics isn’t pharma manufacturing (much less drug development), but it’s clear that the demographics of China create a huge warping effect on markets, in terms of labor access, sales potential and more. In much the same way, Apple’s outsized share valuation is wreaking havoc on the stock indexes that try to include it.

We’ve seen pharma try to develop massive scale in order to generate advantages in R&D, manufacturing, pricing, and more. But in those cases, the companies ran up against the law of large numbers, requiring ever-greater successes to sustain their huge structures. Once it was revealed that pharma R&D doesn’t scale indefinitely, the enterprise was doomed. At some point, Apple and China will each run up against that same law, where growth (sales, jobs, housing, you name it) will become impossible to sustain.

Of course, that’s in the long term. Meanwhile, by the time this issue sees print, we’re all going to be salivating over the new iteration of the iPad, and all our complaints about Apple’s supply chain will revolve around the delay between ordering an iPad and receiving one at your door.



What I’m Reading


A Simple and Convenient Synthesis of Pseudoephedrine From N-Methylamphetamine

Journal of Apocryphal Chemistrybit.ly/zlapdv

Comment: In keeping with my previous editorial about the lunacy of the Adderall quota system, some pseudonymous chemists explain how to synethsize the API for standard nasal decongestant . . . out of methamphetamine. (h/t Derek Lowe)



Selected Stories of Anthon Chekhov

Translated by Pevear & Volokhonsky – amzn.to/ABi0EH 

Comment: Some of the greatest short fiction ever written; I’m embarrassed that I got through more than 40 years without reading these stories, especially The Lady with the Little Dog, The Huntsman, and A Boring Story.


What are you reading?

Let me know — at gil@rodpub.com, www.goodreads.com/groth, www.linkedin.com/groups?gid=1775433 or www.facebook.com/contractpharma — and the first respondent wins a prize!


Gil Roth has been the editor of Contract Pharma since its debut in 1999.