The apparent weak point in Apple’s product lifecycle is supply constraint. Company executives have repeatedly stated that they are selling iPhones and iPads as fast as they can make them.

In episode 3 of their excellent Critical Path podcast, Horace Dediu and Dan Benjamin raise the prospect of Apple using its $66 billion cash horde to ramp production throughput.

Many cash-rich companies encountering a supply problem might be tempted to take the obvious path of acquiring a manufacturer; a number of industry commentators have suggested over recent months that Apple should simply buy Foxconn or Pegatron. Apple, however, has already employed a more lateral approach – one that avoids the pitfalls many companies might fall into. As Horace pointed out in his show, Apple is using its cash to offer supplier finance to selected device manufacturers, in return for favorable terms. I believe Apple has thoughtfully chosen this strategy over overtly buying into a manufacturer.

Here are my Top Five reasons why Apple might not want to buy its factories:

5) Loss of clout: Apple’s buying power commands a lot of attention from the huge number of suppliers of the components in its products. Choosing favorites by buying some suppliers risks losing the attention of the others – potentially handing their preference to Apple’s competitors. Retaining a broad range of partnerships gives Apple leverage and builds resilience into their supply chain.

4) Innovation occurs in the supply chain: Apple does well by cherry-picking components from a broad range of component suppliers. They need the ability to switch out components and suppliers at will.

3) Commoditisation: Apple tends to introduce new technologies earlier than the broader market, so they end up funding development of manufacturing techniques. However, as production improvements and volume commoditises new components, Apple needs competition between manufacturers to drive prices down.

2) Competition: Apple is able to leverage the risk that it may take it’s business elsewhere as a tool for keeping prices low. They do this with Foxconn and Pegatron; Samsung and Taiwan Semiconductor; Qualcomm and Infineon; etc.

The number one reason that I don’t think Apple would buy a manufacturer is…

1) Labour arbitrage: Apple is just too successful to own a factory in China, Taiwan or Brazil. If Apple bought Foxconn, for example, they would be besieged by demands for pay increases from the workforce. The only reason this doesn’t happen now is that the labour movement in China knows Apple can take it’s business elsewhere if they push too hard. There is a reason Apple is helping Foxconn open factories in Brazil.

It seems to me Apple’s options for managing supply constraints are more limited than they might seem at face value, but Apple is once again very cleverly treading a treacherous path by making strategic (and secret) investments in their partner’s capabilities, in return for favorable terms.

Senior Vice-President for iPhone Engineering, Mark Papermaster, has left Apple Inc after just 16 months in the job. Apple has refused to say whether he was terminated or left of his own accord. Some observers claim Papermaster was axed for failing to avoid issues with the antenna on the new iPhone 4, while others suggest he lost the confidence of Steve Jobs some time ago.

As an indication of the high expectations Steve Jobs holds over his management team, it’s instructive to review the transcript of his interview with Daniel Morrow of the Smithsonian Institute, back on 20 April 1995.

Jobs:

I always considered part of my job was to keep the quality level of people in the organizations I work with very high. That’s what I consider one of the few things I actually can contribute individually – to really try to instil in the organization the goal of only having ‘A’ players.

…

I have found, not just in software, but in everything I’ve done it really pays to go after the best people in the world. It’s painful when you have some people who are not the best people in the world and you have to get rid of them; but I found that my job has sometimes exactly been that – to get rid of some people who didn’t measure up and I’ve always tried to do it in a humane way. But nonetheless it has to be done and it is never fun.

Papermaster’s former responsibilities have been assumed by Apple’s Senior Vice-President of Computer Engineering, Bob Mansfield.

In 2007, Steve Jobs looked into the future:

“We’ve got two strong legs on our chair today — we have the Mac business, which is a $10 billion business, and music, our iPod and iTunes business, which is $10 billion. We hope the iPhone is the third leg on our chair, and maybe one day Apple TV will be the fourth leg.”

It’s a good thing Jobs used the word “maybe”, because the iPad has just sailed straight past Apple TV to become that fourth leg. During its first quarter on the market, iPad has already become Apple’s third biggest revenue stream. Despite supply constraints, the combined revenue of Apple’s two newest legs – iPhones & iPads – already exceeds combined revenue from the original Mac and iPod legs by 25%.