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Apple's Tim Cook: What Analysts Miss

Apple's manufacturing power is now entrenched in China. Expect that to change as the new CEO helps reinvent the company, again.
iPad Mini Tablet: Visual Tour
iPad Mini Tablet: Visual Tour
(click image for larger view and for slideshow)
Listening to the analysts on the business channels, you'd think Apple's future is based on things like iPhone maps functionality or the success of the iPad Mini. They're wrong. Apple, as well as most companies producing consumer-oriented products in China, have a much larger problem looming: Will they be able to produce their products to meet market demand?

Boston Consulting Group released a paper last year titled "Made in America, Again," in which it made the case that China will lose its low-cost manufacturing position by 2015. BCG's analysis shows a 15% to 20% annual increase in labor costs in China, as well as continued appreciation of the yuan, further eroding the country's cost advantage. Trans-ocean freight costs will continue to rise. China's economic advantage is quickly evaporating.

Consider other events and trends in China. In recent years we've seen exposures of the abusive working conditions in Chinese factories. Easily preventable explosions in die cast factories have caused deaths, and there have been reports of suicides. The Chinese people, weary of polluted air and water, expect their government to do something about it. Recently, there have been reports of riots and worker strikes in Chinese factories. As manufacturers withdraw to cheaper and friendlier locations, there will be massive labor unrest in China. The clash between capitalism and communism will take years to sort out.

When the crisis becomes obvious, manufacturers will scramble to find a new home to produce their products. Most will simply search for the next location with low labor costs and nonexistent environmental and labor laws. Apple will choose a different route.

This is where Tim Cook comes into the picture. Cook's skill set is unique among CEOs of high-tech consumer product manufacturing companies. A master of logistics, he's credited with reengineering Apple's supply chain to increase profit margins while allowing for more flexibility to produce new products and make changes on the fly. His educational background in industrial engineering, coupled with an MBA, provides him with a toolbox the average CEO doesn't have. His previous career positions at Compaq and IBM provided valuable experience in producing high-volume high-tech products.

It would be easy to envision that under Cook's leadership, there's a skunk works deep inside of Apple looking for the solution--the marriage of innovative product design with innovative manufacturing. In all likelihood, Apple is using its silicon chip design skills to combine product functionality into fewer and fewer components. It's using its uncanny ability to simplify products to be more user friendly to simplify the manufacturing of those products. It's using its patents and expertise in areas such as liquid metals to find materials to create products that will excite customers as well as create unique production opportunities. The result will be a few subassemblies with minimal fasteners and electronic cables that will come together using flexible automation.

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While other companies will search the world to duplicate the low costs enjoyed in China, Apple will reinvent itself, again--this time as an agile, low-cost manufacturer. It will derive even higher profit margins and get products to market faster than its competitors. Apple will find locations that respect patents and intellectual property rights, allowing it to enjoy the fruits of its innovations for a longer time. It will control and manage more of the product life cycle than any of its rivals.

The pundits and experts wanted the next CEO of Apple to be just like Steve Jobs, who was always ahead of the pundits and experts. Perhaps Jobs looked into the future and saw the challenges and opportunities that Apple faces. Keenly aware that Apple had grown into a large and complex company, Jobs knew better than anyone what skills the next CEO would require. And he groomed Tim Cook for the job.