As I scrolled through Youtube yesterday, I came across one of my favorite series. The one CNBC does on the semiconductor industry. In this episode the host, Katie Tarasov, spoke about Apple's chip design business.
Building In House vs Outsourcing
When operating a business, decisions must be made about which tasks to do in house, and which tasks to outsource. Even if we want to control every aspect of our business, time and costs will limit the number of things we can do internally.
Although Apple designs their own processors, they still use ARM's architecture, Qualcomm's modems, TSMC's fabs, and Foxconn's assembly plants. At this moment, Apple cannot replicate the skills of these companies, so they partner with them instead. Manufacturing chips like TSMC is unrealistic for Apple because the process will be too expensive and time consuming. Other tasks, like creating their own modem is more realistic for Apple, so they are working on developing one right now.
Apple's strategy is worth studying because they are constantly pushing the boundaries of what their company can build. They are disrupting their supply chain by bringing more things in house, while creating more stability for the company because they are controlling more aspects of their business.
Questioning the Standard
For a long time, the general wisdom in business was for companies to outsource as many tasks as possible so they could focus on their core competencies. This form of specialization was a great strategy because a lack of focus can lead to resources being wasted. But as with all good things, when taken to the extreme, specialization can become dangerous to practice.
Companies wanted to believe that by shipping their manufacturing overseas they would reduce their costs and enjoy long-term profits. The pandemic showed companies the holes in their strategy because the costs they thought were being eliminated, was actually accruing in other less noticeable areas. Chasing cheap labor and materials overseas, cost companies the stability of their business.
Although the semiconductor industry started in America, companies now rely on fabs in Taiwan and machines from the Netherlands to create their advanced chips. Also, according to the CNBC episode, there is a shortage of semiconductor workers since state-of-the-art fabs were not being built in America for years. If another pandemic hits, or something happens in Taiwan before America builds up its semiconductor infrastructure, companies will be in trouble again.
Start Small But Start
Business owners can learn from the problems facing the semiconductor industry and the success of Apple's business model. Companies must include in their DNA the ability to strengthen and expand their capabilities over time. In the beginning, companies will have limited resources available to them, but over time, as their resources increase, and the foundation of their business solidifies, companies should examine their business and see which operations can be brought in house. For some companies, it might be multiple tasks that need to be brought inside. For others, it might be just 1. Each owner must do their own analysis, and decide what is right for their situation, and what will strengthen their business.
I remember dealing with a real estate investor who had a full-time attorney on his staff. The deals I did with him always moved fast because his attorney only had to worry about him as a client. When I work with attorneys who have multiple clients, the deals often move slow because everyone has to wait for the attorney to find time to review the contract.
The investor with the full-time attorney wants speed to be a part of his business, so he decided to bring his attorney in house. Speed might not be important for other investors, but it is an example of analyzing our business so we can see what is necessary and feasible to bring in house.
Conclusion
Stay strong, stay blessed, and God willing, I will see you next week.
Do you see a man skillful in his work? He will stand before kings; he will not stand before obscure men.
Proverbs 22:29 ESV
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