1.3 Ch1. The Rise of Apple’s Cost Cutter PDF

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The Rise of Apple’s Cost Cutter Apple procurement executive Tony Blevins’s job is to stare down suppliers and slash prices to the bone, an increasingly vital role

To understand Apple Inc.'s evolving place in the tech world, consider that one of its most important executives today is a guy whose job is badgering suppliers to get costs down. Tony Blevins, vice president of procurement, will stop at little to get a favorable deal. He has paraded manufacturers past competitors in Apple's lobby and spurned a UPS contract by sending it back to UPS executives through FedEx. He persuaded subcontractors not to pay a chip maker that Apple was in litigation with, depriving the chip company of $8 billion, according to court documents and people who recall the case. The supply chain was always a critical piece of the Apple formula -- alongside, if duller than, the design magic of leaders like Steve Jobs and Jony Ive. Apple Chief Executive Tim Cook built the supplier network and instilled rigorous frugality in it as he did so. Today the supply chain looms larger than ever at Apple. Slowing iPhone sales, combined with the increasing cost of new features, make the job of hammering down expenses critical for a company mining its marquee products for profits as it transitions to a future more focused on selling services. The result is a company less identified with visionary leaders and more of an operations juggernaut with rich profit margins it intends to keep. At the center of that effort is Mr. Blevins, a vice president of procurement, known as the Blevinator.

A Texas facility of Finisar Corp., which makes optical components for iPhones. For years, Mr. Blevins wore a tourist trinket from Hawaii, a cheap puka-shell necklace he had negotiated to a $2 price from $5. It was a reminder to his staff that nothing should fetch full price, said Helen Wang, who worked on his procurement team for years. "If he's like that for himself, you can only imagine how he is with company money," she said.

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Mr. Blevins has pushed beyond shrewd negotiations. He enforces manufacturing deadlines that help Apple fill orders on time. He manages semiconductor suppliers, making him the bearer of bad news if Apple sets out to build its own chips. Under Mr. Blevins, 52, Apple paid Intel Corp. about $10 per modem chip in recent years, about 50% less than Samsung paid Qualcomm Corp., IHS Markit data show. Mr. Blevins declined to comment, saying he didn't have Apple's permission. "I'm a loyal company guy," he said. Mr. Cook said in an earnings call last year that Apple continues to introduce new technologies and products, such as health features on the Apple Watch. Apple's approach with suppliers is driven by the complementary approaches of its leaders, current and past. Mr. Cook, who took over operations in 1998 and as CEO in 2011, believed that saving 10% on the cost of parts could boost profits more quickly than selling more computers, say former employees. The late Mr. Jobs wanted Apple to own the core technologies in its products to make it harder for others to copy them.

Minimizing costs and protecting sales became the foundation for the margins that drive Apple's lofty valuation of nearly $1.4 trillion. Its phone business has about a 25% operating margin. Apple typically collects nearly 75% of the smartphone industry's profit, according to Counterpoint. Apple's gross margin has held steady at about 38%. Around 2012, Mr. Cook so valued Mr. Blevins's work driving down costs that the CEO tapped him to manage negotiations for the glass encircling Apple's futuristic new headquarters in Cupertino, Calif., people familiar with the project said. The design called for an endless wall of curved glass measuring a mile in

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circumference. Apple projected the glass could cost as much as $1 billion, making it one of the largest glass orders in history. Mr. Blevins invited glass makers to the Grand Hyatt in Hong Kong, those familiar with the process said. He put bidders in conference rooms and went from room to room, pushing them to go lower. If you don't come down in price, he said, another bidder would. He used familiar negotiation tactics, including prolonged silences and bluffing numbers, the people said. It worked. Apple reduced glass costs an estimated hundreds of millions of dollars.

The Apple Park campus in Cupertino, Calif., with the company’s new glass-covered headquarters.

Apple’s new headquarters.

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While Apple got what it wanted, such techniques can strain supplier relationships, some people familiar with his approach said. "His job is to Viking a town and get every resource out of it," a former Apple colleague said of Mr. Blevins. "It's like killing sheep versus shearing them." Mr. Blevins grew up in the Blue Ridge Mountains near Jefferson, N.C., where he learned frugality from his mother, a schoolteacher, and his father, a factory worker who made extra money repairing and selling used cars, said high-school classmate Tracy Goss. Mr. Blevins studied industrial engineering at North Carolina State University and later went to work for International Business Machines Corp. He worked in engineering, finance and procurement and joined IBM's development lab in Greenock, Scotland. Mr. Cook also worked at IBM. After joining Apple he brought Mr. Blevins over about 2000. Mr. Blevins started in procurement buying products as ordinary as toilet paper. He moved up to overseeing purchasing for iPod parts and made a name by helping lock up a five-year memory-chip supply, making competing difficult for rivals. For the iPhone, Mr. Blevins worked with Apple's contract manufacturers and managed the purchase of parts such as modem chips. Sales of the phone soared after its 2007 introduction, forcing suppliers to scramble to meet volume. Mr. Blevins played one against another for better terms. When STMicroelectronics NV in 2013 refused a request to lower prices for gyroscope sensors -- which help the phone screen adjust to movement -- Mr. Blevins threatened to find an alternative, said a former STMicroelectronics executive. The supplier held its ground, only to watch the business shift to a rival. That killed an estimated $150 million in the supplier's annual revenue, according to data from IHS Markit, amounting to a fifth of its sensor sales. STMicroelectronics didn't reply to requests for comment. It continues to supply components for Apple products. Mr. Blevins rotated staff members every few years to keep them from developing relationships that might dilute their focus on saving Apple money, former employees said. Suppliers and colleagues appreciated Mr. Blevins's sense of humor and enthusiasm for muscle cars, such as his 1972 De Tomaso Pantera, which he told a motorsports publication he drove "hard and fast, limited only by my desire to survive." At Qualcomm, executives found him friendly when asking for favors, calculating when pressing for lower prices and punishing when Qualcomm defied his demands. Under the two companies' deal, Qualcomm paid Apple a rebate on some iPhone modem chips that Apple purchased. In 2013, Mr. Blevins wanted Qualcomm to pay rebates for chips made by another supplier as well. "I know the agreement says what it says, but in the spirit of the partnership you should give us more," he told Qualcomm executives during a call, according to people familiar with it. When Qualcomm staff members refused, Mr. Blevins complained to his senior managers, who took the complaint to Qualcomm executives. Although Qualcomm didn't accede to Mr. Blevins's request, executives reprimanded staff for being difficult with Apple.

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Mr. Blevins also looked for an alternative. In 2014, Apple launched an initiative dubbed Project Antique to reduce what it paid Qualcomm. The strategy led Apple to use chips from Intel for some iPhones in 2016. Apple then sued Qualcomm, saying its patent-licensing fees were too high. Mr. Blevins summoned manufacturers to the Grand Hyatt Hotel in Taipei, according to court documents and people familiar with the meeting. At the time, Apple was reimbursing manufacturers for paying Qualcomm's licensing fees. Mr. Blevins told the manufacturers they didn't need to pay Qualcomm and said Apple would stop reimbursing them. Twelve days later, manufacturers began withholding the licensing payments from Qualcomm, in an amount that eventually totaled $8 billion, the chip maker said in court. The developments cost Qualcomm a quarter of its market value at one point and triggered layoffs. In April 2019 the companies settled -- with an Apple payment to Qualcomm -- and reached a new license agreement. Qualcomm stock surged. Its CEO later said the payment from Apple would be at least $4.5 billion. Apple failed to reduce the licensing fees it pays to Qualcomm significantly, according to analysts' estimates, but it weakened Qualcomm and continues to challenge it with an effort to develop its own modem chips. Mr. Blevins enforces Apple's nondisclosure agreements, which can carry potential penalties of $50 million or more.

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In 2017, Japan Display Inc. held a news conference and disclosed it had received orders for its latest liquid crystal displays. It wanted this known because some phone makers were dropping LCD in favor of new display technology.

A Qualcomm modem chip from an Apple iPhone 6. Apple was among the smartphone makers that had expressed interest in a purchase, The Wall Street Journal confirmed at the time. Mr. Blevins called a top Japan Display executive and accused him of violating Apple's nondisclosure agreement. "Are you stupid?" he said, according to a person familiar with the call. Apple later demanded that Japan Display pay $5 million for breaching its contract, according to this person. Although Japan Display didn't pay the penalty, it agreed to submit future news-conference materials to Apple before events, another person close to Japan Display said. Apple's contract gave it the right to review the supplier's emails and executives' calendars. The biggest threat to suppliers comes when Apple decides to develop a component internally. The first sign of trouble is when it starts hiring away a supplier's engineers. Mr. Blevins is the person suppliers turn to when Apple starts poaching talent. Apple began hiring engineers away from Imagination Technologies Group PLC in 2013. That stoked concern, at the U.K. supplier of technology for graphic processing units, that Apple was going to make its own GPUs to power video and other animations on iPhones, according to former Imagination executives. At Imagination there was a feeling Apple was about to pull the rug out from under it, one former executive said. When it came time for contract negotiations in 2017, Mr. Blevins delivered the news many anticipated: Apple was working on an independent graphics design and planned to stop paying Imagination royalties, said the former executives. Imagination Chief Executive Andrew Heath considered this news financially material and told Apple he would need to go public with it. He didn't understand that Mr. Blevins was likely just trying to strengthen Apple's negotiating position, these people said, and Mr. Blevins didn't stop him. When Imagination went public about Apple's plan, Imagination's share price plunged 70%. Apple challenged Imagination's timeline, saying it had stopped accepting new intellectual property from the chip maker in 2015 and confirming it planned to wind down its licensing agreement. Imagination, which later was sold to Chinese investors, recently struck a new deal to license patents to Apple. Terms weren't disclosed. Source: Wall Street Journal. by Tripp Mickle, January 24, 2020.

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