Apple Strengthens Its Supply Chain

NEW YORK (Trefis) -- Apple's (AAPL) famed supply chain has been one of the biggest drivers of profits at the Cupertino-based company.

It therefore should come as no surprise that Apple has decided to split the costs of improving factory conditions at Foxconn with the latter. In fact, we believe it to be a very effective way of putting the company's huge stockpile of cash to good use.

This will not only help Apple maintain a good relationship with its supplier but also strengthen its supply chain and enable it to negotiate favorable deals in the future. With margin contraction still a concern as competition from Samsung, HTC and Nokia(NOK) intensifies and smartphones penetrate emerging markets, Apple should keep investing in its supply chain in order to support its future margins.

The decision comes on the back of an audit of Foxconn's Chinese plants by the Fair Labor Association, which made several suggestions about improving the working conditions and hiking the wages of its employees. Foxconn has since pledged to put the recommendations to action and now has Apple's support for the same.

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Supply Chain Investment

Apple's decision to split the bill goes to prove its commitment toward its suppliers and comes at a time when Foxconn's margins are under pressure from higher employee costs spurred by the audits. Foxconn parent company, Hon Hai Precision Industry, posted lower profits than usual in the first quarter of 2012 as the manufacturer's gross margins slid from 7.25% in 2011 to 4% in 2012.

We believe Apple's gesture can pay rich dividends later as it enables the company to negotiate favorable deals in the future. We also think this might be part of a bigger strategy to strengthen its supply chain ecosystem.