01/10/2020

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
AAPL 0.48%
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 Apples 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 formulaalongside, 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.
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 hes like that for himself, you can only imagine how he is with company money, she said.
Mr. Blevins has pushed beyond shrewd negotiations. He enforces manufacturing deadlines that help the company fill orders on time around the world. He manages semiconductor suppliers, making him the bearer of bad news if Apple sets out to replace their chips with an in-house product.
Under Mr. Blevins, 52 years old, Apple paid
Intel Corp.
about $10 per modem chip in recent years, roughly 50% less than Samsung paid
Qualcomm Corp.,
according to
IHS Markit.
Mr. Blevins declined to comment, saying he didnt have Apples permission. Im a loyal company guy, he said.
Mr. Cook said during an earnings call last year that Apple continues to introduce new technologies and products, such as health features on the Apple Watch and new subscription services.
Apples 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, according to 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.
By minimizing costs and protecting sales, the twin policies became the foundation for the margins that drive Apples lofty valuation of nearly $1.4 trillion. Apples phone business has about a 25% operating margin, well above competitors such as
Samsung Electronics Co.
and Chinese rivals, according to data firm Counterpoint Research. Apple typically collects nearly 75% of the smartphone industrys profit, versus 25% for the rest of the industry, according to Counterpoint.
Investors watch Apples gross margin, a measure of how efficiently it turns sales into profit, because a contraction could foreshadow the end of Apples dominance in the smartphone era. Its gross margin has been holding steady at about 38%.
Around 2012, Mr. Cook so valued Mr. Blevinss work driving down costs that the CEO tapped him to manage negotiations for the glass encircling Apples 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 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 several 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 dont 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 its glass costs by an estimated hundreds of millions of dollars.
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. Its 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.
He remembers Mr. Blevins as someone who knew that he was smarter than whoever he was talking to and could control the conversation if he wanted to.
Mr. Blevins studied industrial engineering at North Carolina State University and later went to work for
International Business Machines Corp.,
where he worked in engineering, finance and procurement before joining IBMs development lab in Greenock, Scotland.
Mr. Cook also worked at IBM, and after joining Apple, Mr. Cook brought Mr. Blevins over around 2000. Mr. Blevins started in procurement buying products as ordinary as toilet paper. He moved up quickly to overseeing purchasing for iPod components, and made a name for himself by helping lock up a five-year memory-chip supply that made competing difficult for rivals.
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For the iPhone, Mr. Blevins worked with Apples 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 sensorsparts that help the phone screen adjust to movementMr. Blevins threatened to find an alternative, according to 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 suppliers annual revenue, according to data from IHS Markit, amounting to a fifth of its sensor sales.
STMicroelectronics didnt respond 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 supplier relationships that might dilute their focus on saving Apple money, former employees said.
Suppliers and colleagues appreciated Mr. Blevinss 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, which has dealt frequently with Mr. Blevins, 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.
Apple faces rising component costs for iPhones as it adds features, making its negotiations with suppliers critical.
Cost of components
iPhone 4 (2010)
Only/smaller model
iPhone 4s (2011)
iPhone 5 (2012)
iPhone 5s (2013)
iPhone 6 (2014)
Larger model
iPhone 6s (2015)
iPhone 7 (2016)
iPhone 8 (2017)
iPhone X (2017)
iPhone XR (2018)
iPhone XS (2018)
iPhone 11 (2019)
iPhone 11 Pro (2019)
100
200
300
$400
Source: IHS Markit
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. They said the rebates would have been worth about $40 million, a small sum for Apple, which had more than $37 billion in net income that year.
When Qualcomm staff members refused, Mr. Blevins complained to his senior managers, who took the complaint to Qualcomm executives. Although Qualcomm executives didnt accede to Mr. Blevinss request, they reprimanded staffers for being difficult with Apple.
They knew the request was nonsense, but they were always concerned about keeping the Apple business, said one of those familiar with the incident.
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 modem chips from Intel for some iPhones in 2016. Apple then sued Qualcomm in 2017, 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 Qualcomms licensing fees. Mr. Blevins told the manufacturers they didnt need to pay Qualcomm and said Apple would stop reimbursing them.
Whats Inside
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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 settledwith an Apple payment to Qualcommand reached a new license agreement. Qualcomms 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 Apples nondisclosure agreements, which can carry potential penalties of $50 million or more.
In 2017,
Japan Display Inc.
held a news conference and disclosed it had received orders for its latest liquid crystal displays. It wanted investors to know this because some phone makers were dropping LCD in favor of new display technology.
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 Apples 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 didnt pay the penalty, it agreed to submit future news-conference materials to Apple before events, another person close to Japan Display said. Apples contract gave it the right to review the suppliers emails and executives calendars.
A Japan Display executive described Apples nondisclosure agreements as torturous, saying he had never heard of others demanding so much.
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 suppliers engineers. Mr. Blevins, who can often be seen on Apples campus with the companys head of semiconductors,
Johny Srouji,
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 didnt understand that Mr. Blevins was likely just trying to strengthen Apples negotiating position, these people said, and Mr. Blevins didnt stop him.
When Imagination went public about Apples plan, Imaginations share price plunged 70%. Apple challenged Imaginations 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 werent disclosed.
Imagination and Mr. Heath declined to comment.
—Takashi Mochizuki contributed to this article.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
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