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Businesswoman with cell phoneIn an alliance that seems destined to adjust their images, practices, and approaches, BlackBerry has moved production of its new Z3 phones to Foxconn’s factories. The associated shift is notable from both sides.

First, whether the reports have focused on the benefits (e.g., rapid manufacturing times) or the harms (e.g., allegations of worker safety violations), the Foxconn factory complex has long been closely and almost exclusively associated with Apple’s production chain. But that exclusivity was not mandated, and when Foxconn lost a big client in Nokia, it found itself with excess capacity and lowered revenue. Manufacturing provides only very slight margins, so it could ill afford to lose any business. In its agreement with BlackBerry, Foxconn not only gains a new client but also has found a way to take up a new position in the supply chain: It will produce the Z3 but also design and engineer the new phone. Thus its contributions add more value, enabling Foxconn to charge more, as well as make itself more difficult to replace in BlackBerry’s supply chain.

Second, BlackBerry has been undergoing some tough challenges in recent years. Once ubiquitous among business users, its communication devices have been losing popularity to competitors, such that it recently reported an annual loss of $5.9 billion. Such a position is unsustainable, and as a result, BlackBerry has chosen to outsource not just production but also some design and engineering tasks to Foxconn. Because it can use many of the same parts in the BlackBerry phones that it uses to produce other technology devices, Foxconn has agreed to purchase all the materials needed. If it buys too much, it takes the potential loss, rather than BlackBerry. Furthermore, with its expertise, Foxconn has sped up the production process, such that BlackBerry was able to develop and introduce the Z3 in just a few months (for previous designs, the process had lasted close to a year), at a lower price than most of its other models.

Thus the benefits to both sides seem obvious. What is less clear is if they will be sufficient. BlackBerry continues to struggle, and consumers’ general reactions to the introduction of the Z3 were less enthusiastic than the company had anticipated. Furthermore, BlackBerry thus far has asserted it will continue to perform the design and engineering tasks for its higher end phones, leaving these steps to Foxconn only for its low end version. For Foxconn, the upside may be easier to leverage, in that it can now show other clients that it has the capacity to design hardware. But if BlackBerry fails, that experience might not do much to establish confidence.

Source: Joe Cochrane and Ian Austin, “BlackBerry’s Partnership with Foxconn Signals Shifting Priorities,” The New York Times, May 18, 2014, http://www.nytimes.com

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