Apple's procurement department once forcefully forced its flash memory suppliers to make concessions. Audits were so frequent that Deloitte also offered volume discounts.

Abstract:

Apple once had almost overwhelming bargaining power in front of flash memory suppliers due to its huge procurement scale. In order to lower prices, Apple not only lets multiple suppliers compete with each other, but also frequently audits suppliers' accounts. It even negotiated volume discounts with Deloitte because of too many audits. Today, as artificial intelligence data centers compete for memory chips, the flash memory market is gradually turning into a seller's market. Apple, which was once accustomed to controlling the pace of negotiations, is also beginning to face pressure from the increased bargaining power of suppliers.

Apple has adopted an extremely tough strategy in flash memory purchase negotiations in the past. Tony Blevins, Apple’s head of procurement at the time, was so well-known for being strong and good at negotiating that suppliers even gave him a joking nickname. Apple not only requires suppliers to provide competitive prices, but also tries to keep procurement costs as low as possible by auditing accounts, comparing competitor quotes, and controlling purchase order allocation.

An important contract clause of Apple requires flash memory suppliers to give it "most favored customer" treatment, that is, it cannot sell similar products to other customers at lower prices. To confirm whether the supplier is complying with this agreement, Apple will review the supplier's books and transaction records. According to people familiar with the matter, Apple audits suppliers so frequently that Blevins negotiated with the audit firm Deloitte to get a discount on audit fees similar to bulk purchases.

This audit is not just about verifying prices. By examining suppliers' financial information and operating data, Apple can also understand the actual output of the production line, the operation of factory equipment, and the operating pressure of suppliers. Armed with this information, Apple's procurement team can determine how much the supplier needs a large order and adjust its negotiation strategy accordingly.

Apple has also used audits in the past to uncover price violations by suppliers. Apple was awarded tens of millions of dollars in additional compensation through arbitration after discovering that Micron had sold flash memory to another customer at a lower price, people familiar with the matter said. Such cases also make it clearer to suppliers that Apple will not only strive for favorable terms when signing contracts, but will also continue to monitor them during contract execution.

During the negotiation process, Blevins also deliberately created competitive pressure. He sometimes arranges for multiple suppliers to participate in consecutive negotiations so that sales teams from different companies have the opportunity to meet to intensify competition between them. Salespeople involved in negotiations even need to prepare food in advance because the meeting may last until after midnight, and dinner may not be available during the meeting. If the negotiating team cannot obtain satisfactory terms, they may also ask Blevins to personally intervene as a means of pressure.

Around 2015, the conflict between Apple and SanDisk escalated further. At the time, SanDisk rejected Apple's request to increase supply because the company already had other customers willing to pay higher prices. According to a person familiar with the call, Blevins then told a SanDisk salesperson that he would make SanDisk CEO Sanjay Mehrotra eventually have to "come back on his knees" to beg Apple for cooperation

Later, Western Digital acquired SanDisk. As the supply of flash memory tightened around 2017, Western Digital began to change its transaction methods with Apple. According to people familiar with the matter, the company requires Apple Pay fees to reserve the supply capacity of flash memory chips, but does not promise to eventually sell a corresponding number of chips to Apple.

This approach angered Blevins. He wrote the date on the office whiteboard and circled it. He also sent a photo of the whiteboard to Western Digital executive Mike Cordano, saying he would look for opportunities to fight back.

The opportunity presented itself the following year. In 2018, when flash memory prices fell, Cordona and another executive, Jerry Kagele, went to Blevins' office with refund checks in hopes of easing the relationship. But Blevins didn't give up and asked Western Digital to promise not to charge similar supply reservation fees. The two sides finally reached an agreement with a handshake.

The reason why Apple has been able to gain an advantage in negotiations in the past is closely related to its huge procurement scale. As one of the world's largest buyers of consumer flash memory, Apple has long purchased large amounts of memory chips used in iPhones, iPads and Macs. In order to obtain stable and large orders, suppliers often have to accept lower prices and stricter contract conditions.

The storage upgrade business also brings considerable profits to Apple. According to estimates from market research firm IDC cited in relevant reports, approximately 100 million iPhone users purchased larger-capacity models or storage upgrades last year. Among them, many consumers spent US$200 to purchase an additional 256GB of storage space, and some paid US$800 to increase the capacity by up to 1.75TB. Based on the estimated gross profit margin of approximately 85% used in relevant analysis, the iPhone storage upgrade alone may contribute more than US$10 billion in gross profit. Storage upgrades for Macs and iPads, as well as demand for iCloud subscriptions due to insufficient device space, have further expanded Apple's revenue from the storage business.

However, the rapid expansion of the artificial intelligence industry is changing the rules of the game. The demand for memory chips from large cloud computing companies and artificial intelligence data centers continues to grow. They are not only competing for flash memory, but also purchasing other types of memory products in large quantities. They are often willing to sign long-term contracts and pay higher prices, so that storage suppliers are no longer as dependent on large orders from consumer electronics manufacturers such as Apple in the past.

Relevant reports pointed out that the price of flash memory has increased significantly compared with the level in 2023, and Apple's procurement costs have also come under pressure. Apple expects to pay about $6 billion for flash memory in 2025, and related spending this year may rise to about $25 billion. As supply tightens, the advantages Apple built in the past through competing with multiple suppliers, auditing its books and driving down unit prices are eroding.

This does not mean that Apple has lost its purchasing power. Its massive shipments, long-term relationships and supply chain management experience remain valuable. However, in an environment where supply is limited and artificial intelligence companies are willing to pay higher prices, it has become increasingly difficult to guarantee the lowest price simply by relying on procurement scale and tough negotiations.

For flash memory suppliers, the current market changes also have some belated reversal implications. In the past, they had to accept Apple's strict price supervision and harsh purchasing conditions; now, when artificial intelligence companies become strong new buyers, suppliers finally have more choices. Apple remains an important customer, but it can no longer dictate terms of deals as it once did.