Apple component lock-ups jump 40%
$11bn in commitments leave a mere $55bn to play with
Apple has made commitments to spend $11bn in manufacturing and component expenditures, a new record for the company and a sign that Cupertino is working to lock up components in an increasingly competitive market.
"As of March 26, 2011," reads Apple's 10-Q filing to the US Securities and Exchange Commssion, "the Company had outstanding off-balance sheet commitments for outsourced manufacturing and component purchases of $11.0 billion."
The SEC 10-Q filing was made after Apple's 8-K filing of last week revealed that Apple's second-quarter 2011 profit had grown 95 per cent year-on-year, a level of performance that prompted CEO Steve Jobs to crow: "We're firing on all cylinders."
This $11bn figure – which equals one-sixth of Apple's $66bn nest egg – is a significant uptick in Cupertino's manufacturing and component commitments. In the company's 10-Q filing for its previous quarter, such commitments totaled $7.9bn. We'll do the math for you: that's an increase of just under 40 per cent.
One year ago, the commitments totalled $4.9bn, making the year-on-year growth a hefty 125 per cent.
This growth in both component-purchase commitments and manufacturing-cost planning reflects not only Apple's hedging against a tightening component market due to the increased display and NAND hunger of the burgeoning mobile market, but also Cupertino's confidence that iPad 2's sales will further blossom in its next fiscal quarter.
That is, if Apple can build them fast enough. In a conference call with reporters and analysts after Apple's second-quarter 2011 financial results were announced last week, company COO and Steve Jobs stand-in Tim Cook said: "The iPad has the mother of all backlogs, but we're working very, hard to get [it] out to customers as quickly as we can."
A 40 per cent increase in manufacturing and component commitments should help. ®
COMMENTS
Dear god
Oh for feck's sake. Apple aren't buying and stockpiling the components, they've just paid cash (a lot of cash) up front to a) get a better price, b) hedge against price increases, and c) to guarantee first dips.
There isn't a fecking big warehouse with $11bn of kit in it. We had these sort of idiotic comments the last time Apple announced this sort of thing.
@RichyS
The end result is the same as if they did buy the parts and stock them in a warehouse.
It's interesting that not even Apple can rely on the market lifetime of components and have to make this sort of up front commitment to secure a supply. Nintendo ran in to the same problem with the Wii in the early days. Because the sales were way in excess of predictions they wanted to expand production but couldn't because the component manufacturers themselves couldn't keep up.
Component obsolesence is an increasingly major issue for everyone, and I know some small manufactureres who now routinely make lifetime buys of everything needed to make a product, (maybe not the passives like resistors, etc). For small-ish production runs it's simpler to have bonded stores of every unique component no matter how unlikely it is to go out of production. Warehouse space can be a lot cheaper than a redesign to deal with obsolesence. It's just-in-time delivery, but with a coarser timescale. It also gives you some control over when your re-design for obsolesence takes place, rather than it being sprung on you as a surprise just because some chip suddenly become unavailable.
Of course, Apple are big enough that they can probably get any component that's ever been sold remanufactured. But it wouldn't be as cheap.
It's subtler, but simpler than most seem to understand
Apple is covering the supplier's downside risk when investing for growth, and guaranteeing preferential supply.
There's a huge, competitive industry making components, which are bought for every kind of electronic device. Apple doesn't just want a huge supply of generic components, it wants very particular novel components, which often require brand new production facilities. Billion dollar investments in a cutthroat market are risky. Typically a novel device used to take nine months from first private showing to free availability. Apple wants huge, guaranteed supply of novel components switched on just a couple of months before free availability. They want no-one to see the product until they can buy it. It gives them a huge competitive advantage.
The purpose of Apple's up front prepayments to suppliers is to cover supplier cash flow to set up new production facilities, to commit to taking enough product to eventually pay those costs, and to ensure preferential supply when everyone else has copied Apple's product, and the component becomes mainstream.
This whole situation is one reason why Apple can never control the majority of the market as Microsoft did while it continues to innovate. Apple has no use for the bulk of the industry's production facilities. The exact opposite of Dell in its tin box glory days, when any old components could be bought at rock bottom price after customers had ordered their computer.
Not quite
They haven't paid any cash. They have just signed contracts to pay cash in future when the parts arrive, or at some point, probably 30 days after they arrive. It means they have to accept delivery and pay for the parts whether they have any use for them or not, but they haven't received them yet, and legal liability to pay for them only happens when they do, so that is why it is off balance sheet.
