How about buying up its own supply chain? A lot of high-tech manufacturers on The Global 2000 dream about controlling what they pay for components and gaining the assurance that crucial parts will flow as needed.
The iPhone maker has $64 billion or so of its cash sitting overseas, taxed at an attractively low 5% rate but also earning little to no interest. Any cash Apple chooses to bring back to the States would get hit at the 35% U.S. tax rate, not a pleasant prospect. Spending that money on expanding offshore production is far more compelling. Apple keeps the depreciation expense while keeping production costs down. It also means the company will be ready to continue pumping up the volume to feed the seemingly insatiable appetite for iPhones and iPads in the near term and rumored new category-busting products like an interactive TV in the long term.
According to Katy Huberty, an analyst at
It took Huberty a little time to figure out exactly what Apple was up to. When the company disclosed in October it planned to spend $7.1 billion on capital expenditures in 2012, up from $4.3 billion last year, lots of folks were scratching their heads over how Apple would use the money, which didn’t include $900 million set aside for opening new stores.
Even after you factor in costs for data centers to support its cloud service, the new 175-acre campus going up on land formerly owned by
Discussions with suppliers in Asia gave Huberty the answer. “Put yourself in the shoes of suppliers for
When asked about the supply chain plan, Apple referred back to its public statements about its cap-ex spending. In a Mar. 19 conference call about how the company was going to use some of its $100 billion in cash, Cook was sure to include “capital expenditures in our supply chain” among the list of his other spending items.
The plan would likely look like this: Apple fronts the money to buy the production equipment for suppliers that set up the factories, hire the labor and run the day-to-day operations. Apple still owns some of the equipment and takes the depreciation, the extent of which is not known because Apple isn’t saying. Huberty believes that most of the $7.1 billion is going toward equipment purchases for the suppliers.
Apple’s investment in its own supply chain, coupled with growing scale and the prepayments it routinely makes to lock up supply of crucial components such as memory and screens, will translate into a 15% to 20% cost decline a year, Huberty estimates. That helps establish and maintain higher margins for the iPhone (50% or more) and iPad (about 40%). It also gives Cook the flexibility to consider moving into low-margin, high-volume markets such as TVs and to cut pricing on older products to lure cost-conscious buyers, as Apple did when it chopped the price of the iPad 2 by $100 when it released the new iPad.
Those 40%-plus gross margins on phones and tablets are part of what puts Huberty among the cadre of analysts and investors who think Apple’s shares will top the magic mark of $1,000 in the next two to three years (up from about $609 today). That would make the Silicon Valley garage startup the first company with a trillion-dollar market valuation.
Stephen Coleman of Daedalus Capital has been buying Apple shares since 2004 and thinks the company can get to a trillion even faster. Coleman, who remembers being mocked by investors in 2007 when he predicted Apple’s shares would reach $200, thinks they’ll surpass $1,000 later this year. He’s convinced the company will continue to run circles around smartphone rivals
Coleman is waiting for Apple’s financial results to be announced on Apr. 24 to see if his timetable is realistic. Sales in the quarter, lifted by new iPhone sales from China Telecom and orders for the third-generation iPad, which debuted Mar. 16, are expected to rise 47% to $36 billion. Profit is expected to jump from last year’s $6.40 a share to $9.86.
To naysayers who insist that Apple’s run won’t last or that Cook and his team can’t keep up momentum in the mobile-device market or that Apple boosters are just plain crazy, Coleman is having the last laugh. “I live in the real world,” he says. “When I see people rioting in China to get their hands on an iPhone, and when I hear Tim Cook say on earnings calls quarter after quarter that they can’t make enough to meet demand, there’s no reason to expect the sales will drop.”