I am not sure of the writer's intent, but this is a very strange way idea that, as written, suggests that Apple is spending in an inefficient way:
"In the twelve months ended June, Apple will have spent $2.9 billion in M&E to manufacture 118 million iOS devices. To put that in perspective, Nokia, which manufacturers a large (if not majority) of the 340 million phones it sells, expects full year 2011 capital expenditures of $1.1 billion.
Correcting for amortization and depreciation and deducting some spending on Mac M&E, it’s very likely that Apple spent twice as much as Nokia on the instruments of production for one third the number of devices."
There is another, better interpretation that can be given to the facts: Apple's level of investment is high because it believes it will experience dramatic growth in the near future, and Nokia's level of investment is low because it does not expect dramatic growth in the near future.
This bit is an especially odd bit of reasoning:
"it’s very likely that Apple spent twice as much as Nokia on the instruments of production for one third the number of devices."
Investment in production facilities are investments that are aimed at the future, whereas how many units you've sold so far is a reflection of what you've done in the past. What Apple is investing in the future says nothing about what it has paid so far to produce its iPhones and iPads. Building up production facilities is more expensive than maintaining them.
Imagine you have 2 companies, A and B. Imagine A has a great decade where it dominates its industry, but then in the next decade is falls into decline, and starts to lose market share. Imagine B sleeps through the first decade but then takes off and has stellar growth during the second decade. What sort of investment patterns would you expect to see in that second decade? Clearly, you would expect investment from A to be declining, and investment from B to be rising. But A probably built up some impressive production facilities back when it was doing well, and it can coast on those production facilities for awhile. It can continue to produce large amounts of units, without investing a lot more in new facilities.
My point is, one has to be careful when drawing a relationship between present levels of investment and how many units a company can build. Past investments in production can allow a company to coast a long time. Building up production facilities is more expensive than maintaining them.
I agree with your analysis but Apple may also be motivated by a desire to delay or diminish a competitor's ability to leverage a supplier's excess manufacturing capability.
This strategy assumes more risk by taking ownership of the capital equipment but it strengthens their negotiating position with the supplier considerably. The supplier is only leasing labor and would be more effectively barred from running a second or third shift in the same facility to create competitive products. For example, ownership of the capital equipment would allow for considerably more visibility into factory operations by virtue of maintenance and product test activities.
Apple is investing in helping its oversea partners to build these facilities in exchange of ridiculously low prices and few months of exclusive on all those shiny things they produce. That's how Apple's margin are the double of a device with a similar price (e.g. the tables)
Given that the author likes to point out that Nokia is failing I don’t think it’s his intention to claim that Apple is spending inefficiently. Take it for what it is, it’s a paragraph to “put that in perspective”.
Comments
I am not sure of the writer's intent, but this is a very strange way idea that, as written, suggests that Apple is spending in an inefficient way:
"In the twelve months ended June, Apple will have spent $2.9 billion in M&E to manufacture 118 million iOS devices. To put that in perspective, Nokia, which manufacturers a large (if not majority) of the 340 million phones it sells, expects full year 2011 capital expenditures of $1.1 billion. Correcting for amortization and depreciation and deducting some spending on Mac M&E, it’s very likely that Apple spent twice as much as Nokia on the instruments of production for one third the number of devices."
There is another, better interpretation that can be given to the facts: Apple's level of investment is high because it believes it will experience dramatic growth in the near future, and Nokia's level of investment is low because it does not expect dramatic growth in the near future.
This bit is an especially odd bit of reasoning:
"it’s very likely that Apple spent twice as much as Nokia on the instruments of production for one third the number of devices."
Investment in production facilities are investments that are aimed at the future, whereas how many units you've sold so far is a reflection of what you've done in the past. What Apple is investing in the future says nothing about what it has paid so far to produce its iPhones and iPads. Building up production facilities is more expensive than maintaining them.
Imagine you have 2 companies, A and B. Imagine A has a great decade where it dominates its industry, but then in the next decade is falls into decline, and starts to lose market share. Imagine B sleeps through the first decade but then takes off and has stellar growth during the second decade. What sort of investment patterns would you expect to see in that second decade? Clearly, you would expect investment from A to be declining, and investment from B to be rising. But A probably built up some impressive production facilities back when it was doing well, and it can coast on those production facilities for awhile. It can continue to produce large amounts of units, without investing a lot more in new facilities.
My point is, one has to be careful when drawing a relationship between present levels of investment and how many units a company can build. Past investments in production can allow a company to coast a long time. Building up production facilities is more expensive than maintaining them.
I agree with your analysis but Apple may also be motivated by a desire to delay or diminish a competitor's ability to leverage a supplier's excess manufacturing capability.
This strategy assumes more risk by taking ownership of the capital equipment but it strengthens their negotiating position with the supplier considerably. The supplier is only leasing labor and would be more effectively barred from running a second or third shift in the same facility to create competitive products. For example, ownership of the capital equipment would allow for considerably more visibility into factory operations by virtue of maintenance and product test activities.
Apple is investing in helping its oversea partners to build these facilities in exchange of ridiculously low prices and few months of exclusive on all those shiny things they produce. That's how Apple's margin are the double of a device with a similar price (e.g. the tables)
Given that the author likes to point out that Nokia is failing I don’t think it’s his intention to claim that Apple is spending inefficiently. Take it for what it is, it’s a paragraph to “put that in perspective”.