How much do Apple's factories cost?

In the last two posts (How much does an Apple store cost?The down payment on iCloud) I discussed two line items in the PP&E asset class on Apple’s Balance Sheet. In isolation, the data is interesting as it gives us an idea of the cost structure of stores and facilities being developed to sustain its current business model. In aggregate, it provides insight into Apple’s strategic intent.

To complete the picture, I will look at the third asset: “Machinery, equipment and internal use software.” It’s the yellow line in the chart below:

It’s plain to see at first glance that it’s the most significant asset. What does it represent and what conclusions can we draw about Apple’s strategy?

Before I begin, I should make clear what this asset represents and what it does not represent. These expenditures cover equipment used in production. They do not include components used in the production nor loans to suppliers for purchasing equipment. These are fixed assets that can be depreciated on a schedule and have specific tax treatment as a result. These are, in plain language, instruments used for producing things to be sold. They are things Apple owns.[1]

Using the same method as in the other asset analyses I took a measure of the sequential change in that asset over the time period and tried to see if there is a correlation between that spending and some other measure of output from the company.

Here is the sequential change chart since the end of 2005:

I noted that the pattern seems to relate closely with the increase in shipments of iPhones. More specifically, iOS devices. To test this I overlaid the overall volumes (with estimates of product types) of iOS shipments. This is a modified version of the chart published here.

There is a broad similarity. But again, as in the other analyses, the spending on assets typically predates the “output” from that asset. As we saw in land and buildings, the operational start of a facility may happen many quarters after the purchase is made. Similarly, stores open some time after the spending on fitting them out.

So it is with Machinery and Equipment. If we time-shift the output one quarter to account for spending before production we have a better fit (note the change in the title with “Q-1” indicating that the dates for the iOS shipments are offset by 1 quarter to the left).

We can even take the analysis further by breaking the spending and output into Phases corresponding to specific product cycles and introductions.

Phase 1: The original iPhone

Spending on M&E prior to the iPhone launch began two quarters in advance of sales. The following chart reflects this delay. Note that the M&E payments are marked with quarters ending six months earlier than the shipment schedule. Note also the scale (red denoting the M&E spending and black the units shipped). I also separated the two product types  (iPod touch are my estimates, iPhone numbers are published by Apple).

This Phase corresponds to the first “bump” in the expenditure chart but offers more detail. There is an evident relationship between the “input” expense and the “output” of units shipped.

The cost of Phase I was $408 million.

Phase II: The iPhone 3G series

Phase II covers spending from the quarter ending March ’08 to December ’09 and production from September ’08 to March ’10.

For this Phase the time shift is only one quarter but there is a quarter’s worth of spending that is initiated prior to any shipments. I chose to demarcate this Phase to cover production for both the 3G and 3GS as they probably shared a lot of common equipment. Some spending on new production lines however still had to happen as volumes increased during 3GS production.

Note the scale change from the first Phase. Whereas the maximum in Phase I spending was around $150 million per quarter, the peak is nearly twice as much in the second Phase. The peak output is 5x higher.

The cost of Phase II was $1 billion.

[I had to guess whether the Sep 09 and Dec 09 M&E spending was for 3GS or whether it was to prepare for the ramps in the new products about to be launched in the third Phase.]

Phase III: The iPhone 4 and the iPad

Phase III begins with spending prior to the launch of the iPad 1 (March ’10) to the last quarter (ending June 2011). Coupled to this is production starting in quarter ending June ’10 and ending in the last quarter.

Note that due to the time offsetting on production, the output from the spending on the quarter just ended will not be known until Apple publishes their shipments for the June quarter (scheduled for October 18th).

The relationship between pre-dated spending and production one quarter later holds quite well. There is a “surplus” of spending in December 2010 but that could be seen as the ramp being prepared for the second iPad.

Phase III cost is $3.7 billion so far.

Note again the change in scale from the previous two Phases. Peak M&E expenditures are around $900 million per quarter while production peaks at around 35 million units. This is a tripling of spending coupled to about a doubling of output.


The data suggests spending on equipment is correlated with the volume of production of its iOS devices.  However, Apple is understood to be a company that outsources its production and does not “own” its own factories. Claiming that it keeps equipment used in the production of iOS devices on its books is an extraordinary claim.

I make a further claim that the scope of spending itself is extraordinary.

The following chart shows the three asset classes discussed in the three latest posts relative to each other (quarterly change in asset value).

In How much does an Apple store cost? I noted that the spending on leasehold improvements of $2 billion over a few years is significant and sustaining and largely asymmetric to competitors. You can see that spending in the grey bars above.

In The down payment on iCloud I noted that spending on Land and Buildings is significant and sustaining to iOS but not on a scale many can match. Those costs are shown in the blue bars above.

If, as I claim here, the yellow bars show the spending on Machinery and Equipment used in the production of iOS devices, then the commitment Apple has made to controlling production is even higher. In December 2010, M&E expenses were 50% higher than the spending on the data center and the new Cupertino campus put together.

The M&E assets have cost a total of $6 billion. The Apple stores have cost $2.3 billion and land and buildings $2 billion.  In other words, Apple’s machinery and equipment is worth much more than all its buildings and stores put together.

Compared with what Apple spends on other fixed assets, M&E is spectacularly significant.

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.


It may be too early to draw conclusions from this analysis. The claims should be debated and the claims should be tested, but I can suggest some tentative strategic implications.

Last December I wrote that I thought Apple should use its capital to own the means of production for iOS. I reasoned that device supply was its biggest deficiency and that perhaps ownership would allow them to become better at it.

Indeed, Apple has used capital to ensure it has better control over the supply of components and to also perhaps ensure capacity of production of those components.

But this analysis shows that Apple has gone much further toward integrating its value chain. It suggests that a large part of the tooling in its supply chain is owned by Apple. It suggests that those tools are put out of reach of its competitors.

The implications could be profound but given the length of this post, I’ll leave that discussion for another day.


  1. Some of the capital expenditures were also allocated to servers or “information systems hardware, software and enhancements.” From the Annual Report 2010:

    Capital Assets. The Company anticipates utilizing approximately $4.0 billion for capital expenditures during 2011, including approximately $600 million for retail store facilities and approximately $3.4 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.

  • Anonymous


  • Can’t these costs be servers too? They are possibly factored in as costs of iPhones as Siri needs server power. Also they are used to “produce” iCloud. Just a thought.

    • Anonymous

      A quick back of the envelope calculation makes me think that only a tiny proportion would be servers, unless you think apple buys more than a MILLION servers. Per year.

      • Didn’t check the figures yet, but Apple replaces servers every 3 years(?) and the business booms. It is lots of servers. Would be interesting to compare this to Googles figures. How much is Google spending on servers?

      • Q is too that how much of their own servers does Apple use? Xserve is no more, but they can still make what ever they want.

      • Anonymous

        See my other comments – Google has a total net investment of 4.6BN in servers – and they’re thought to be one of the top owners of servers in the world

        See for instance

        Oh and you can be sure that Apple doesn’t use Xserve to any significant degree – it would be far cheaper for them to buy servers from Dell et al. than make their own at this point.

    • The question is one of scale but also of why would spending on servers track closely with iOS device production?

      • They must run together. Each sold Siri instance links to more server power beeing needed. Each iCloud User means more storage and syncing abilities. So these two do track.

      • Significant spending on M&E began well before the iPhone 1 shipped (December 2006). In that case we would have to assume it was tracking iTunes. But then again, App store did not open until 2008. So server capacity to the tune of $400 million would have to account for incremental iTunes music consumption on the iPhone 1 and iPod touch.

      • Well obviously iTunes needs servers, but it might be a bit much. At the same time I am wondering what kind of equipment they would OWN. I mean production is outsourced.

      • Additional comments from the company’s annual report.

        Capital Assets

        The Company anticipates utilizing approximately $4.0 billion for capital expenditures during 2011, including approximately $600 million for retail store facilities and approximately $3.4 billion for product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements.

        Clearly it’s both, but my bet is that tooling and process equipment is the bulk of the cost.

      • Frank Capra2

        $600MM for the stores seems really high… I would think most of this is for new store openings, but they are only opening like 50 stores world wide this year,so that seems high.

        The only other thing I can conclude is all the IPADs they have put in all the stores next to each product… There has to be 50 IPADs per store in use now that were not in use say 1 year ago… At $500 each that is about $25,000 per store X 400 stores = about $100 Million. Something is still missing here… So we have say $100 Million for the Ipads, then lets say it cost an average of $4 million per new store to open, which is probably very high as they lease all the land. If they open 50 new stores that is $200 Million… So where is the other $300 milion of the estimated $600 million going?

      • Ben Rosengart

        Apple doesn’t pay $500 for an iPad.

      • Anonymous

        I believe that Apple’s primary reason for capital investments in manufacturing equipment is to drive their costs down. Automating is best with simple product lines which last for a long time, like the iPhone, and gives Apple the lowest manufacturing costs. I suspect that one of the reasons no one can match the iPad’s low costs is that the process has been highly automated, and the future increase in robotics is to retrofit the iPhone line.

      • Anonymous

        Your suspicion that iPad production is highly automated is interesting . Foxconn has been reported to be opening up iPad production in Brazil very soon and very quickly.

        I’ve always been puzzled by this development wondering how Chinese mass production techniques based on tens of thousands of campused workers could be quickly implemented in Brazil. Your idea answers the question.


        Please consider these additional drivers for Apple’s investment in M&E:

        It is a way to eliminate and correct the massive labor/human rights issues that are endemic in all mass hi tech production device today.

        It is also a way for Apple to scale production 10x the current production scales since owning/designing the robotics allows them to duplicate and open production quickly in other cultures and locales.

      • The whole thesis of this post is that “outsourced” is a red herring. Apple buys a (significant?) part of the equipment that is used in the factories that produce its products. What are the benefits of ownership? Why tie up capital in this asset class when those tools could be owned by its service providers?

        Answering this question may shed new light on what Apple is up to.

      • Luis Alejandro Masanti

        “What are the benefits of ownership? Why tie up capital in this asset class when those tools could be owned by its service providers?”

        With the introduction of unibody, more machine tooling was needed, and unibody made a great difference to Apple’s products over competence.

        Owning the tooling machines assures Apple no other can have the same procedure.

        That’s, maybe, the reason to own the tools and not the manufacturer company: keep away competition!

      • tmay

        I agree, and it has worked. I seem to recall that Apple has furnished thousands of machining centers to Foxconn et al, and that the lack of similar capability was the reason that other Asian builders felt that not only could they not compete on price with MBA and further, but that they couldn’t compete with the unibody design. The first of the Ultra Books bear this out, being much less the premium design than the MBA.

        Somewhere in the future is Liquid Metal, an exclusive license for mobile in hand, and a mere single production machine (at the time of license) available.

      • Good points. Looking forward to your continued analysis and will continue reading this religiously 😉

      • Anonymous

        There are a couple of obvious advantages:

        1) exclusive control of the equipment
        2) Apple’s low cost of capital compared to that of the suppliers
        3) dedicated plant purchase constitutes a risk, and assumption of risk should allow for increased rewards

        Essentially there are two reasons to outsource, one is to shift risk and capital expenditure, the other is to leverage expertise. You’ve provided convincing evidence that Apple is mostly interested in the latter.

      • MacMarc

        These are great questions for the next financial conference call!

      • Ajs

        Apple is no longer capital-constrained, so tying up capital is not the same for them as for a company with that constraint. Besides possible operational advantages to ownership, maybe there are tax advantages to these expenditures when viewing Apple as a whole?

      • Horace,

        While Apple does not own the ‘factories’ that make their products, my guess is they do own the test systems that get deployed in these factories.

        Why? Standardizing testing & production processes gives Apple great flexibility in terms of adding or replacing factory partners. Equally important, this gives them the ability to scale production more quickly vs depending on each factory to come up with their own test systems.


      • Anonymous

        It’s very unlikely that Apple own the majority of their iTunes related server kit, for practical reasons. First they need servers in multiple locations, to serve multiple markets. At the very least they need US, EU, and Asia. Then they need multiple sites per region to handle contingency and failover. Far simpler for a firm with Apple’s scale in net services to use 3rd party data centers.

        Moreover we see that Google only spends around 750mil per quarter on machinery, presumably almost entirely for datacenters. Google’s net investment in servers is in fact $4.6BN. Apple cannot require more than a tiny fraction of the server hardware that Google needs.

      • Ajs

        Not wishing to disparage Apple’s engineers who I’m sure are excellent, but it wouldn’t surprise me at all if Apple required 10x the hardware for an equivalent level of service as Google. Performance optimization of services is hard; it’s easy to make mistakes that cause order of magnitude problems; and the culture and history of both Apple and Google suggests that Google would be better at this. In the same way that you would expect Apple products to have considerably better usability than competitors; it’s reasonable to expect Google to be better at wringing value from the hardware.

      • Anonymous

        Google’s exceptional expertise lies in providing complex services such as search with simple low cost hardware – however iTunes is a simple service, and already lends itself to a simple distributed solution.

        Fancy software systems and no-sql databases aren’t required. Just a lot of storage, and a lot of bandwidth. Google may have some advantage when it comes to storage solutions with an in-house tech, but I doubt it’s 10x cheaper. Bandwidth won’t be either.

        Finally Apple’s network needs aren’t even a 10th of Google’s, they may not even be a 100th.

    • Michel

      I was thinking the same thing, surely part of the M&E spending is iCloud related.

  • Anonymous

    In other words, Apple spent nearly three times as much as Nokia on the instruments of production for one third the number of devices.

    I think we need to be a little careful here. As best I can tell from Nokia’s financials, they are stating their Plant&Machinery figure as net, ie. post amortization&depreciation – whereas you are using Apple’s gross figures. Also while most of the money may be to support iOS, at least some is to support Mac, say around 500 million.

    Correcting for that could easily switch this to being a factor of 2 rather than a factor of 3 – though your overall conclusion clearly holds – per-device, Apple has a far far higher capital investment.

    • Thanks. I made the correction. I don’t have a break-down of depreciation and amortization for each asset in Apple’s PP&E so it’s impossible to determine exactly how much is M&E capex.

  • Anonymous

    Wow! What a catch.

    A few months ago there was a report that Foxconn was going to buy millions of robots to lower labor costs and improve production efficiency. I wonder if this is Apple’s doing.

    • Anonymous

      I found the reference:

      Partial quote:

      “Foxconn has a reputation as maker of our much-beloved iDevices. It also has a reputation for inhumane living and working conditions for employees in its Shenzhen-based plants.

      One way to potentially fix that tarnished image: replace some of those workers with robots.

      One million robots, in fact, hopefully all in place within the next three years. The robots will be tasked with mundane tasks such as welding, spraying and assembling, which humans currently do. Foxconn currently uses 10,000 robots to supplement its 1.2 million human workers in its production process.

      Foxconn CEO Terry Gou said in a statement Friday that he wanted to shift the company’s employees “higher up the value chain, beyond basic manufacturing work.” This would enable the Shenzhen factory to improve its overall working conditions, and create increasingly sophisticated products, he said. IDG News was first to report the news.”

  • Pingback: Sunday links: staying true | Abnormal Returns()

  • Ajay S

    Apple probably invests in Tooling and equipment to keep the option of changing supplier if required in future.

    New supplier using proven, working equipment reduces QA cycle by a magnitude.

    • Rj

      Moving all of that equipment, however, probably makes it mostly non-functional.

    • Rj

      Moving all of that equipment, however, probably makes it mostly non-functional.

  • Alan

    Well Macintosh sales have also increased quite a bit over that time and it is known that they use an aluminum process that is expensive as well. While the numbers are much smaller (around 12M / yr vs 100M / yr for iOS devices) the ASPs are higher, the number of discrete components is higher, and there is more aluminum involved. Maybe adding unibody MacBook sales to the chart would show a similar correlation and might explain some of it.

    Right now 2.9B / 118M devices works out to $24.50 per device which would be much larger than the expected production price.

    How would equipment such as this be depreciated? Is there some hint in the tax filings? The schedule for that should give an indication of how long it’s expected to be used. If they are matching production equipment quarter to quarter with devices that seems like it could lead to a severe oversupply of equipment if sales levels ever drop or taper off.

    • Anonymous

      We can get a rough estimate for the depreciation, but Apple don’t break it out for just M&E, so we’re seeing it averaged across all of PPE. At any rate, it is averaging as a 20% annual depreciation rate, or a 5 year expected life.

    • Anonymous

      I think this is right. A CNC machine is usable on many different products across Apple’s product line. And the same machine can be used on a new line or increase in production of a different line and have a useful life of many years.

  • Anonymous

    Some other data for quick comparison purposes

    Motorola: Gross $1.7BN, Net <800mil
    RIM: Net $2.6BN (includes property)
    HTC: Gross $350mil

    I think we need to take some care in interpreting this however. It's entirely possible that some of the difference is due entirely to balance-sheet shenanigans – ie. firms shifting stuff off balance sheet by use of leasing agreements. The data I found for Pegatron suggested that they only owned $7million in M&E, which can only be explained by the heavy use of leasing.

    • Anonymous

      Unless Apple owns most of it.

      • Anonymous

        Pegatron is only a secondary supplier to Apple, most of their assembly is by Foxconn (who unfortunately don’t seem to publish much financial data, at least not in english). So if all of Pegatron’s equipment is owned by their customers, then we’d see it on the books of Asus etc. Asus has around $100mil in M&E, which would seem too low to support their business. Leases seem an unavoidable explanation.

  • Manuel allemann

    Great thesis so far!
    After antennagate, Apple revealed their inhouse cellular test facility, mentioned costs of around 100 millions for the antenna labs.
    I wonder where those costs reside and what other inhouse of a similar magnitude exists. How much are all the latest and greatest tools in their Cuppertino workshops to design the devices? Where does the gathered traffic/ personal data get they collect get processed? Do they have other test facilities regarding maps, Nuance/ voice or other unrevealed projecty?

    I think while your thesis mainly stays true, there are a few not insignificant points to keep in mind.

    Great work as always!

  • (deleted)

  • Alex Park

    It is a common practice to pay for product specific machinery (tooling/fixtures) and test equipment even if manufacturing is outsourced. (Contract manufacturers can not cover the
    costs unless margin is thick enough. And the margin is usually thin.)

    And if Apple paid for the machinery and equipment, then they are owned by Apple.

  • Anonymous

    It’s getting too late for competitors now. The size, cost and execution level Apple is playing at is too high for anyone to reach. They are buying their own equipment, have exclusive use of it. This is the latest and greatest. Then when it becomes dated they will sell it back to foxconn (manu) and start the process all over.

    Apple essentially already owns it’s own factories, at least the hardest, costliest part, the equipment. There is no reason for Apple to do the remaining 5%(arbitrary figure) that would encompass owning it’s own factory.

    • Anonymous

      Well that’s something of an exaggeration, Samsung has enormous cap-ex. At the end of 2010 for example Samsung Electronics were at $46.5BN in PPE, having gained $8BN over the year. Most obviously goes into component manufacturing, but then their SAMOLED components are close to being an exclusive for their devices.

      • Anonymous

        Aren’t you combining different Samsungs into one? It is a group of companies, essentially. The part that makes phones does not make components. They part that makes components has to bid for the phone maker’s business, just like everybody else. Some Samsung phones use Qualcomm SoC’s.

      • Anonymous

        Absolutely as I actually did say, and we obviously can’t compare their capex directly against Apple’s because they are involved in so many high capital businesses that Apple isn’t such as Displays and Chip Foundries.

        But they do demonstrate that Apple’s investment in M&E is hardly some insurmountable barrier to entry. Samsung could make the same investment, Googorola could, Sony-Ericsson could, LG could.

        In the world of big firms, this isn’t a particularly big capital investment.

    • Anonymous

      I’d say that would be true if they’re intent on perfectly emulating Apple. But they aren ‘t. Apple’s aluminum unibody construction is not going to be emulated, for example. And arguably it doesn’t have to be.

      • Anonymous

        Sorry – above post was directed to TravisLewis….

      • Anonymous

        If you don’t cut metal, you can’t build a MacBook Air -class device. Apple did not decide one day that cutting metal would make a prettier notebook, they had to do it to make a thinner notebook.

        By far the best-selling PC’s in the world are iPad at the low-end and MacBook Air at the high-end. If a PC maker can’t make systems in that class, they will see their sales go down until they are a server company only.

  • Ask

    Excellent analysis of PPE. I teach accounting at and would love to use this as an excellent exhibit of the analysis that can be don on PPE and more importantly the process from which insight can be gained.

    • Feel free to use the material. Contact me by email if you need the data.

  • Guest

    So when Terry Gou is ordering machines to produce iOS devices, he’s just billing Apple?

    « When Apple’s iPhone 4 was nearing production, Foxconn and Apple discovered that the metal frame was so specialized that it could be made only by an expensive, low-volume machine usually reserved for prototypes. Apple’s designers wouldn’t budge on their specs, so Gou ordered more than 1,000 of the $20,000 machines from Tokyo-based Fanuc. Most companies have just one. »

    • Xavieritzmann

      That sure is the implication of this article! This is mind boggling. Up until now the general assumption was that Foxconn et al sourced their own capex funding.

      That all Apple provided was, at most, advances on firm orders and/or BOM.

      To imply that Apple actually owns the equipment on which its products are made is quite mind-boggling. Also raises the capital risk of Apple because that´s a lot of capex stranded in China if relations with that country sour up.

      • Even if the China relation sours up, the capex [machinery (tooling/fixtures) and test equipment ] is depreciated within 5 years anyway, so it is not a fatal impact. (land/building is another matter… I think that’s why Apple is not owning factories … )

      • If Foxconn runs 3-shift system, then the life-span of machinery and equipment would be much shorter … they would be 100% depreciated within 2~3 years…

  • Anonymous

    The assembly of the device is one thing, but where do A4, A5, and so on fit in here? Aren’t they essentially motherboards with microscopic components assembled on them? Doesn’t that require tiny little screwdrivers, so to speak? And aren’t those hideously expensive? Isn’t the chip designing part of Apple sort of an assembler also?

    We see their expenses ramping up before iPhone 4 … that was the first phone with an Apple chip.

  • Pingback: Segment Data of Divisions within Apple Inc. | ArturJazowski: Business Media()

  • I wouldn’t have considered this possibility until looking at your analysis, but there are a few things that jump at me which may be good examples of proof of this hypothesis. Apple has innovated in manufacturing in a number of ways, including things like making curved glass and carving aluminum. I’m sure there are many other aspects of the manufacturing process that they’ve improved on that are not as openly spoken of as well.

    For these processes, it may be that they want to protect their investment by providing the tools for doing so to their outsourced manufacturing partners without opening the kimono, so to speak, and reveling too much of the underlying workings of them. If Apple owns and maintains the devices, and the folks who operate them at Foxconn basically just see an input and an output but none of the workings, that may help minimize the likelihood of someone being inspired with a similar idea of their own which they could then sell (or contract out) to other clients.

    One of the real differentiators with Apple products is the outstanding build quality. It would make sense that they would take whatever steps possible to protect that advantage for as long as it is viable. Other companies could certainly develop the same technologies, but forcing them to do the hard work instead of copying Apple’s R&D investment should have a significant benefit.

    • Rj

      If a proficient engineer has physical access to a machine and can watch it operate, they should be able to copy it. Of course, that is still more complex than simply being able to re-tool it and use it to manufacture competitive products.

  • Anonymous

    Horace, (recopied from a deeply nested post)

    Please consider these additional drivers for Apple’s investment in (robotic) M&E:

    It is a way to eliminate and correct the massive labor/human rights issues that are endemic in all mass hi tech production today.

    It is also a way for Apple to scale production passed the mid 9 figure levels (coming in 3 years) since owning/designing the robotics allows Apple to duplicate and move high quality production quickly into new locales and cultures (see Brazil).

    • I think this is a bit more ambitious than what Apple is doing. I think they bought more mundane equipment and tooling. They are just doing it on a huge scale. There might be some additional innovation happening but I think the innovation in process engineering is just beginning. Robots are not likely to be a large component of the budget.

  • Anonymous

    I think someone needs to look at Apple’s financials from when the unibody MacBooks launched. I always suspected that Apple may have paid for those 1000 Fanuc CNC machines. It was such a large order and so unusual, and Apple paid such attention to the process as if it were proprietary, which it’s not. Perhaps, it was pride of ownership, and not just pride of design process?

    Remember, Apple had a highly automated factory in Cupertino? back in Steve’s first tenure at Apple, and Steve has a habit of revisiting his ideas from the past.

    • 8625330

      I think you mean NeXT not Apple.

    • That’s a good reference. The Unibody Mac started shipping in 2008. Assuming investment began before the Macs began shipping, the first two quarters of ’08 M&E spending was $250 million. The first two quarters of this year M&E spending was $1.3 billion. The Mac volumes have not increased enough to justify this increase (5x) in spending.

  • Alan

    It is odd that the cost correlates to the production level rather then the CHANGE in production level quarter to quarter. I would assume the equipment already purchased would be sufficient to maintain the same production level month to month and that new equipment would only be needed for increasing that production level.

    Otherwise it wouldn’t be production equipment but rather parts which I’m sure are counted in an inventory account somewhere.

    • Anonymous

      Given that Apple’s production is growing exponentially, the change in production should be proportional to the production. You’re right though, it would be interesting to see the correlation with change in production.

  • Guest

    1.”The data suggests spending on equipment is correlated with the volume of production of its iOS devices. ” – was there any earlier thought that it could be otherwise?

    2. I don’t get it how you can break out cap equipment spending on product vs equipment in the data centers. Did Apple break those out in their 10K?

    • There is no break out of data center spending as part of overall M&E. You can see how Apple reports it in the footnote. The reason the correlation with production of iOS devices is interesting is that it suggests that the bulk of the spending is on tooling and manufacturing equipment rather than information systems. In other words, the answer to the second point is in the first.

  • So the question is, Is Apple spending all that money on Machine Tools, or Servers?

    Its probably BOTH, but my guess would be the latter that is taking the lion’s share. The language in Apple’s Financials (“including information systems hardware, software and enhancements”) certainly allows for that possibility.

    There may very well be legal and accounting mechanisms that would permit Apple to own Capital Goods inside supplier facilities. But from a use-of-capital perspective that doesn’t make too much sense, at least on a wide scale. The only thing that DOES make sense, to me at least, is that Apple has decided to cut Google out of the equation.

    Look at it this way: Google makes ALL of its money serving up display ads for people who want to buy something. Everything else Google does, be it Google Earth, or YouTube, or Gmail, is extraneous. And Google is busy pouring billions into Android, hoping to maintain its Search Revenue leadership as the world goes mobile.

    Except, what if the dominant model for mobile search isn’t done on a Keyboard? Its done using your voice – using Siri. And if Apple has a data center, packed with tens of thousands of servers – then all it needs is a search algorithm (and an ad sales department) to make Google all but unneccessary.

    • I would be willing to bet that the majority if not the vast majority of spending is on machinery and equipment for use in process manufacturing. If you compare Apple and Google’s CapEx, Google spends more but not much more than Apple (and Google counts its real estate in that mix). It’s highly improbable that Apple needs as much data centers that it needs to match Google’s CapEx.

      • Apple only needs to spend as much as Google on data centers if it intends to compete with Google on some level. (A circular argument, I know…)

        Thanks for the fantastic research/insight. The question of what Apple is spending all that money on is an intriguing one. We may not know the answer for some time.

        But, it seems to me, that Apple is a company that works on a long time-scale. Buying machine tools and stamping machines seems somewhat of an “Industrial Revolution” business strategy. Seeing the future of the Search Advertising business, and quietly building a software and hardware infrastructure that can disrupt the existing market leader seems much more their style.

      • Owning industrial machines on a vast scale today is as asymmetric as you can get, which is why I firmly believe it’s what Apple is doing. I’ll write another post about the strategic implications.

        You may also look at the linked post from December:

    • “then all it needs is a search algorithm”

      Don’t minimize this. It’s really hard and you have to keep going full blast all the time just to keep in place, let alone improve quality. Also, one large datacenter does not make a reliable global service. Google has many many datacenters all over the world.

      • I commented in the Christensen thread that the TYPE of search that is done on a mobile device is probably going to be fundamentally different from the sort of search one does on a laptop or desktop. Less deep search for minutiae – more search for the nearest pizza joint and gas station. Not only is this going to be easier to create effective (ie “good enough”) alogrithms for – but its also going to be easier to monetize.

        Your point regarding “one large datacenter” is valid. But who is to say Apple can’t expand its datacenter footprint to match the international expansion of iTunes – and Siri?

  • “it’s very likely that Apple spent twice as much as Nokia on the instruments of production for one third the number of devices”

    Thanks for getting at one of Apple’s key differentiators. Decades ago the printer (and soon-to-be MacArthur fellow) Richard Benson pointed out that the difference between a well-made and a poorly-made fifty dollar book was the difference between five dollars worth of printing and paper and binding and ten dollars worth of printing and paper and binding.

  • Here is my estimation of server cost for each new Apple user:
    [1] a low-cost quad-core server = $1,000
    [2] each core should be able to support 10 users (1:10 over-subscription)
    [3] each server can support 40 users, i.e. $25/user

    So Apple must spend $25 for each new iDevice customer.

    Which means more than $600 million for each quarter…
    (Assuming new 24 million iOS users per quarter)

    Now if Siri is considered, the over-subscription rate should be
    more like 1:3~1:5, so the server cost will be more than doubled.

    • Anonymous

      10% of a server core is more powerful than an A4, so what on earth is it that you think my iPhone-4 is doing all the time that it demands such heavy back end servers? A single server core could support easily 100 clients simultaneously, and the average device isn’t making requests more than a small percentage of the time.

      Divide your estimate by 100 and you’d be approaching reality.

      • In terms of instruction/data cycle, a server core is only 2~3 times better than A4 chip. A low-cost server core is clocked at 2.4~2.8 GHz and A4 chip is clocked at 1GHz. And a server core must be constantly running for:
        – data/file/app/e-mail/iCal sync ( i.e. iCloud)
        – “Genius” feature for iTunes (Music/App)
        – device status backup/housekeeping

        *** iCloud is not a local HDD. It takes several network processes in CPU,
        i.e. CPU cycles are used up.

      • Anonymous

        Ok, lets start with the easy bit. You seem to have a very simplistic idea of CPU performance, and are equating it with GHz. That is simply hopeless, even on a per core basis.

        For example, for integer performance, a single A8 ARM chip at 1GHz is around 2k MIPS, a single i7 core at 2.6 Ghz is 20k MIPS.

        As to the idea that there are processes on Apple servers continuously using CPUs to provide each of those features for every device – well that’s simply couldn’t be more wrong.

        The only permanent connection that an iOS device makes to Apple is for push notifications, and for 99.9% of the time that connection is consuming no resources beyond a bit of memory and a port. The other services will be transactional, and will only consume resources when an operation is actually required.

        How else do you think that web services are able to serve a population of billions without hundreds of millions of servers?

      • Maybe I’m too conservative about the over-subscription ratio…
        (1:20 is comfortable server:client ratio for general office deployment.) But I figured 1:10 ratio is needed for traffic surges.

        And as for Dhrystone MIPS, it features unusual code that is not usually representative of real-life programs, and Dhrystone’s small code size may fit in the instruction cache of a modern CPU, so that instruction fetch performance is not rigorously tested.

        Also, in case of network intensive processes, data cache doesn’t help much since the data cache hit rate is fairly low…

        But, it is only my estimation, so only Apple knows how many servers are needed for their customers…

      • Anonymous

        1:20? That’s not even required for Citrix!

        A dual opteron 848 (single core CPU) machine in 2007 could support 160 concurrent users, and allow them to run office. 80 simultaneous users per core in 2007!

        Your estimate results in Apple needing 6 million servers, even though best industry estimates are that even Google has under 1 million.

        I’m sorry but you’re not just a little bit wrong here, you’re enormously, glaringly, ludicrously wrong.

      • As I’ve said, it is only my estimation number for smooth operation requirement (minimum response delays). I guess Apple may not have enough servers now, so it is why Apple is having iCloud hiccups and Siri connection issues.

        Please note that even 1 server can support 1 million users if infinite response delay is allowed. (according to Queueing theory…)

        I only wanted to guess the number of servers needed for a good service.

      • Anonymous

        Apple almost certainly don’t have enough servers for Siri, which is probably why they’ve chosen to release it as a beta and only on the 4-S. That alone should demonstrate that they don’t have 6million machines available!

        Their servers for other operations seem to be fine, there were a few hiccups on launch day but that is to be expected. Nobody builds out enough capacity to server all their users logging in at once – it would be a grotesque waste of resources. The same applies to SIri of course, a new user would be expected to play with it considerably, whereas once we’ve included it in our daily workflow usage will smooth out.

        The number of servers required for a good service (non-siri) are probably under 50k, and certainly under 100k.

        What Apple should be doing is making better use of MS and Amazon cloud services to handle very high launch day demands, not buying world-busting numbers of servers.

  • Pingback: How did I get the iPhone number so wrong (part II) | asymco()

  • Pingback: Putting capital to work | asymco()

  • Pingback: The tipping hand of production: How Apple foreshadows iOS volumes | asymco()

  • Pingback: The role of capital [1] | asymco()

  • Pingback: The role of capital [1] | asymco()

  • Pingback: The real threat that Samsung poses to Apple | asymco()

  • Pingback: Cách kinh doanh, không phải thiết kế, mới là mối đe dọa thực sự từ Samsung tới Apple | DEVLOVER()

  • Ooh.. A huge investment in Machinery equipment. Certainly will help them to produce more quality products because that is what they are all about right? Give their competitor a tough fight through quality. And I am sure they will see that running the business smoothly and efficiently is what their needs through spending in software upgrades. These are a good step to be taken to boost their production and development.