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5by5 | The Critical Path #10: The Means of Production

Dan and Horace talk about Apple’s quarter with an eye toward the operational commitments being made. We cover the cost of store openings, data center purchases and machinery used in manufacturing iOS devices. By tracking capital expenses we can get a clue about where Apple wants to go.

This episode is sponsored by Sourcebits, Handelabra Studio, and Shopify.

via 5by5 | The Critical Path #10: The Means of Production.

  • http://twitter.com/AndrewKorf Andrew Korf

    Really enjoy your regular analysis on 5by5 one of the best hours they offer weekly. Thanks Horace. It would be great to hear your thoughts about mobile penetration at the the bottom of pyramid (BOP) perhaps as 1st/primary/only access devices to the internet for many both here in the United States and on the global stage.

  • Magnus K

    …and there we got the explanation to why the iPhone form factor and physical was maintained in the 4-> 4S transition: the huge investment in (unique) production capabilities for millions of glass-and-steel cases for the iPhone. It also explains why competitors cannot imitate the looks – simply difficult to get manufacturing in volume, as Apple have bought it all. Plastic backs are much easier to make – leave that for the competitors. Finally it explains why the old phone models are maintained as lower-end: it contributes to the payback of the manufacturing machinery. Thanks for the insight Horace!

  • Anonymous

    Horace, I think you were wrong when you said that Apple has half of Samsung’s Capex. From my reading of Samsung’s data they have a quarterly capex of 5billion USD just for electronics – that’s not including the ship-building, or the other heavy industry.

    • http://www.asymco.com Horace Dediu

      Thanks. I need to look at a thorough comparative analysis. Dirk is working on in.

  • Bill

    Can your “host” do anything but sound like a thirteen year old? “I am so happy that I can talk to someone like you.” Puh-leese. This was one of the weaker shows and Dan is just embarrassing. Since it is obvious that he cannot ask an intelligent question, can’t you just feed him some notes ahead of time to steer the conversation? (What are the implications of Apple moving into manufacturing — winners/losers?; What would be the reasons they wouldn’t do that?; What is the outlook for Samsung/LG/HTC?) Today’s episode repeated too much of the past. Tell Dan to stop mailing it in or take a few more weeks off.

    • http://www.informationworkshop.org Mark Hernandez

      We’re all very different from each other, and it’s fine for everyone to be themselves, including allowing YOU to get bent out of shape about Dan. Dan is an excellent host because he always steps out of the way and lets the guest speak about whatever s/he wants to, but is always ready to guide should the conversation stop.

      This episode, like all the rest, was 99.99% Horace. Horace ran the show and was telling us what he thinks we should know, and an hour wasn’t enough! Horace had the opportunity to paint a complete picture without the host interrupting and short-circuiting his train of thought.

      On the other extreme, for example, is a host like Jon Stewart. How often does one of his amazing guests say “there are three important things to consider” and the train of thought gets derailed by Jon asking another question after only the first point was made. Listen to Gene Steinberg of the Tech Night Owl interview Daniel Eran Dilger and be prepared to pull your hair out.

      Finally, Dan shares the sentiment many of us have. Of the people following Horace, a small number are his direct peers, and the vast balance of the rest of us are those who are thirsting for the straight poop, and rarely getting it from the over 150 Apple-related BS-ridden lazily-written rarely-researched news sites and blogs.

      It’s a privilege to have Horace illuminating our space with fundamentally important information that comes from no one else, really, and we take great delight in hearing what he has to say. Our jaws are always dropped, we are amazed and feel informed afterwards, and we sometimes feel like star-struck groupies. That’s okay too.

      Thanks for listening. :-)

      • http://twitter.com/beno1604 Michel

        Well said. Critical Path is my favorite of all the 5by5 shows, and I think Dan is 100% right when he expresses his appreciation for an extraordinary guy like Horace and then mostly gets out of the way.

    • http://twitter.com/nursegirlt Thea

      I disagree. Dan asked a couple of clarifying questions that wouldn’t be needed by anyone who hangs out here, but would be helpful for the general audience, and then he noted how different Horace’s analysis is from anything else that’s available in the general Apple or tech press circles.

      I think it might be less frustrating for you if you expect the Critical Path to be primarily aimed at 5by5 listeners and only secondarily interested in Asymco readers. That’s why Dan’s asking the questions that people who haven’t read Horace’s last posts would ask, rather than the questions that people who are on here everyday would ask.

      • http://twitter.com/Moeskido Moeskido

        Speaking as a member of that general audience, I’m grateful for the efforts Dan makes to include listeners who aren’t deeply experienced at discussing finance.

      • Terri MacMillan

        I agree. I read asymco, but I only understand a small fraction, yet I find it fascinating and I am slowly learning more. At the same time the Critical Path podcasts are easier to understand, in part because of Horace’s storytelling style, but also because Dan is such a positive, sincere presence and a great stand-in for listeners who want to learn more.

  • poke

    I’m glad you mentioned Apple becoming a $100 billion / year revenue company. That’s what I think we need to start getting our heads around. Their profit for the 2011 fiscal year was $26 billion. In 2012 they will be up there with the big oil companies. What happens when a technology company – a consumer hardware company with so few products you could put them all on one table, no less – gets that big? The unibody Macs are an excellent example of how they use quality as a moat. I suspect we’ll see more of that. Premium products at unbeatable prices with huge margins due to the incredible scale and component purchasing power that comes with being big.

  • Robert Kim

    As an operations guy (supply chain side), Apple’s ability to pull off these things is fascinating and educational. People take for granted Toyota’s manufacturing and operations prowess (no justification needed), but it seems even Toyota could learn something from Apple (and vice versa).

    • TwangisKhan

      Does Toyota continually run out of product forcing customers into the arms of Honda?

      For all then accolades Tim Cook receives for his operational excellence, why does he continue to run out of product?

      Seems his supply chain gets broken again and again.

      • Lee Dehmlow

        As Horace has revealed, Apple’s products push the limits of the supply chain, and in fact nearly always require pulling the supply chain where it’s never gone before. Cook ( and what must be an extremely smart operations staff) have by any logistical measure performed extraordinarily well, and to do so while relentlessly producing best of industry financial results is an accomplishment in the tech industry. Demand is always an unknown, supply is what’s manageable, and Cook has managed that very, very well.

      • Anonymous

        No it does not “break” again and again. It merely tries to catch up to demand at product launch. At no time did the iPhone 4 ever run out other than when it originally launched.

        Furthermore, Apple did not run out of iPhones, they ran out of the newest model because of pent up demand. You can still buy the iPhone 4 and 3GS.

      • http://www.asymco.com Horace Dediu

        Your question is a very good one. It deserves a whole hour of discussion on its own but I’ll try to make a quick summary here.

        You’re right that production is broken.

        The reason operations for iOS seem “not good enough” vs. operations for car manufacturing is that iOS products are not good enough for the market, whereas cars are more than good enough.

        When a product is not good enough, you need to constantly improve it and fix it and make it perform according to the prevailing expectation in the market. The performance might need to be improved in terms of quality or price or choice or any number of things not just raw speed.

        When a product is good enough you can focus on optimization or non-product issues like distribution, production and segmentation.

        Because iOS and mobile computers in general are crummy and because consumers increase their expectations in response to what they are offered, they need constantly new “redefinitions” of what they are. Also consider that the infrastructure they depend on is also straining to support them. Every few years you need not to just deliver a new product but to change what job it’s hired to do.

        Using automobiles as an analogy it’s not that Toyota needs a completely new Corolla every year, but that Toyota would need to make a new car type every year. One year it needs to be a car for the road, the next a car for the road and the off-road and the next that and an amphibious car. It needs to change its engine and perhaps the fuel it uses every other year. It may also need to cope with new road networks every few years where they switch from dirt roads, to asphalt to perhaps friction-free polymer surfaces and even rails. It also needs to re-define the “user interface” so that every third version needs to replace the driving controls with something else. Since there is no licensing of drivers it must also contend with children driving and since there is little to no government regulation it needs to deal with hundreds of competitors who will draw down supplier capacity.

        Not only that but every year, the number of cars produced needs to double.

        What’s more, Toyota cannot run the lines continuously, but for a few quarters out of the year because most cars will be sold in a few months.

        Finally, there are hundreds of millions of buyers not just a few tens of thousands.

      • http://twitter.com/beno1604 Michel

        Even with all those advantages, it takes forever for a new car to be delivered. But of course you can not choose the color and upholstery of an iPhone. So all in all, a bad simile.

      • http://twitter.com/beno1604 Michel

        That is a terrible example, delivery of a new car takes place many months after ordering.

      • Bill

        A more relavent question would be, at a similar stage of development, did auto makers run out of cars? I am guessing that Henry Ford did.

  • Andrew

    Great stuff – it’s very informative. A layman’s version of HBR ?. I haven’t reached the end yet, so maybe Samsung gets more coverage, but if not, that company and other key suppliers would be a good follow-on to the machining and assembly topics covered in this talk.

  • http://twitter.com/onemikey Mike Schneider

    Do you have any thoughts on

    • http://www.asymco.com Horace Dediu

      Apple’s increase in CapEx is in proportion to their output which means that margins should not be affected. Think of CapEx and OpEx as being both scaled at the same rate. If they don’t change as a percent of sales then there is little impact on margins.

      Regarding the retail store data, see http://www.ifoapplestore.com/stores/charts_graphs.html

      The growth for FQ411 vs FQ410 is vs. the launch quarter for the iPhone 4. That was a huge quarter (note charts in link above).

      It’s amazing that Apple can get higher revenues during a transition quarter than during a launch quarter.

  • http://www.facebook.com/profile.php?id=100000728233984 Kristian Iskanius

    BTW Apple will not return the money to the USA when the money is needed for the universal expansion. There are “analysts” who thinks that Apple should do idiotic things like dividends or something. The amount of cash that Apple has is solely for the Apple porposes only. That is also why we invest to Tim Cook&Co

    • http://www.facebook.com/profile.php?id=100000728233984 Kristian Iskanius

      What is few billion between friends? ;)

    • Anonymous

      Except Apple doesn’t need 80BN in cash for ‘universal expansion’. They’re amassing cash far faster than they can invest it, and all it is doing is diluting the high growth stock with low growth bonds.

      We’ve been through all this time and time again – there is no doubt that at some point they will need to return cash to investors. The only question is how and when they go about doing it.

  • http://www.intomobile.com/ Stefan Constantinescu

    You really should switch formats.

    60 minutes isn’t enough. Though I’m glad you’re now doing weekly episodes, 90 minutes would be perfect.

  • Pedro Cezar de Andrade

    Horace, I just heard this podcast so sorry I’m late. You mentioned demand for iPhone is infinite, and I know you meant to say way greater than supply. But how can we actually estimate the demand potential going forward? It’s a huge market but there are disposable income limits. It would be fantastic to see the curve of price point / demand for phones in the world and the amount of stretch that is happening as people adopt smartphones. As you mentioned about AT&T, the marginal iPhone customer is going to be harder to get. Apple has kept iPhone average prices above $600 since 2007. Of course it’s going lower with the 3GS, but how much lower will it need to go to keep expanding share as smartphones become every phone? There are a few complexities involved, such as differences in pre-paid and post-paid publics and Apple’s potential market share per price point. This seems to be a key piece of the puzzle of iPhone growth in the future and I’d love to hear your views.