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The cost of building Galaxies (and iPhones)

Although Samsung and Apple are acclaimed as the leaders in profit capture for smart (and otherwise) phones, what is not lauded is how much they spend on capital equipment used in the making of these phones.

In 2012 Samsung spent around $20 billion while Apple spent about $10 billion (excluding leasehold improvements or Apple stores but including real estate).

Compare these figures with Intel at $11 billion, Google at $3.2 billion, Microsoft about $2.8 billion and Amazon $3.8 billion (including presumably new distribution centers.)

Screen Shot 2013-04-04 at 4-4-5.51.15 PM

What each company spends on differs depending on its business model, but as the graph above shows it’s easy to see that there is a class of “big spenders” who spend so much that it makes it hard to imagine just what $10 billion/yr could actually buy.

To get an idea of just how big that figure is consider that a Nimitz class aircraft carrier costs about $4.5 billion to build and it takes several years to do it. Or consider that the largest data center in the world probably costs about $1 billion or that the largest office building will cost between $4 and $5 billion. Either of these infrastructure projects are massive multi-year projects. Apple, Intel and Samsung spend well more than this every six months.

So it’s a special class of equipment which falls in the multi-billion dollar range: semiconductor process equipment.

Whereas in the case of Intel it’s the obvious target for the funds, how can we assume it’s the case for Apple and Samsung.

We don’t have proof but there is a remarkable correlation between CapEx and Semiconductors in Samsung’s divisional financial reports:

Screen Shot 2013-04-04 at 4-4-5.58.22 PM

We also have the historically reported allocation of CapEx as reported prior to 2008:

Screen Shot 2013-04-04 at 4-4-6.00.26 PM

 

Therefore I consider it safe to assume that the bulk of Samsung’s Capital Expenditures are in support of semiconductor production (note that this does not include display panels).

Note however that in the first graph, Samsung’s expenditures seem to be declining. Measured in Won, the level in Q4 ’12 was about the same as that in Q1 2010 and down 30% y/y. Apple’s spending also dropped sequentially in Q4 but was up 75% y/y. It’s also nearly ten times higher than what Apple spent in Q1 2010.

So the question I would ask is whether Samsung’s reduction CapEx (which is safely assumed to be supporting semiconductor production, and which, in turn, is, to a large degree, supporting Apple) is being picked up by Apple.

If so then then this would be evidence of the re-alignment of role and control in the value chain of a terribly important industry.

  • obarthelemy

    As you say, these are big complicated multi-year projects. I’m not sure much can be deducted form quarter on quarter variations. If instead of looking at Dec-12, you look at Mar-12, your conclusion is mostly reversed.

    Machinery deliveries, tax optimization, project schedules… can lead to money outflows being delayed.

    Year on year, maybe. It’s hard to figure that out from the graphs though. Is there a table somewhere ?

    • Kizedek

      No, what he said was, it’s hard to imagine how big these numbers are, because things like Aircraft carriers and office buildings are multi-year projects. He said that Apple and Samsung are spending these amounts every six months.

      So, what are they spending the money on? Some very, very expensive equipment, on the order of Intel.

      Next, if Samsung’s spending is going down and Apple’s is going up, then Horace is wondering if Apple is working to be less dependent on Samsung.

      • obarthelemy

        Are you saying Samsung build Fab plants in 6 months ?

        Hint:

        Update: Intel to build fab for 14-nm chips
        Mark Lapedus
        2/18/2011 3:01 PM EST

        “Construction of the new fab is expected to begin in the middle of this year and is expected to be completed in 2013.”

        http://www.eetimes.com/electronics-news/4213295/Intel-to-build-new-Arizona-fab-

      • Kizedek

        No, not necessarily. That might be part of it. What Horace has consistently said is that Apple and Samsung are adding equipment for production lines, or fitting out new production lines. Depending on what the equipment is to produce, that can be far more expensive than “simply building a whole ‘conventional’ factory from scratch.”

        This is the CapEx at work, and Horace has consistently tracked large spends by Apple to new product launches or ramp-ups in production and new releases in additional countries, etc. — very soon after the spend took place. Within a couple of quarters.

        Like Apple buying up pretty much all the specialized CNC machines in the world and outfitting their production partners assembly lines. Very expensive, but much faster than building a factory or an aircraft carrier.

        The same can be done with whoever might build Apples next chips — Tawain SemiConductor, or whomever. Apple buys expensive equipment and has it installed in their plants. That’s faster than building a new plant, and makes much more sense, because there is no plant cost and responsibility for Apple. Horace has consistently talked in these terms for a long while, and I think you have consistently played obtuse in order to contend with it.

  • deemery

    I see the Galaxy S4 pricing is “in line” with Apple’s: $199 for the 16gb version, $249 (vice Apple’s $299 – in my experience Apple ‘overcharges’ for RAM), etc. That made me wonder: Why can’t Samsung, with its tight vertical integration, produce phones at a lower price point.

    • obarthelemy

      But they do: a GS3 is 460 euros, an iP5 is 680 euros, incl tax, 16GB version for both. 220euros = the iP5 is 49% more expensive than the GS3.

      Linkies:
      http://store.apple.com/fr/buy/home/shop_iphone/family/iphone5
      http://www.cdiscount.com/telephonie/telephone-mobile/samsung-galaxy-s-iii-i9300-noir/f-144040203-samsungsghi9300n.html (a major French etailer, iP5 is actually a bit more expensive there than at Apple’s)

      Operators’ subsidies then modify that price, but I’m guessing retail, unsubsidized prices are a more valid comparison.

      • Sacto_Joe

        Yeah? And how much did the S3 cost when it first came out? Try $750 in Britain:

        http://www.pcadvisor.co.uk/buying-advice/mobile-phone/3355794/samsung-galaxy-s3-price-release-round-up/

        Heck, they’re giving ‘em away, and STILL losing market share in the U.S.:

        http://www.comscore.com/Insights/Press_Releases/2013/4/comScore_Reports_February_2013_U.S._Smartphone_Subscriber_Market_Share

      • obarthelemy

        1- You’ll have to explain to me the magic formula you use to infer GS3 sales from aggregate Android or Samsung sales.

        2a- Your pricing article actually says “Galaxy S3 for £499 SIM-free.” You’re only off by 50%

        2b- the iPhone 5 was launched 8 months ago. Are you saying Apple’s prices are still launch-period-inflated ?

        2c- Or are you saying that Apple routinely lower their prices after the launch honeymoon ?

        3- How are yesterday’s prices relevant to today’s situation ?

        You’re wrong, then wrong, then wrong, and then.. wrong again !

      • Sacto_Joe

        1. Not my point. Aggregated or otherwise, Samsung is losing market share in the U.S..
        2a. Interesting. You think $750 is worth twice as much as £499….
        2b. I’m saying you’re comparing the 5’s price to today’s price on a year-old phone. Not hard to understand, really….
        2c. Actually, that’s Samsung’s M.O., which is why their phone is now selling dirt cheap. Apple, OTOH, is clearly able to support sales at the original price even, as you (almost) pointed out, 7 1/2 months after they first went on sale.
        3. How are today’s giveaway prices for year-old S3’s relevant to today’s prices for 7 1/2 month old 5’s? Answer: They aren’t. So why, then, did you try to compare them? Answer: Because you’re a troll who is interested in proving his point far more than he is interested in sticking to fair comparisons.

      • obarthelemy

        1- read you own chart: Samsung went from 20.3 to 21.3 share.
        2a- editing your post to change £ to $, heh ?
        2b- the GS3 was relased closer to the iP5, and has broadly equivalent specs. The GS4 is almost twice as fast as the iP5/GS3 (http://www.primatelabs.com/blog/2013/03/samsung-galaxy-s-4-benchmarks/), clearly a new generation. Let’s compare comparable stuff.
        3- because comparing a 12 months old phone to a 7.5 old one ( 4.5 months difference) is more relevant than comparing a 7.5 old phone to a -1 old one (8.5 months difference). The GS4 is twice as fast as the iP5, clearly a new generation.

      • Sacto_Joe

        1. I stand corrected. Samsung grew its market share 1%. It was Google/Android that lost 2% market share.

        2a. Nope. Never touched it. Interesting, though, that you’d blame your own mistake on me….

        2b. The S3 was released in early May. The 5 was released in late September. That’s not at all “close”. And I’m not going to get in a pi**ing contest with you over specs. That’s another argument.

        2c. What? No rebuttal? Hmmm.

        3. You weren’t comparing the S4 to the 5. You were comparing the clearance price of a much older S3 to the price a much younger iPhone 5. It was, and remains, a phony comparison.

        You can run, but you can’t hide….

      • Sacto_Joe

        And re: point 2a, this is a copy/paste from the email alerting me to your post:

        ———(snip)
        obarthelemy’s comment is in reply to Sacto_Joe: Yeah? And how much did the S3 cost when it first came out? Try $750 in Britain:

        http://www.pcadvisor.co.uk/buy

        Heck, they …

        Read more

        You’re receiving this message because you’re signed up to receive Disqus notifications. You canunsubscribe from these emails, or reduce the rate at which we send them by adjusting yournotification settings.

        (snip)——–

      • whatareyoutalkingabout

        “2a- Your pricing article actually says “Galaxy S3 for £499 SIM-free.” You’re only off by 50%”

        Err, £499 is $760 USD…

      • http://loewald.com/ Tonio Loewald

        The only thing funnier than correcting someone and belittling them is doing it and being wrong. One of the things Apple does very well is not spam the world with new models while dropping the predecessor to bargain bin prices. I bought my iphone 5 six months ago, and a new iphone 5 costs the same. I don’t feel like a sucker for paying the introductory price, and I won’t be gunshy when the next model comes out.

      • claimchowder

        499 UK POUNDS versus 750 US DOLLARS is not “off by 50%”.

    • JohnDoey

      Galaxy S3 has a pen tile RGBG screen with no color management, not a color-managed true RGB screen like iPhone. Galaxy S3 has viruses and no emergency patching system, while iPhone has no viruses and the Apple Software Update system that has been patching Macs since the 1990’s. Galaxy S3 has Java phone apps, while iPhone has native C/C++ PC apps. The devices are not in the same class. The Galaxy S3 should sell for half the price of an iPhone. It masquerades as an iPhone in order to charge iPhone-like prices while delivering budget hardware and Samsung banks the difference.

      • obarthelemy

        You can go both ways: GS3 has a bigger and HD screen, widgets, AMOLED, a bit better performance than the iP5 (http://www.primatelabs.com/blog/2013/03/samsung-galaxy-s-4-benchmarks/), a choice of keyboards, launchers and lockscreens, NFC, full Bluetooth and USB stacks…

        If you compare to the GS4, as parent did, the gap widens, with 1080p screen, and almost 2x the performance…

      • KyleZ

        To be fair, Samsung also has to spend a fortune to pay obarthelemy for all this trolling of asymco.

      • http://twitter.com/wuffel Basti

        “Galaxy S3 has viruses”
        Show me the S3 viruses please.

        “and no emergency patching system, while iPhone has no viruses and the Apple Software Update system”
        Google has the same remote app removal system as Apple does

        “Galaxy S3 has Java phone apps, while iPhone has native C/C++ PC apps”
        First, on iOS the apps are written in ObjectiveC, not C or C++. Second what is you’re point? You are just stating the obvious. I think what you infer is that Android apps which are written in Java are somewhat inferior. They are not. Just play games or look at performance comparisons between iPhones and Android phones. Third, you’re statement isn’t even completely true because you can write C/C++ apps for Android with the NDK.

        “delivering budget hardware”
        Have you recently looked at the components inside smartphones? Beside that they are kind of the same for all devices Apple puts the same types of chips in is phones as Samsung does…you know that Samsung is building chips and displays for Apple, yeah?

        So please, get your facts straight.

        PS I live on both platforms, Android as well as iOS

      • Kizedek

        “Beside that they are kind of the same for all devices Apple puts the same types of chips in is phones as Samsung does…you know that Samsung is building chips and displays for Apple, yeah?”

        You do know that “building chips and displays for Apple” is NOT equivalent to “Apple using ‘Samsung chips and displays'”, yeah?

        Since Apple does not manufacture the chips that Apple designs for itself *someone* must manufacture them *for* Apple. Yeah? It’s a pretty basic concept in the architect/contractor relationship that is the most common way things get done in this world.

        A4, A5, A6… are NOT “Samsung” chips. Likewise, Apple does a lot of its own unique display technology development (materials, layers, lamination processes, touch sensors, color management), and commissions others to build them to spec. Pretty simple concept, yeah?

        On the other hand, I can see how you might miss that Apple is an integrated solutions company (both a software and hardware engineering company)… afterall, few companies can do both. Amazon and MS, for example, may well use all off-the-shelf components or even complete devices with a couple of tweaks and some token gestures towards branding — ebook readers, mp3 players, phones, that kind of thing. It’s easy to forget that Apple is pretty unique and that their success is down to more than just hype and marketing, which are criticisms much more aptly applied to others.

        Nevermind that the performance and power and battery life are generally greater on the iPhone despite “lower specs” — precisely because Apple designs its own OS and processors (and many of the components) to go hand in hand. And Samsung hasn’t copied *that* for some reason. Perhaps because it would get into very hot water if it’s component manufacturing division was caught directly passing proprietary customer designs to its phone division. Hmmm. Though that does seem to be a perennial problem that one has to guard against, and why some companies might get the reputation of being copiers.

      • http://twitter.com/wuffel Basti

        “Samsung chips in iPhones?” Not Samsung chips but the same! For example the baseband chip in the iPhone 5 is the same as in the Galaxy S3.

      • http://www.isophist.com/ Emilio Orione

        I think carriers banks the difference, they wanted an iPhone competitors and priced the most similar phone (copied) the same as an iPhone and said they were the same.

        They had to, Verizon for instance was without iPhone for four years.

        You also forgot the plastic of the case of Samsung phones and the amoled restricted color space, craftsmanship and material are another category versus the iPhone.

  • ADVILL

    Question for me …Is Samsung earning something with the Galaxy production?, We know how much is IPhone in Apple structure, but that is not case with the Taiwanese, there are different considerations ;
    1. Samsung is a industrial conglomerate, a “chaebol” which has a jungle in accountability so they can dissimulate and hide costs, price transfers etc.
    2. They are also suppliers for other manufacturers and for themselves, they charge 10 to BBRY for a display and 5 for themselves, in the financial report appears as a 7.5 but who knows…
    3. They only produce hardware, the Android update responsibility is not a direct cost for them .
    4. Mixing costs of parts, lines of products, cross subsidies, salaries of different plants etc. makes very difficult to know if they are losing money in each Galaxy or how much are winning.

    Nice article Horace.

  • Walt French

    Samsung *IS* capacity constrained in its semiconductor production. But they’re also in a phase of working out the kinks in the latest technology. It’d be a reasonable business decision to hold off on new spending right now — even if losing the Apple business slows down their growth rate a bit.

  • Neil

    Horace is arguably the most astute analyst. But this morning I was thinking about how much of an advantage I have in sales negotiations because of information I know about our inventory, etc. that a prospective customer doesn’t. Similarly, I think analysts are at a tremendous disadvantage because they lack inside information. I’m not suggesting Horace should choose another progression, but he has a very tough job because he lacks the kind of information a management consultant would obtain if hired by a company.

    • http://twitter.com/fivetonsflax fivetonsflax

      There is a corresponding benefit, though, in that Horace is also not exposed to management’s biases.

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

      I’ve been on both sides of this and the insider info is a disadvantage in understanding how an industry will change. It’s an advantage only in knowing how it will be sustained. Since most rewards come from disrupting and not sustaining I’d rather rely on public info.

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  • Chaka10

    “… the largest office building will cost between $4 and $5 billion”

    As Bloomberg reminded everyone today, Apple is building out the largest office building in the world, at a $5bb expense. To what extent is Apple’s capex growth reflective of that?

    Assuming nonetheless Apple capex growth reflects substantial increased spending for capital equipment used in production, is that accompanied by a corresponding increase in Apple’s in-house production (or plans therefor)? Or will out-sourcing continue (for many good reasons) and that equipment, though funded by Apple, nevertheless still located or to be located in factories owned by out-sourced production partners (different from Samsung, but still outsourced partners)? If it’s the latter, does Apple really gain much control over production (what would it do with the equipment if the out-sourcing relationship gets troubled?), or is its purchase of the equipment really just a financial term of its production out-sourcing relationships?

    • http://twitter.com/WalterMilliken Walter Milliken

      As far as capital expenses for land and buildings, Apple breaks these out in their financial statement, separate from machinery and equipment, though I think Horace included that in his capex numbers above (but not the leasehold improvements item, which I’d expect is mostly the retail stores). The 2012 10-K shows most of Apple’s capital expenditures in the machinery and equipment category (which also includes internal software, which I doubt is a big piece).

      From various reports, it seems like Apple stays in troubled relationships until contract terms end. Presumably, they get whatever control over the use of capital gear they fund that the contract specifies, and I’d expect them to include contract elements like priority of use and restrictions on use for competitors’ manufacturing. And Apple may expect such equipment to no longer be relevant to them at the end of contract — either worn out or obsolete for their purposes, so it may not be an issue what happens afterward.

      I can’t see Apple ramping up in-house production unless they decide they simply can’t get what they want through contract manufacturing. And they can’t do it in the US, since there simply aren’t the right numbers of people with the right skills to set up Apple-scale production lines in the US anymore. And all the infrastructure pieces are missing, too. Anything they could do in the US would have to be small-scale. And even there, it looks like they still prefer to use manufacturing partners. (See the recent news stories about Macs being made in the US again.) A factory is a lot more than capital equipment, and Apple may believe that there are enough contract manufacturers that they can find one or more to meet their needs. This is a dubious proposition in silicon fabrication, though. Which may explain Apple’s recently high capex. They may be creating a credible competitor to Samsung, probably by helping boost TSMC’s capability.

      • Chaka10

        “A factory is a lot more than capital equipment”. — yes indeed. Apple (and not many others) has the financial resources to bear the massive cost of semi mnfr equip, but building its own mnfr capacity (with benefit of control but other risks) is a whole other story.

        “And all the infrastructure pieces are missing too” — yes indeed. There’s a whole ecosystem (supply chain etc) that’s needed, surrounding the location of a mnfr plant.

        I guess my point is, I can see that Apple has to (or wants to) and can take on the financial costs of the massive required capex, bc even a TSMC doesn’t have that financial resource — or doesn’t want to bear the risks of that scale of spending. But, I’m not sure I see that it’s to gain control of its value chain down to the production level. It seems that doesn’t change unless Apple brings production in-house, and that’s a whole other proposition….

    • ChKen

      Apple hasn’t spent a fraction of that rumored $5B, as the project is still in the approval phase, so Apple’s capex growth is not reflective of that at all.

      As for your bigger question, that capex is spent money, and unless Apple has factories they aren’t telling us about, I think it’s safe to assume the situation is that it is still outsourced. As for the future, I don’t know if anyone can say, given how labor rates are increasing so fast in China, who knows.

  • KirkBurgess

    Samsung just released its Q12013 “preview”

    http://cl.ly/image/00372T052929

    A large growth in profits (45%) vs a small growth in revenue (13%) suggests the reduction of Capital Expenditure that Horace has noted is giving Samsung a significant increase in profit margin for the year-on-year comparison, especially while Apple continues to use already developed Samsung chips in its current products (the A4, A5, A6 etc).

    This could be a peak profitibalily margin period for Samsung – they are spending nothing to build plants for Apples next generation of chips, and apple continues to use samsung built chips in all its current iOS devices.

    However once Apple moves chip production to a new supplier, Samsung loses its largest chip customer. What implications does this have for Samsung as a whole? They lose visibility into Apples future chip direction: is Apple continuing to go for increasingly powerful chips, or has it turned its focus to highly power efficient chip designs?

  • Brrriiiaaallliiiaaannnttt

    Would be interesting to see the CapEx of TSMC over that same period, as apple transitions its foundry chip business from Samsung –> Taiwan Semi…