A yardstick for capex

Photo credit: Wikipedia, CVN-78

I’ve been writing about Apple’s capital intensive operations for some time. The difficulty has always been in explaining the scale involved. I’ve compared the spending to that of Samsung, Microsoft, Google, Intel and Amazon. But these numbers still can’t be easily grasped. You can’t point to any comparable objects when you try to explain the figure. I struggle to create a less abstract notion than that of a “sea of tooling and servers.”

Instead, I’ve used the analogy of US aircraft carriers. Historically, Nimitz class aircraft carriers have cost a less than $5 billion. The USS Ronald Reagan, christened in 2001, cost $4.5 billion. Therefore I was comfortable saying that Apple spends the equivalent of about one Nimitz class aircraft carrier every six months (and that the Navy takes about six years to put it together.)

Unfortunately, costs for aircraft carriers have gone up. The USS Gerald Ford will take about $13 billion to complete. That places Apple and Samsung capital spending in the following context:

Screen Shot 2013-11-12 at 11-12-12.29.32 PM

Note however that planning and construction for the latest aircraft carrier takes 12 years, rather than the 12 months spending schedule for the companies shown. Note also that Apple’s spending is unspecified and included several categories while Samsung’s categories are partially specified.

Due to this inflation in aircraft carrier costs, my denomination of capex is beginning to be strained. Nevertheless, the question of what Apple spends $10 billion a year remains knowing what that could buy the Navy (or Samsung.)

  • albertodepaola

    The question that arises is when are they going to finish “buying” their supply chain. And what will come next. I think that by then telecom companies will be weak enough for Apple to take over a few.

    • mlabrow

      That really doesn’t make a lot of sense though if you think about it. If they buy a carrier they will then be subject to reams of laws, most of which were crafted in the 30s and 40s and have only loosely been updated since. They will be directly under the thumb of the FCC and the FTC and singled out for singular monopolistic oversight. Purchasing a carrier would immediately alienate every other carrier in that market, and those are Apple’s customers as much as any individual user… More so really.

      This will also signal a shift away from the hyper focus that the company has traditionally exhibited, and their core strengths what exactly? They’re already very well positioned in the smart phone market for long term revenue. They like the current subsidy market and would like to see that expand… The carriers certainly aren’t more profitable than Apple is if examined on any rational front.

      There’s no upside to purchasing a carrier, and a terrific amount of downside. I can’t see it happening. Apple seems perfectly happy focusing on hardware and the software that hardware runs.

      The only way this would make sense, is if it followed the move into marketing, and the carriers unilaterally negotiate against Apple to freeze out their customer relationship or block them from the market, then that would be one thing. But there would be so much build up, legal maneuvering, etc. that it would be obvious that Apple had to do that even if pundits thought they were crazy for doing it.

      • handleym

        IF you can spin buying a cell network as owning a DATA network rather than a VOICE network, you may be able to get away from that regulation…

        Suppose Apple owned a cell network, but offered only “data” carriage? My guess is that this could be viable.
        Of course this limits your interop with other carriers, but suppose you delegate that to gateways (owned by a separate gateway company) which massages the incoming (“voice” traffic, subject to ancient laws) into IP traffic (subject to modern laws).

        ATT and VZW of course, would scream bloody murder. But what matters is what the FCC (and perhaps Congress) would think. My guess is that they would be more sympathetic than not — that they’re as aware as anyone of how unproductive much of this obsolete regulation is, and would be happy for an excuse to basically upend the system.

        Which is not to quibble with your other point. Owning a network is a tremendous pain and a tremendous distraction. Its only saving grace is that it allows you to control the pace of change, and to drop the stupidity of the telcos, which is limiting the value of the products you sell.
        But if Apple were to do this, perhaps the way to do it would be not as an Apple initiative, but through Braeburn putting up the money to allow someone else to do it.

      • barryotoole

        LOL. You think our Congress is that intelligent!

      • When the question of Apple buying an operator comes up, the next question that must also follow is where.

      • albertodepaola

        That’s the reason why they can’t do it now. But I think that the rapid change we’ve seen in the traditional phone market, new projects like Loon from Google, the increasingly number of cellular only households and cellular broadband will push a general reform in those regulations. And Google will surely lobby for such a change. Apple could simply enter the game once the rules are changed, and let others do the fighting.
        My reasoning behind the comment is that it is the last bit of user experience they don’t control, and one we have daily contact with. What @handleym:disqus pointed out may be possible or something along that lines.
        Also, it’s not at all easy, because it’s not just about their direct relation with the iPhone. Those same telcos sometimes are part of big media groups, so every single content agreement becomes jeopardized.
        I hope that 10 years from now technology companies like Google and Apple can compete with giant media conglomerates as Vivendi.

    • barryotoole

      I agree with you. People have listed how difficult it is to own a wireless network NOW, and that’s why Apple hasn’t plunged, methinks.

      I’ve been following Apple for a long time, and get the feeling that they don’t do anything without a reason – even hoarding cash. The A7 is exhibit A, and the name of iPad as Air is B.

      It won’t surprise me that in the near future, Apple acquires a wireless carrier and offers ‘data-only’ services for transmitting Internet and phone calls.

  • Glaurung-Quena

    Samsung owns big chunks of their supply chain — IIRC, they have their own fabs, they make their own screens, and probably a bunch of other parts too.

    Apple doesn’t own their supply chain outright – they don’t want to be in the semiconductor or screen making business, they don’t want to have a camera or battery factory on their balance sheet.

    But they want the control and vertical integration that Samsung enjoys. So they are signing oodles of partnership agreements and buying gobs of machine tools. Apple goes to a supplier and says, “Here is money to build a new factory building. Here, fill it with these machine tools that we own. Now what you make in this factory you will sell to us and only to us.” And that company, or a branch of it, becomes Apple’s indentured servant. Apple gets all the benefits and none of the liabilities of being a vertically integrated conglomerate.

    And they’re doing this across their entire supply chain — from screens (sharp’s IGZO tech) to those aluminum enclosures, about the only part that they aren’t doing this with (yet) are the chips, and it’s only a matter of time before they pay someone to build and operate fabs for them.

    • Jessica Darko

      You’re right, though “indentured servant” isn’t quite right. The company makes a profit on the deal, or they wouldn’t do it.

      • Glaurung-Quena

        What I was trying to convey was that the companies Apple does this with become beholden to Apple — and thus are not able to turncoat on them, they way Samsung (a more traditional parts supplier) did with their line of Android phones.

  • ssiinnaa

    I’ve been thinking about this recently (and your old post) and glad you brought it back up.

  • Lee Penick

    But how do you stop the contracted supply chain from taking your IP?

    Is it just a cost of doing business?

    I would like to know the other factors involved, since dealing with Samsung appears to give them inside info on the future sof apples business, apple sues them, and then continues to use them and risk IP.

    • barryotoole

      True, as Asus did with Dell. He said hey, instead of putting just parts together, let’s do the design as well at a lower cost. Dell fell for it and now Asus is their #1 competitor.

      I’m sure Apple is aware of this, and that’s why all products are ‘Designed in California, Manufactured in China’. Nonetheless, Foxconn and others in Apple’s supply chain are getting better at making Apple products, and even though Apple may own the tools, it cannot own expertise. It has no control over the knowledge factories in its supply-chain may offer to competitors. I’ve heard that Foxconn is thinking of building their own phones and tablets; I hope this is just a rumor.

      The only way Apple can control its destiny is if it owns all processes, including manufacturing. I am, again, sure that Apple is aware of it, but is handicapped, at least partially, by the fact that all of its supply-chain has shifted to Asia.

      Not only would the cost of manufacturing will be higher in the US, but supplying almost everything from Asia to an American factory will be costlier too. So it is doing the next best thing: owning its supply chain. Also, it is spreading the chain wide, so no one entity can hold it hostage.

    • You focus on a new basis of competition.

  • Jonorom

    The Gerald Ford displaces about 112,000 tons, or 3.7% of the current total warship displacement (3,024,000) of the US Navy. At a 30% lower cost per ton than the Navy pays (Apple has much better supply chain management), at 2012’s capex rate Apple could buy a brand new, equally capable, entire US Navy in about 20 years, or a bit longer than the Gerald Ford took to build. That would be in lieu of making devices of course – they’d have to rethink the business model.

    • Luis Alejandro Masanti

      “Not to fear, the weapon systems are considered accessories and are not included in the advertised price.”

      Apple will sell them as “Made for iWar” accessories.

  • Jessica Darko

    I want to put that awesome war machine in further context.

    Roughly every $10,000[0] taken out of the economy (via taxes or inflation) destroys one job, and removes $100,000 from the GDP the first year, growing to around $1M in cumulative loss to the GDP after 10 years.[1]

    This means that, a $13B carrier that we have no real need for, destroys 1.3 million jobs, and $1.3T in growth of the GDP.

    When Apple spends $10B, it produces economic growth. When the government does, it creates poverty.

    This is the thing that those who advocate unlimited government spending (on war making or on “the war on poverty”) never seem to recognize.

    Ironically, the Obama “stimulus” destroyed jobs, and slowed down the economy because of this effect!

    [0] The rough marginal cost of a $100,000 a year tech job. For lower paying jobs, like a $36,000 average job, only $3,600 of government spending destroys that job, assuming the marginal cost is around %10. This is not a precise figure, but it is in the ballpark.
    [1] This happens because it reduces the available surplus for people and companies to invest in the future. By driving up costs for them (inflation) they have less to spend on things they need (new plant, better education to get a better job, etc.) By increasing taxes, they have less surplus to invest for the future. (that plant or education) This hits people at the “profit” point, magnifying the impact. Thus people are not able to invest for the future like they would be if the money hadn’t been spent. Some government spending justifies this damage, but most does not.

    • dreamfeed

      So if not for federal taxation, there would be over 400,000,000 jobs in the US. Since our population is only 315,000,000, this would lead to a nightmarish world in which children and the elderly are forced to work 16 hours a day. I never realized how lucky we are to have taxes, thanks for opening my eyes.

    • tfd2

      so building the aircraft carrier produced zero jobs?

    • Davel

      I am sorry. This is a classic guns vs butter argument.

      Clearly you are for all butter and no guns.

      So when the country places a carrier group in the Mideast region to constrain some activist country this has no impact on the economy?

      My point is you need some military, your own or someone else’s to maintain peace for an economy to work. In the past we had the British navy when we had none. Today we are the worlds strongest navy enforcing our will to enforce our foreign policy as well as the wishes of the fortune 100.

      Your argument sir is false.

  • Jonorom

    Horace, the “yardstick” metaphor using a single item is flawed. Yardsticks have multiple points of measure along their length, so they can represent different quantities. Also, a large warship, which is an extremely expensive item almost beyond intuition or comprehension, hides the true magnitude of Apple’s capex.
    I suggest you change to a supertanker, which is an industrial tool. One VLCC supertanker can be a long as the Empire State Buildig is high, and costs about $120M. By that measure, Apple’s 2014 capex is the equivalent of about 91 supertankers.