On Samsung’s use of Capital, Value Chain Evolution and Below the Surface. Why would you read the balance sheet of a tech company, the difference between R&D and capital spending, how to prevent suppliers becoming competitors and what are the economics of systems and application software in a device-centric model. Finally, why you shouldn’t confuse obscurity with secrecy.
via 5by5 | The Critical Path #67: Manufacturing Flying Cars.
How much does it cost to have the world’s best maps?
The answer may seem simple: $8.1 billion.
That was the cost to Nokia in cash for buying Navteq in October 2007. It would seem that buying that asset (or another one like it) is a cut-and-dried solution to anyone needing a mapping “solution”. But it’s not an answer that is either complete or explanatory of how mapping solutions are valued.
Navteq was not priced as a database for an app. It was a business which was expected to create licensing revenues and profits[1]. The actual price for this business net of cash was $7.7 billion but the following graph shows the net sales and operating profits since Nokia began reporting its performance:
The blue area represents the difference between sales and costs and hence the operating expenses–the payments needed to “keep the lights on”. Continue reading “How much do maps cost and what are they worth?”
When the iPhone 5 launched Apple promised availability in 100 countries before the end of year. This was a very aggressive plan given the gradual release of previous products. Last year the iPhone 4S only arrived in China (along with 21 additional countries) on January 13th. This year it was almost a month earlier.
Apple also announced for the first time this year first weekend sales for China: 2 million. This is, as far as I know, the first weekend sales data for a single market outside of the US. The time span was three days and therefore the daily sales rate was 2/3 million per day.
The following chart compares the launch performance for the launches which Apple reported:
If we normalize by population, Continue reading “Calibrating launch performance for the iPhone in China”
Early data shows that the PC market has not experienced a “pop” from Windows 8. Market watchers have been anticipating this pop since every previous version of Windows has led to a surge in shipments. PC vendors have also been hoping for this to lift their volumes. Volumes have been stagnant for a while, as the following chart shows:
If we combine the traditional PC and tablet markets—what I refer to as “large and medium screen PCs”— there has been growth. However the growth is all due to the tablets. When seen in a share split (blue tablets vs. brown Windows PC’s) the shift toward tablet computing is clear. Continue reading “Below the Surface”
In the post reviewing Samsung’s Capital Structure I noted that its component divisions have historically taken 90% of capital investments and that the overall capital intensity for Samsung Electronics has increased in proportion to its component revenues.
In another post regarding the capital structures of other technology companies with different business models I noted that Apple has changed its capital structure to a significant degree over the previous three years.
In the following graph I combined these observations to show how capital expenditure patterns may be used to discern the underlying business model.
I would group “cloud” or “platform” based companies like Google, Amazon and Microsoft as a cohort which, although spending significant amounts on capital equipment, do so mainly to support services. Their primary employment of capital is to sustain the infrastructure of data centers necessary to deliver the services underpinning their business models.
Having described the Revenue, Operating Margin and cost structure for Samsung Electronics it’s time to review their investment strategy.
The Economist summarized it well:
[Samsung’s] businesses look remarkably disparate, but they share a need for big capital investments and the capacity to scale manufacture up very quickly, talents the company has exploited methodically in the past.
Samsung’s successes come from spotting areas that are small but growing fast. Ideally the area should also be capital-intensive, making it harder for rivals to keep up. Samsung tiptoes into the technology to get familiar with it, then waits for its moment. It was when liquid-crystal displays grew to 40 inches in 2001 that Samsung took the dive and turned them into televisions. In flash memory, Samsung piled in when new technology made it possible to put a whole gigabyte on a chip.
When it pounces, the company floods the sector with cash. Moving into very high volume production as fast as possible not only gives it a price advantage over established firms, but also makes it a key customer for equipment makers. Those relationships help it stay on the leading edge from then on.
The strategy is shrewd. By buying technology rather than building it, Samsung assumes execution risk not innovation risk. It wins as a “fast follower”, slipstreaming in the wake of pioneers at a much larger scale of production. The heavy investment has in the past played to its ability to tap cheap financing from a banking sector that is friendly to big companies, thanks to implicit government guarantees much complained about by rivals elsewhere.
Can we find evidence of this capital intensity?
To answer, I reviewed Samsung Electronics CapEx as reported in their quarterly cash flow statements. The following graph illustrates the data:
Note that during 2006 and 2007 the company specified expenditures on an operating divisional level. Since 2008 it has reported only a total. For the years where divisional detail is available, the percent split looks as follows. Continue reading “Samsung's Capital Structure”
Two years ago, almost to the day, I wrote a post titled It’s time for Apple to look at owning factories again.
What I argued then was that of the problems that Apple had the means to fix, production was what most needed fixing.
Since then we’ve seen evidence of significant investment in manufacturing tooling, where Apple is effectively purchasing the means of production rather than just renting or contracting it out. This capital equipment investment is the equivalent of owning one of the three asset classes that make up a manufacturing operation:
It did not stop there. It has also used capital to ensure capacity through pre-orders thereby allowing the skills and labor to be more predictably applied by its suppliers (and preventing competitors from having sufficient supplies). Apple has also taken control of chip design for the vast majority of its CPUs thus building a more bespoke supplier chain.
However these are not enough steps to make production “good enough” to meet the demands of a billion customers buying a new product every other year. Continue reading “Apple's new factories”
John Sculley:
“I think they’re going through a very significant change now in terms of product cycles,” Sculley explains. “Traditionally Apple introduces products once a year; now it’s really introducing products twice a year. The complexity of that from a supply chain is immense, and Apple seems to be doing it well. So, I think that people are underestimating just how well Apple is run, and just how successful the company can be when it gets to that twice-a-year product introduction cycle.”
Former Apple CEO John Sculley: Apple is well-run | TUAW – The Unofficial Apple Weblog
Suggesting that Apple is moving to a semi-annual cycle is a very provocative thing to say, but it’s something I’ve also speculated is happening during a Critical Path podcast. Sculley’s comments prompted me to weigh the possible evidence that this is happening:
Samsung Electronics’ SG&A expenses are curiously high. Consider the following graph:
It shows SG&A as reported by Samsung and Apple over the periods 2010, 2011 and the sum of the first three calendar quarters of 2012. Note that Samsung appears to be spending three times as much as Apple on sales and administration.
The company offers a break-down of these SG&A costs and they are also shown (Apple does not provide a break-down except for advertising in its yearly report). The suspicion that something is not right comes from looking not only at the overall picture but the notion that Transportation, Warranty and “Other” for Samsung are higher than overall SG&A for Apple. Continue reading “The mystery of Samsung Electronics SG&A”
9:00 to 10:15 Being Back. How California came to disrupt
The disruptive history of California is remarkable. Whereas few nations can claim credit to one, California is home to at least four major disruptions: Semiconductors, recorded entertainment, venture capital and personal computing. And it did all this in less than one century. If any one place can vie for the title of “serial disruptor” it’s California. One success can be seen as luck, but many successes imply a system is at work. In this case session we discuss California’s disruptive history and put forward hypotheses on the what causal mechanisms are at work. We ask further whether California can still be the home of future disruptions or whether the system has broken down.
10:15 to 10:30 Break
10:30 to 12:00 Designed in California, Assembled in China
Geographically and culturally, California is closer to Asia than any other western market. It has always faced west more than it has faced east. Is there a symbiosis between California and Asia? Are its institutions adapting to a new center of economic mass? Is California leading in thinking or culture or is it being disrupted by a new frontier as growth moves east?
12:00 to 1:00 Lunch
1:00 to 2:15 Guest presentations and Panel session
Guests are invited to debate or discuss points raised during the morning sessions. A chance for panelists to challenge or refute points made as well as for the provision of anecdotal evidence.
Potential panelists:
2:15 to 2:30 Break
2:30 to 4:00 North vs. South
Does the tension between industries of Northern California and Southern California reflect an opportunity or a crisis? We will re-visit the narrative of what Entertainment is hired to do. We will review the differences and similarities of the technological creative process vs. the artistic creative process. We will see whether industrialized, commercialized art is subject to disruptive forces or whether there is persistent exceptionalism at work.
4:00 to 6:00 Reception
Please register here.
