Hacker News Reader

Comment by IBM | Hacker News Reader

This is what makes it difficult to compete with Apple. These types of prepayments allow Apple to negotiate favorable deals for components that the manufacturer will happily sell at razor-thin margins. In order for the competition to produce an equivalent product on a hardware level, they would have to be willing to accept much lower margins than what they have. And there's no guarantee that they'll sell as well, making the investment in those materials risky.

View on HN

This only matters as long as Apple continues to make products consumers want most. If (as many speculate) this changes once the product pipeline that Jobs oversaw before his death is exhausted, the Cook supply chain dominance won't really matter; less people will buy Apple products and Apple's power to make these sort of plays diminishes. If Apple continues to make products consumers want most, then who cares about supply chain coups? Everyone else has a bigger problem on their hands.

The supply chain enables Apple's products and is a competitive advantage that isn't easily replicated by others.

But there are implications, human ones: http://www.businessweek.com/articles/2013-11-07/an-iphone-te...

I wish people would repost the above more. Knowledge of this is one reason I tend to grab second hand stuff on the way to the skip rather than fish out for new kit every year.

Apple competes against companies like Samsung (2012 ad budget: ~$4B) and Microsoft (2012 ad budget: ~$2.75B).

This is not a lot of money in the markets where Apple competes.

Its not the size of the money, its what the money does:gobbling up scarce resources in advance hence locking out rivals from crucial supplies.

The first phrase of the article is "Apple is building a manufacturing plant in Arizona". Space to build manufacturing plants is not scarce. They are actually even re-purposing one.

I guess GT Advanced Technologies might have some scarce expertise.

I'm so glad I bought a bunch of GTAT a year ago.

What inspired you to buy stock in the company a year ago?

convergence of three things really.

When I heard the iPhone 5 was going to use a sapphire lens cover I decided to lookup more on the technology and found that GTAT had what looked like the best know-how in its manufacture.

I had also previously seen a story on some tech being created by a company called Twin Creeks that looked pretty cool, and was surprised to see that GTAT had acquired it's assets. That made me think the company was being aggressive in it's pursuit of acquiring/developing cutting-edge manufacturing processes.

Plus, I think solar power is a major part of the future and things will be pretty bleak if it can't deliver long-term, but I like to be an optimist, so why not put my money there?

Very interesting. Thanks for the insight!

If I understand their business model, GTAT wanted to be in the furnace and process business and sell those to other companies that would do the manufacturing. It looks like no one wanted to be one of those companies.

There is no "scarce" here. GTAT wanted to make and sell a lot of this capacity, they just couldn't get a buyer to risk their capital.

From that standpoint it makes perfect sense for Apple to pony up. They want the end product. There is no need for a third company to take risk, provide capital, and make extra profit. Apple provides the capital, takes the risk.

The "scarce" is their ASF furnaces that enable production at scale and low cost, which is currently being repurposed for their own contract with Apple.

Sapphire glass uses synthetic Sapphire so this is more like building another Gorilla Glass factory than hoarding the output from a Diamond mine.

http://en.wikipedia.org/wiki/Sapphire#Synthetic_sapphire

Apple just purchased 15 percent of Samsung's entire worldwide advertisement budget in just sapphire.

That's a pretty enormous chuck of change, even for massive corporations such as Samsung.

For comparison's sake, Apple's ad budget in 2012 was $1 billion [0], so they just purchased almost 60% of their own advertisement budget in just sapphire.

[0] http://www.sec.gov/Archives/edgar/data/320193/00011931251244... ("Advertising costs are expensed as incurred. Advertising expense was $1.0 billion, $933 million and $691 million for 2012, 2011 and 2010, respectively.")

How is this bold in comparison to Google buying Motorola for $12B on the premise that it afforded patent protection?

Apple's move here is a solid move to secure supply of a key material/component for their devices.

Meanwhile Moto has yet to produce a profit, much less meaningful patent protection for Google.

Those figures don't mean those companies have half a billion dollars to spend on sapphire.

Edit: and that is just the prepayment.

Microsoft has $77 billion in cash reserves[0]. I assume this is pre-Nokia purchase but that doesn't change the fact that they could have done the same thing if they wanted to - they just didn't. It wouldn't make sense either as they don't manufacture to my knowledge.

[0] http://www.geekwire.com/2013/apple-controls-10-percent-corpo...

Like the article says, the $578M is just the prepayment. The total amount may be much greater. The facility itself was acquired from First Solar, who sold it at a loss, and it seems like Apple will be fronting the capital for the factory's construction. The deal also requires a minimum amount of capacity for Apple and also exclusivity for some unknown amount of time (perhaps the same 5 years), so it's unlikely that they'll be supplying anyone besides Apple. And this is just for one component, Apple likely makes these deals with all their suppliers.

Not sure why the total advertising budget for companies with radically different product sets should meaningfully compare in any way with the cost of preordering a single material in bulk.

I used ad budget as a proxy for a firm's discretionary cash flow. If you wanted, you could instead look up other financial figures and choose another proxy. For instance, Samsung had 2012:

Revenue: $268 B (17% of S. Korea's GDP)

Net Income: $26 B

Total Assets: $470 B

My point is that the companies Apple is competing against don't make these moves because they don't have the financial resources, it's because moves like these don't fit into their overall strategic plans.

And yet they were at one time the low-volume underdog. People scoffed at them when they first started making iPods and again later with iPhones (even though there were fewer doubters by the time the iPhone came to be, there were still some). They clawed their way up to where they are now over the last 15 years, pretty much "back from the dead". During much of that time, their products were higher priced than their competitors due to the same supply & volume constraints you are describing, only against them instead of in their favor. Now it seems the shoe is finally on the other foot.

If they can make it, so can any other company.

Exactly. I remember very similar supply chain locking stories about Nokia at its heyday. Didn't help them much when market shifted

This is a classic Apple maneuver, too. During the heyday of the iPod Apple regularly cornered the market on NAND flash, and they also paid Corning to bootstrap production of Gorilla Glass for the first iPhone.

It's not the money that gives Apple the edge here, it's the "innovation" (let's leave the debate about whether Apple innovates or just improves/repackes aside for now) that allows them to pre-empt the need for those components.

Apple is still enough ahead of the competition in the product development department that they start making these deals long before anyone else.

Plus of course the manufacturers trust Apple to actually take delivery of all and more based on the success of the past.

Being able to put up the money for those kind of prepayments is about the only area in which competitors can match Apple.

Isn't this the case with big players in any industry that have greater purchasing power?

Are you IBM's official HN account? Just curious.

I believe they are holding off antitrust lawsuits due to Android having higher global market share. I find it odd because Apple has higher share in the US and a near monopoly on tablets.

Apple has a higher share in the US (40%) compared to other manufacturers, but Android is dominant (51%) vs. iOS.

Regarding tablets, I'm surprised more Android tablets didn't target the Asus Transformer/Chromebook form factor - seems like an area where Apple wouldn't want to tread (to not cannibalize their Macbook sales).

Reply on news.ycombinator.com