Apple's Third Secret Of Success - Low Cost Manufacturing

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) is well known among consumers for its innovations and high product quality. But there is a third source of success: low cost manufacturing, due to its scale and pre-purchase agreements with component suppliers.

As discussed in a recent New York Times article, Apple buys the components for its products ahead of time reaping off two kinds of benefits. First, deep discounts. Second, it reduces the supply of components available to competitors that buy components on the last moment—and eventually and up paying a higher price that pushes the cost of their products higher.

Apple’s strategy that is financed by its $80 billion cash chest, gives the company a cost advantage over competitors that allow the company to quickly cut the price of its models undercutting the competition. Customers, for instance, can buy Apple’s iPhone 4S for $199, providing that they sign a two-year contract with a provider, slightly lower than Samsung’s (OTC:SSNLF) Galaxy II, and way lower than Motorola’s (NYSE:MMI) Droid Bionic model.

There is a downside to this strategy, however. Should demand for Apple’s devices drop unexpectedly, due to a severe economic downturn, Apple may be in for big losses, as was the case with Cisco Systems (NASDAQ:CSCO) back in the early 2000.

Company

Model

Price

Service Provider

Apple

iPhone 4S

$199

AT&T (NYSE:T)

Motorola

Droid Bionic

$300

Verizon (NYSE:VZ)

Samsung

Galaxy II

$230

T-Mobile

Click to enlarge

The bottom line: What makes Apple an unbeatable company isn’t just innovation and product quality, but lower production costs that are eventually passed on to its customers—strengthening its competitive advantage, and helping its stock head north—a good reason for investors to stay long with the stock.

Disclosure: I am long VZ, T.