The Cost Of Apple's Excellence

Nov.16.11 | About: Apple Inc. (AAPL)

A week or so ago, we had a post on operational excellence as key to Apple’s (NASDAQ:AAPL) success. Now we have a picture of what that kind of excellence can cost:

This graph originally appeared in a Bernstein analyst's report on Apple and was included in a Fortune blog post (Is Apple suing Samsung — and tooling up its factories?, Nov 15). As you can see, Apple has been dramatically increasing its capital expenditures, particularly outside of retailing. For 2012, it's expected to spend north of $7 billion on top of what it spends on its retail arm.

What can one buy with that kind of money?

Supposedly Apple has earmarked much of that cash for “tooling.” Here is how the Bernstein analyst expects that to play out.

We estimate that the majority of Apple’s FY12 non-retail capital expenditure ($3.8B – $5.8B) will fund tooling equipment dedicated to Apple’s use but residing in supplier facilities, as in the case of tooling used to manufacture unibody enclosures for Macbooks. The machinery will be carried on Apple’s balance sheet, and used to produce components exclusively for Apple. We do not believe the machinery is at its ODMs [original design manufacturers] (i.e. Hon Hai). Instead, the high level of capital expenditures points to partners in one or more areas of key component manufacturing: NAND, displays and/or processors. Likely partners include Sharp, Toshiba and Samsung.

Note that this is very much in line with what we discussed in our previous post on Apple’s operations. It bets big on technology that lets it have distinctive products. With its limited product line and high volume, it can make commitments that other tech firms may shy away from. It also means that (if it's right), other firms are going to be hard pressed to catch up if Apple has locked up a large amount of supplier capacity.