You are on page 1of 4

THE GLOBAL 2 0 0 0

UNITED STATES

APPLE'S SECRET PLAN FOR ITS CASH STASH


A chiinli of Tim Cook's $100 billion war chest is going toward outfitting factories in Asia that will be beholden to one customer: Apple.
BY CONNIE GUGLIELMO

APPLE HAS $100 BILLION of cash and a lot of ways to spend it. Add more retail stores? Check. Set up more server farms to support its iCloud service? Check. Build a second campus in Cupertino, Calif to house its burgeoning staff? Check. Acquire companies
U6 1 FORBES MAY 7.2012

and expand R&D? Check. Pay dividends and do stock repurchases? Check, check. How about buying up its own supply chain? A lot of high-tech manufacturers on The Global 2000 dream about controlling what they pay for

components and gaining the assurance that crucial parts will flow as needed. Apple is one of very few firms with the financial wherewithal to make that come true, specifically by buying production equipment to outfit new and existing factories in Asia that other

FORBES

INTRODUCING THE UNITED MILEAGEPLUS^ CLUB CARD.

THE GLOBAL 2 0 0 0

UNITED STATES

CHASE O

MileagePlus Club

VISA

people will run. Apple is already deploying its cash toward this very goal, say people who follow the company closely. It's a strategy that will likely continue the disruption in the consumer electronics field that Apple has led to date. The iPhone maker has $64 billion or so of its cash sitting overseas, taxed at an attractively low 5% rate but also earning little to no interest. Any cash Apple chooses to bring back to the States would get hit at the 35% U.S. tax rate, not a pleasant prospect. Spending that money on expanding offshore production is far more compelling. Apple keeps the depreciation expense while keeping production costs down. It also means the company will be ready to continue pumping up the volume to feed the seemingly insatiable appetite for iPhones and iPads in the near term and rumored new categorybusting products like an interactive TV in the long term. According to Katy Huberty, an analyst at Morgan Stanley, that's exactly what CEO Tim Cook, an operations

ONE ANALYST CALLS TIM COOK'S PLAN "FRANKLY INGENIOUS."


expert who has been the master of Apple's supply chain since Steve Jobs hired him in 1998, is doing. And she calls the move "frankly ingenious." Says Huberty: "Apple is cornering the market in [its] supply chain... giving them an edge beyond volume and scale. If Apple owns its equipment, it means its suppliers can't build an HP PC or HTC smartphone on it." It took Huberty a little time to figure out exactly what Apple was up to. When the company disclosed in October it planned to spend $7.1 billion on capital expenditures in 2012, up from $4.3 billion last year, lots of folks were scratching their heads over how Apple would use the money, which didn't include $900 million set aside for opening new stores.

United Club" Membership 50% Mileage Bonus: Earn 1.5 award miles per dollar spent-a 50% bonus on the 1 mile per dollar you typicaliy earn. Earn even more on United tickets-2 miles per dollar. Premier Access" Free Checked Bags' No Foreign Transaction Fees'

Apply now and get a $95 statement credit after first purchase.^

For more information, visit www.MileagePlusClub.com or call 877-227-4245


Apple CEO Tim Cook (left) visiting one of the Chinese factories that makes iPhones,

UNITED M

118 I FORBES

MAY 7.2012

FORBES

THE GLOBAL 2000

UNITED STATES

Even after you factor in costs for data centers to support its cloud service, the new 175-acre campus going up on land formerly owned by Hewlett-Packard and the special tooling needed to accommodate Apple's unique product designs, there's still a lot of unaccounted-for cap ex. Discussions with suppliers in Asia gave Huberty the answer. "Put yourself in the shoes of suppliers for Nokia, Motorola, HP and Dell, with businesses that are very volatile. They have to build out capacity for these companies, and when the products don't sell well, their margins go down," she says. "If a customer comes to you and says, 'I will take the equipment risk, and I will own it so you don't have to depreciate it I take the volatility out of your business,' there's no way most of them are going to say no." When asked about the supply chain plan, Apple referred back to its public statements about its cap-ex spending. In a Mar. 19 conference call about how the company was going to use some of its $100 billion in cash. Cook was sure to include "capital expenditures in our supply chain" among the list of his other spending items. The plan would likely look like this: Apple fronts the money to buy the production equipment for suppliers that set up the factories, hire the

labor and run the day-to-day operations. Apple still owns some of the equipment and takes the depreciation, the extent of which is not known because Apple isn't saying. Huberty believes that most of the $7.1 billion is going toward equipment purchases for the suppliers. Apple's investment in its own supply chain, coupled with growing scale and the prepayments it routinely

"THERE'S NOWAY ASIAN SUPPLIERS ARE GOINGTOSAYNO TO APPLE'S PITCH."


makes to lock up supply of crucial components such as memory and screens, will translate into a 15% to 20% cost decline a year, Huberty estimates. That helps establish and maintain higher margins for the iPhone (50% or more) and iPad (about 40%). It also gives Cook the flexibility to consider moving into low-margin, highvolume markets such as TVs and to cut pricing on older products to lure costconscious buyers, as Apple did when it chopped the price of the iPad 2 by $100 when it released the new iPad.

TO THE INNOVATOR GO THE SPOILS


APPLE CAN OUTSPEND ANYONE TO MAINTAIN ITS MOMENTUM. IF THE STOCK HIT $1,000, AS MANY ARE PREDICTING, IT WOULD BE THE FIRST COMPANY TO BE WORTH $1 TRILLION.

CASH AND EQUIVALENTS'


APPLE

LATEST 12 MONTHS EBITDA

$4S.SBILU0N

MICROSOFT

GOOGLE

CISCO SYSTEMS

'INCLUDES LONG-TERM MARKETABLE SECURITIES SOURCE: 7N0MS0N REUTERS FUNDAMNTALS VIA FACTSET RESEARCH SYSTEMS

Those 40%-plus gross margins on phones and tablets are part of what puts Huberty among the cadre of analysts and investors who think Apple's shares will top the magic mark of $1,000 in the next two to three years (up from about $609 today). That would make the Silicon Valley garage startup the first company with a trillion-dollar market valuation. Stephen Coleman of Daedalus Capital has been buying Apple shares since 2004 and thinks the company can get to a trillion even faster. Coleman, who remembers being mocked by investors in 2007 when he predicted Apple's shares would reach $200, thinks they'll surpass $1,000 later this year. He's convinced the company will continue to run circles around smartphone rivals Google, Samsung, Microsoft and HTC with a new version of the iPhone this summer and that Apple will persuade more buyers to shun PCs from the likes of Hewlett-Packard, Dell and Acer in favor of iPad tablets. Coleman is waiting for Apple's financial results to be announced on Apr. 24 to see if his timetable is realistic. Sales in the quarter, lifted by new iPhone sales ftom China Telecom and orders for the third-generation iPad, which debuted Mar. 16, are expected to rise 47% to $36 billion. Profit is expected to jump from last year's $6.40 a share to $9.86. To naysayers who insist that Apple's run won't last or that Cook and his team can't keep up momentum in the mobile-device market or that Apple boosters are just plain crazy, Coleman is having the last laugh. "I live in the real world," he says. "When I see people rioting in China to get their hands on an iPhone, and when I hear Tim Cook say on earnings calls quarter after quarter that they can't make enough to meet demand, there's no reason to expect the sales will drop."

120 I FORBES

MAY 7,2012

Copyright of Forbes is the property of Forbes Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

You might also like