Supply Chain Matters just came across a timely article published by Forbes, Apple’s Secret Plan for Its Cash Stash that we recommend for mandatory reading and discussion among senior supply chain and procurement sourcing executives in the high tech and consumer electronics sector.

In the article, author Connie Guglielmo cites an assessment made by Katy Huberty, a Morgan Stanley analyst that Apple may be deploying a portion of its current, rather lucrative capital appropriations budget in buying dedicated production equipment to outfit new and existing facilities within its existing supply chain. The author also cites unnamed sources who follow Apple as indicating that Apple is already executing this plan. The premise is that with a majority of current cash sitting in offshore accounts, protected from higher U.S. tax rates, that capex spending on expanding offshore capacity is a compelling use of this cash.

More importantly, the plan, as outlined, was cited by Morgan analyst Huberty as “frankly ingenious” and Supply Chain Matters would add the term brilliant. By providing dedicated production equipment to suppliers for sole use in producing Apple products, Apple can both lockout other competitors to supplier capacity in producing mobile phones or tablets and relieve certain suppliers of the risk of volatility in planning output levels  and incurring expensive capital costs. Apple has the opportunity to benefit from future depreciation expense benefits while its huge production volumes are assured by basis of owning its own production equipment.  The plan, if carried out, challenges the classic contract manufacturing model that has a premise of transferring expensive manufacturing assets to a supplier in order to achieve higher return-on-assets.  Given the recent labor practice audits underway CM provider Foxconn, we would logically assume that Apple may also consider higher levels of factory automation in its capex planning. Huberty estimates that a combination of strategies related to Apple’s pre-payment to suppliers for products coupled with a dedicated investment in production equipment could translate to a 15-20 percent cost savings per year, as well as afford the opportunity to produce lower cost versions of Apple products for broader geographic markets. That analysis may be conservative.

Of course, the success of this plan is highly dependent on Apple’s current suppliers, and in a certain sense, the reaction of consumers.  Removing equipment expense and providing more automation reduces a contract manufacturer or supplier to that of host supplying direct labor and utilities, limiting opportunities for margin growth. On the one hand there are compelling benefits, on the other, it can lockout certain suppliers from integrating further value-added components in their production strategy as well as lockout any potential future thrusts to release their own branded mobile phones, tablets or television products, at least not, involving Apple owned equipment. Keeping other customers will involve the need for more space and capacity, with the question of who funds that expense.  On the consumer side, the open question remains as to whether Apple’s investment in advanced production equipment cannot be made in country where the majority of Apple products are being sold.

Whether or not this plan comes to full fruition, industry executives representing both large and smaller firms had better be keeping abreast, since Apple may well be exercising a disruptive strategy that shifts industry supply chain balance for years to come.

Bob Ferrari

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