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This is what Apple does with all of that cash

There are a lot of advantages to keeping a hoard of $81 billion in cash on hand, as Apple (s AAPL) does. One in particular allows Apple to set itself apart from its competitors in a very real and tangible way: by dominating the global electronics supply chain.

Bloomberg BusinessWeek has a great story out on Friday illustrating the massive pricing, manufacturing and shipping advantages that Apple gets from having one of the most successfully managed supply chains in the world. Reading it, you see how having lots of money frees Apple up to do things other companies either can’t or won’t.

The report includes interesting details, like how Apple made that little green light appear next to the webcam in your MacBook. It was a manufacturing challenge that required $250,000 laser machines to cut tiny holes through metal, so Apple bought “hundreds of them.”

There’s also the tale of how Steve Jobs bought out all air freight for Christmas 1998:

To ensure that the company’s new, translucent blue iMacs would be widely available at Christmas the following year, Jobs paid $50 million to buy up all the available holiday air freight space, says John Martin, a logistics executive who worked with Jobs to arrange the flights. The move handicapped rivals such as Compaq that later wanted to book air transport.

The report illustrates two of the things that set Apple apart from its competitors in ways that are invisible to most of its customers: money and attention to detail. It’s all of those billions in the bank that give Apple the freedom to lavish gobs of attention on everything from massive manufacturing problems to insanely small but critical details. Some of the things the company does with that freedom range from buying out the world’s supply of smartphone displays to Senior VP of Industrial Design Jonathan Ive and some of his team staying near a manufacturer’s facility in China “for months” to closely monitor the design manufacturing and prototyping process for future products.

For next year, Apple appears to be pursuing the same tactics. It has already said via its annual report to the SEC that it will spend “$7.1 billion for product tooling and manufacturing process equipment.”

Locking down the supply chain is clearly a spending strategy that has proven itself. But it will be interesting to see how or if Tim Cook, Apple’s new CEO and longtime supply-chain guru, will continue to use the company’s cash in other ways outside the strategy approved by Jobs. Jobs turned Apple into an extremely conservative company when it came to its spending and investments and resisted any calls for investor dividends or share buybacks. Cook, however, has indicated that he and Jobs differ slightly in their philosophies. During the company earnings call last month, Cook declared:

I’m not religious about holding cash or not holding it. I’m religious about a lot of things but not that one. We’ll continually ask ourselves what’s in Apple’s best interest. So it’s a topic for the board on an ongoing basis.

Thumbnail courtesy of Flickr user Tracy O

15 Responses to “This is what Apple does with all of that cash”

  1. So the Visa ad..which says “for everything that money can’t buy” is irrelevant to Apple. :-)

    Jokes apart, love the way Apple uses their money in a constructive manner. No splurging money in trying to do something else and venturing into other businesses. Like how Google does – they are everywhere.

    Apple is focussed and thats why they are awesome.

  2. Jonathan

    So, based on the fact that Apple 10 years ago – when they didn’t “hoard billions” bought up air flights, we can deduce that having the money now enables them and not the competition to do that? Ehr… Know much about causality? Maybe it’s because they did run the risk of buying up stuff beforehand that they’ve gained an advantage and that this is one of teh reasons they’ve been able to “hoard billions”?

    • Actually, Apple’s always had a lot of cash on their books. A combination of their higher margins, their (previously) niche focus on design and student markets (surprisingly), and a general lack of competition. They didn’t really try to compete against PCs early on. Creative types favored Macs because of the designs and students were hit up with Macs left and right at college computer stores. They didn’t enter the ultra competitive and rapidly commoditized business PC market so they didn’t have to slash margins and eek out an existence on a paltry margin.

      Now, they’re knee-deep in mainstream consumer products and competition with the PC market now. Was their causality here, of course. But it’s not because they threw money at their supply chain for the last 20+ years. It’s because they positioned themselves well and maintained a lot of cash on the books which allowed them to buy up capacity in anticipation of high demand they expected would come. Granted, there was some risk but with the clout they’ve built up with the success of the iPod and iPhone, that risk is seriously mitigated. All they’re doing now is leveraging all that saved up cash (and lack of excess leverage) to help ensure they can retain their competitive edge…even if that edge is merely them blocking all lanes of traffic so their motorcade can drive through at a leisure pace.

  3. Now if this Cook can take some of that money and undo the direction set when Jobs fired the Cook that launched the original Mac in a factory floor tantrum, they might be able to get back to a discriminating competitive advantage going more vertical again. And keep some of the money here instead of sending it overseas to folks who give flying lessons to errant employees.

  4. Marcos Herasme

    All that money also is a good insurance bed for the company to be in. No one knows the future, but, a huge pile of cash help to dodge some the uncertainty, because any thing that come along it’s sure is going to cost money.

    • Erica Ogg

      Agree. That’s what Jobs would always say, that keeping all that cash and zero debt prepares them for uncertainty in the future. I wouldn’t expect Cook to stray too far from that philosophy, but he is showing that he might differ in some respects from his predecessor.

  5. physical

    In summary, apple spends excess amounts of money on small details, whereas other companies don’t sweat the small stuff.

    Perfectionists everywhere swoon over this attention of detail, whereas the regular users wonder why the product is so expensive.

    • Erica Ogg

      But that’s really not true anymore. The iPhone, one of the items highlighted in the article for the attention to detail on the supply chain side, is not more expensive than competitors and at $199 to start, in some cases it’s cheaper. Same with the MacBook Air. It’s either the same price or cheaper than the new ultrabooks coming out that compete with it.

      • A 32gb Iphone in the UK is £599 when I can pick up a Samsung SGS2 for £385 plus a 16gb flash rounds it off to about £400.

        I think you should clarify that Apple starting oint for its Iphone / Ipad are at similar prices to the compeition but not when you move up to a higher storage capacity.

        £100 for 16gb extra storage – thats where the markup is.

    • Jim Dempsey

      “regular users” tend to compare a standard laptop to a netbook, too. If you compare the capabilities and features, Apple’s products haven’t been more expensive than close comparison Windows-based products in years. The iPhone is even with Android phones, and the iPad is actually cheaper than many similar sized tablets, and only slightly more expensive than smaller, less capable ones.

    • Peter Deep

      I would disagree with one of your statements. I consider myself a “regular user” because I’m just a regular consumer. I’ve never built my own computers, I have no interest in jail breaking, etc. etc. However, we average consumers do notice details, and appreciate them. Here’s an example: years ago I bought a beautiful and expensive monitor from Dell because I really liked Dell monitors, they were very sharp and clear and bright. We all know that USB devices have a front and a back. Often there’s a light or something on the front of a USB device. This particular monitor had USB ports on the side, but the inserted device was backwards, the front of the device was facing the wall. I remember thinking, “Apple would never do that” and I was right. It’s a small, small detail but it forever changed the way I looked at Dell, that was very sloppy, and I don’t think I ever bought one of their products again.