The Limits of Money

Apple Inc. (Nasdaq: AAPL) has just discovered the limitations of a fat bank account.

Despite having enough funds to outright pay cash or combine cash with stocks to acquire some of its rivals (Motorola Mobility and Nokia, with market values of $7.4 billion and $33 billion, respectively, come to mind), the world's richest and most successful technology company is still struggling with the same twisted demons of inaccurate forecasting and supply-demand imbalance that have for long tortured the electronics industry.

Unexpectedly high demand for smartphones and iPads hurt Apple in its recently ended quarter (yes, I know, the company had a blowout quarter, but as you'll see below, even though it far exceeded its own sales forecast it fell short of actual demand). And the company has acknowledged it may be hit by potential supply problems linked to the earthquake that struck Japan in March.

By all accounts, Apple had an explosive performance in the fiscal second quarter ended March 26. Revenue exceeded analysts' average estimates, rising a stunning 83 percent, to $24.7 billion from $13.5 billion, and profits nearly doubled to boot.

But that's not even the most surprising thing about Apple's performance. It turns out the company could have done even better in the quarter; it was unable to manufacture enough iPad tablet computers to satisfy pent up demand. By the end of the reporting period, many potential iPad buyers were left hanging because the company just couldn't make enough, Apple said.

"The demand for iPad 2 has been staggering," said Timothy Cook, Apple's chief operating officer, during a conference call to discuss the results. "We're still amazed that we are still heavily backlogged, not only at the end of the quarter but also up to date."

Peter Oppenheimer, Apple's CFO, added the company sold every iPad it made during the quarter and drained its channel inventory down by 400,000 units to below 850,000, "which was below our target range of four to six weeks."

Apple had taken steps in the last year to ensure it could meet demand for its products. In addition to maintaining a strong relationship with contract manufacturer Foxconn to ensure enough flexibility was built into the system to meet any unexpected demand, the company, on the component front, wrote a fat $3 billion pre-payment check to secure scarce parts.

But there are some problems you cannot solve simply by throwing money at them. Money can buy parts and secure manufacturing facilities when you know what to plan for and when nature or a totally unexpected development is not toying with your supply base. Apple came up short on one of these matters -- accurately forecasting demand for iPads and iPhones -- but in the ongoing quarter it also faces the possibility it may not have enough parts to produce its products.

Cook described the complexity of the problem Apple and other high-tech equipment manufacturers face as a result of the Japan disaster as follows:

We source hundreds of items from Japan, and they range from components such as LCDs, optical drives, NAND Flash and DRAM to base materials such as resins, coatings and foil that are part of the production process at several layers back in the supply chain. The earthquake and subsequent tsunami and the associated nuclear crisis caused disruption for many of these suppliers, and many unaffected suppliers have been impacted by power interruptions.

The situation remains unpredictable. Further, there are some supply risks that are beyond the current quarter. Although we know of no issue today that we view as unsolvable, the situation is still uncertain and there are obviously no guarantees.

If money could solve these sourcing and manufacturing problems, Apple could simply write a check. No technology company is quite as rich: It had about $29.2 billion in cash and short-term investments and $36.5 billion in long-term investments for a total of approximately $65 billion at the end of the recent quarter.

The cash pile is growing by billions every quarter, and it's overall a positive development for Apple. The combination of a hefty cash hoard, huge sales, and cost of goods sold, gives the company enormous clout in the supply chain and offers it the ability to secure critical parts -- when available -- leaving others to scramble for the leftovers.

Even the richest company can get humbled, though, when money fails to solve its most pressing problems.