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The Limits of Money

{complink 379|Apple Inc.} 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.

28 comments on “The Limits of Money

  1. AnalyzeThis
    April 25, 2011

    Well said, Bolaji.

    If you put aside the supply chain difficulties caused by the Japan earthquake, I think this situation is rather similar to the problems Nintendo experienced in keeping up with the demand for Wii a couple of years ago.

    In a way, you can't really be too upset for their respective failures to anticipate the unprecedented demand both companies experienced: what if they had done the opposite, over-producing and wasting money on very expensive to produce inventory? In general, using such a tactic would be very poor strategy.

    There are simply times when the market demand for your product goes well beyond your wildest projections. This is really a nice problem to have, and I think very excusable.

    Now that being said — as you mention at the end of the article — this situation differs from Nintendo due to the Japanese disaster issues. It will be very interesting to see how well Apple will be able to deal with this crisis. It could very well snowball and become a big problem, long-term.

    Fortunately, Apple has an advantage in this situation that other companies do not: in times of limited supply, I am sure suppliers will try to fulfill Apple's requests first. They're obviously a very important client which they do not want to disappoint.

  2. SunitaT
    April 25, 2011

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

    Bolaji,

     I totally agree with you. The fact that its rich comapny doesn't mean that it can secure critical parts all the time. But it gives the comapny extra flebility to diversify its supply-chain base. It can secure critical parts from different regions of the world so that in case of catastrophe there is no impact on the production.

  3. Eldredge
    April 25, 2011

    The is the best kind of problem to have, as long as capacity can be increased in the short term for the critical compoments….but in this case, the issue is greater than just increasing the supply, but involves recovering lost capacity in face of still increasing demand.

  4. eemom
    April 25, 2011

    Apple is still in a much better position than its rivals.  Not being able to keep up with demand only means that Apple's products are widely desired.  As far as the supply issue, that is something that will plague the industry as a whole.  Apple still carries a lot of clout and I am sure will fair well in this situation but no company, including cash rich Apple, will be able to escape the negative ramifications of the Japan crisis.

  5. Wale Bakare
    April 25, 2011

    Aftermath of Japan's tsunami and quake being felt across all the high -tech sector. This should be a wake up call to all high -tech equipment manufacturers to shift attention from regions that are prone to natural disaster. 

    Its high time production of parts focused on other regions. Though, political instability and uprising may not  make atmosphere condusive in those areas but i strongly believe human unrest can be curtailed rather than predicted natural disaster that no one can stop from being happening.

     Apple's distinct indepth quality in high – tech industry plays key performance to its unquantifiable success especially since the emergence of tablet computers. Infact, despite the exodus of an Android platform tablets to the world markets, ipad still the most sought for tablet computer in the world. 

     

  6. DataCrunch
    April 25, 2011

    It's nice to always be sold out of product. I wonder if the supply problem due to the tragic events in Japan will be relative to Apple's competitors, meaning will their main competitors also have the same issues in terms of supply (they only wish they had the same demand issues).   

  7. Anna Young
    April 25, 2011

     

    Despite all odds, Apple is still better positioned. Imagine having about $29.2 billions in cash and yet still unable to resolve the current issue plaguing the electronic industry, well like you said Bolaji, it truly shows the “Limits of Money” -Money cannot hold back an act of God that plagued Japan.

    Wale Bakare, I do agree with you, although complex as it seems, it's time the high tech electronics industry extend its manufacturing base from Japan to another location, to safeguard against future occurrence.

     

  8. bolaji ojo
    April 26, 2011

    Dennis, Many of its rivals would rather have the Apple problem — high (and not completely fulfilled) demand combined with enough cash to address the problem and clout with suppliers to leapfrog the pack. One of the things I couldn't mention in the article was Apple COO Tim Cook assuring his audience that he had a team of procurement managers working hard at the problem. He admitted the challenge but was sure Apple would find a way out. In the end, money talks even when its echo sometimes doesn't carry as far as one would like.

  9. Jay_Bond
    April 26, 2011

    Apple is doing great financially. In fact there are thousands of companies that would love to have one of Apples quarters as their yearly figures. Their supply issue is definitely one of those factors that money can't buy. Apple had to take a gamble on predicting their sales and they lost. Granted they didn't exactly lose because their sales for the year were still phenomenal, but they could have had even more. At least Apple has done this correctly and under estimated instead of overestimating and having warehouses full of product.

  10. prabhakar_deosthali
    April 26, 2011

    Since Apple has its order books full and its cash bags overflowing it will do all that is posiible to keep its production at peak levels to meet the market demands. This is seriously going to affect the smaller players or even the players in other consumer areas as their supplies are going to be affected. This can have a cascading effect on the market where other consumer electronic goods may have a short supply.

  11. Himanshugupta
    April 26, 2011

    Rightly said that Apple's rival would love to have their product being in short supply. I remember that when Apple lauched iPad then there was so much skepticism as whether this is the product which people want, whether there will be any future for iPad etc. Now the situation is that the analyst are considering iPad and other tablet as a threat to PC and Notebook (which is bearing the brunt). 

  12. saranyatil
    April 26, 2011

    It is clear now for me how the Japan earthquake has affected the electronic OEM's. Even apple can't do much about the supply chain problems since no one has predicted the earth quake or tsunami. The only solution would for apple is actually to look for suppliers who can operate even when earth is falling down. But it is not possible ot is it?

  13. Ms. Daisy
    April 26, 2011

    Bolaji:

    Your comment about Apple is an enviable problem “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.”

    I bet other OEMs are envious of Apple's current “problems”, and wish they have the same problem of over-demand of goods and overflowing pockets of cash. We should however brace for the future impact of the earthquake. It sure will define the limits of money!!

  14. Eldredge
    April 26, 2011

    What is the best solution – geographical diversification of sources for the same products? That comes at a price, and maximization of profit benefits from minimizing costs. Sometimes there just isn't an easy answer.

  15. bolaji ojo
    April 27, 2011

    Eldredge, You are right. There are no easy answers but sometimes companies have to move beyond the tight resource management that has characterized the industry over the last decade to a more risk-sensitized resource management strategy. As some researchers have pointed out, the concentration of procurement and manufacturing activities in a single region of the world may make sense on an immediate cost basis but it also holds the potential for a mega-disaster if an unexpected event occurs. Will this industry hold together if a major disaster hits Taiwan, for instance? Apple is in a position where it can afford to spread out its procurement and manufacturing — with the same company. It just has to require they manufacture in multiple locations.

  16. Kunmi
    April 27, 2011

    The supply/Demand problem with apple is really a good problem. It is an indication that apples product is generally accepted as the need of the hour in today's technology. It is also an opportunity for competitors to think of how generic products can snatch some of these demands if apple can not handle the level of the turn outs.

  17. Tim Votapka
    April 27, 2011

    A good problem to be stuck with at the moment. Who would have thought there would have been a product line so well in demand? Has there been any other that's come as close?

  18. maou_villaflores
    April 27, 2011

    A good supply chain system and process and a stable ERP system.

  19. Backorder
    April 29, 2011

    Always a nice problem to have. With a feedback like this from the market demand, I am sure Apple will be ramping up to level out with the demand in the coming quarters. Goes without saying, how essential it is to secure the supply chain. The procurement chiefs at Apple must be on the edge after the Japan Quake. Hopefully, it doesnt put off the supply-demand gap too much for the fanatic seekers of ipads to handle.

  20. Ashu001
    April 29, 2011

    Bolaji,

    In keeping with Eric's Blog

    http://www.ebnonline.com/author.asp?section_id=1064&doc_id=206163&

    I have a solution-Come back to the USA…

    Apple needs to build a back-up manufacturing facility here in America.

    They got the money,the power and the means to do it.What's stopping them?

    Complacency,in fact it would actually make them even more popular with rank and file Americans.They could very well hire a few thousand Americans depending on the facility they design.

    Regards

    Ashish.

  21. bolaji ojo
    April 29, 2011

    Ashish, It's unlikely Apple will start manufacturing in the United States simply to satisfy a national call to produce locally. The same investors who boosted the company to become the most valuable tech company will flee its stock if it starts manufacturing its iPhone, iPad and iPod locally without stating clearly how it made financial sense. It comes down to the company's loyalty choice. Is this to the shareholders or to the United States?

  22. Mr. Roques
    April 29, 2011

    Very interesting article and Backorder points out, it's always a nice problem to have. Has any other country stepped up to the challenge and start providing the materials that Japan can't? I'm thinking of South Korea? Probably they won't be able to handle all the demand but could take advantage of the situation.

    Also, do you think Apple should do more with that enormous amount of cash? Invest it somewhere – the dollar doesn't looking very promising.

  23. Backorder
    April 30, 2011

    Normally, the excess cash of the order of what Apple has, would make for an acquisition. But in case of Apple, I cant see a major acquisition just because it would be difficult for the culture and vision at Apple to merge with another smoothly. It could dilute the nature of products from Apple.

  24. Ashu001
    April 30, 2011

    Apple tends to buy stuff/companies when it suits them perfectly and integration proceeds super-smooth.

    Otherwise they don't bother with the hassle of M&A.

    Regards

    Ashish.

  25. Backorder
    April 30, 2011

    Having said that, Apple could invest in integrating its own supply chain to be more sure of its ability to deliver products. Much like the A4 experiment.

  26. Ashu001
    May 7, 2011

    Bolaji,

    I am not so sure that those same investors will flee Apple(as you said here);given the kind of Investors(especially Momentum Chasing Hedge Funds) Darling it has become.

    But still the below article was an eye-opener of sorts!! An Ipad would cost twice as much as it does today;if it were to be manufactured in the US instead of China!!!

    http://stonestreetadvisors.com/2011/05/06/how-much-would-the-ipad-2-cost-if-it-was-made-in-the-u-s-a/#more-2104

    Unless of course the Chinese Govt.chooses to revalue their Currency in response to surging inflation.By 15-20%(atleast);thats when things will probably be more competitive[Comparing production costs in China with those in America].

    Regards

    Ashish.

  27. Mr. Roques
    June 15, 2011

    Thanks Backorder,

    How about vertically integrating then? It doesn't have to change the company, just buy it or invest in it. Don't know what the fed's would think about that (or if they can even have a say in that).

  28. mario8a
    June 22, 2011

    Hopefully one day I'll have the same problem as APPLE, having to manage extra cash.

    we shall not forget APPLE has the challenge to compite to so many other companies and their innovation will have support their invesvements as well as they been doing it.

    Cheers

     

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