Apple reportedly 'demands' 10% price cut from key iPad suppliers as orders increase - Page 2

http://www.bangobang.com/2011/01/app...overloads.html

Apple is overbidding competitors to secure a larger portion of Samsung Semiconductor's production capacity.

ie. they are paying a premium to secure supply for some components.

Manufacturers aren't simply going to take this from their bottom line. Quality will suffer, or worker compensation or safety, or environmental responsibility, or all of the above. A 10% cut just "because I demand it" is huge. Productivity does not go up that fast.

No it isn't. As well as the news that Apple was bidding up prices on components to lock out competitors (esp. after 3/11),
http://www.appleinsider.com/articles...el_supply.html
Apple has been prepaying for parts in the billions of $s - that is a premium in itself since it gives the supplier 60-180 days extra with the cash to invest, make a return on etc.

Maybe Apple wants to be able to make the iPad cheaper. There are now many Android tablets entering the marke,t as well as RIMs and HP's offerings. Most of these tablets match the iPad's price with some now going below (Toshiba, I think). Apple made it perfectly clear when they released the iPad that they were going to destroy the competition with price. The only way they can lower their prices and maintain margins is to reduce the cost of manufacture. I just see this as Apple staying ahead of the competition in a market that is fast becoming saturated with products.

As opposed to all the evidence on offer that Apple is "demanding" anything? How do you figure that works-- someone from Apple gets on the phone and starts screaming at a supplier to cut prices or Apple will walk away, thereby blowing a huge whole in the critical iPad 2 supply chain?

Assuming this story has any basis in reality at all, it's easy to imagine a lot of scenarios wherein "demanding" is simply spin designed to play into ambient animosity towards Apple.

For instance, Apple may be attempting to renegotiate component prices based on increased orders. That would typically be called "doing business", but that doesn't make for a nice click-bait story.

Or Apple may have had clauses in their original contracts that allow for reopening pricing negotiations at certain thresholds. Or they may be guaranteeing certain levels of purchasing, for which they expect to receive discounts.

We have no way of knowing, of course, but this kind of story doesn't provide us with any basis to suspect Apple is doing anything particularly noteworthy or particularly unpleasant.

NAND's price per gigabyte declines faster, at an average of 50% per year.
DRAM drops at 30% per year (same link)

LCD panels can drop faster than that

Processor power prices drops at insane rates

The reason that this isn't generally noticeable in the cost of a new PC is that PCs have both cost deflation and spec-inflation at the same time, so the two balance out. Devices like the iPhone or iPad are identical components throughout their lives so the cost deflation has full force.

This is why games consoles can sell at a loss early in their cycle and at a huge profit later - even at a lower cost.

Procesor power costs is not the same as unit costs. The CPU in the iPad 2 has two cores to the iPad's 1. That is already a 50% drop in cost per power.

If you look at the chart for screen prices, you will note a flattening after the initial dramatic drops. 10" screens have been in volume production for many years, used in netbooks. The iPad uses IPS screens, which are new in that format, but IPS itself is quite old as well.

DRAM also drops per MB, but not nearly so quickly for unit prices which are actually quite stable. It's simply that density doubles every couple of years.

Bear in mind also that many prices have risen in the past couple of years, since the bottom of the market crisis. Commodity prices are all well off their 2009 lows. Labor prices are rising in China, etc.

All I am saying is, cheap is never free. Somewhere, there will be a cost.

I once worked as an estimator for an electronics contract manufacturer. Pricing is based on volume, the more you order the lower the price. Even in the middle of a contract if volume goes up significantly a customer will ask for a good faith change in price.

There is nothing unusual here

Yes but even if you look on it on a per processor basis it's still over 10% per year for the same model, because old models are made on an old fabrication process and the premium models are all moved to the new shiniest lines on the shiniest fabs.


10inch screens in netbooks didn't have that aspect ratio, they're almost all widescreen. I'm willing to bet that the iPad was the first platform to use that screen in volume.


Again, even on a chip basis it still drops considerably, certainly by more than 10% per annum.


All true but none of those factors have seriously impacted tech component deflation because it is mostly capital intensive and not material or labour intensive. Interest rates are extremely low right now, for $, which most Asian markets peg to.


Tech gets cheaper and better every single year, it has done since it began as a measurable industry and it will for at least a few more decades - aside from a few crunches due to supply issues. 10% is not a lot by tech deflation figures - even on a per unit basis. It's certainly not call for people to start tearing their hair out on web forums and complain that Apple is stealing bread from babies mouths.

How about apple takes 10% off the iPad and all their other products? Or better yet, give their employees a 10% raise to help with the Gas crime, i mean gas prices.

uh!?

I always love it when people post stuff like this. As if the company's board of directors has no choice in the matter. "Don't blame us, it's our fiduciary responsibility." Can you please point to the law or SEC regulation that says this?

Yes, it's the board's responsibility to make decisions in the best interest of the company. But nowhere does it say that the "best interest" = maximizing profits for shareholders. If the board decides it is, that's fine. Nothing wrong with that. But don't act as if it's anything other than greed, either on the part of the board or the shareholders.

Don't get me wrong, making money is good. And there is nothing wrong with wanting to make lots of money. Just don't pretend is some sort of mandatory "duty" imposed by law or regulation. It's a decision made by the company, perhaps compelled by it's stockholders (on the threat of kicking out it's board members). Nothing more, nothing less. There is no outside force compelling this so-called "fiduciary responsibility".

Cheaper, yes. Better, not really. A tremendous amount of junk is being sold now for low prices. Poorly built laptops and netbooks are legion. Practically disposable.

The electronic components do get cheaper, though not as quickly on a unit basis as is generally believed. But the physical device does not. This is why machines that have excellent specs by the standards of a few years ago feel like they will fall apart in two minutes. It's why the 15" MacBook ASP has barely changed in many years. It's why the Mac Mini is actually more expensive than it was with the earlier model.

A well built machine, with a proper case, mechanically good keyboard and components, and so on, will not deflate substantially through time. Apple builds good hardware (could be more robust, but clearly the best of the industry), so unit prices cannot really drop so easily.

I am not tearing my hair out, but Apple has had unnecessary quality problems, such as poor thermal paste application, for years. A confrontational relationship with suppliers is not often associated with quality. Japanese automakers for example worked cooperatively with their suppliers, while US manufacturers used a low-bid model. Who was more competitive?

Well, it sort of does, actually.

The key is the timescale. When people pull out the "fiduciary responsibility" card, they are often justifying short-term gains.

It's easy to maximize short-term profits. Cut corners, squeeze suppliers, cheat customers with poor service, and so on. But all of these will destroy a brand in the long run. Blindly cutting costs is not management, and it is not responsibility, fiduciary or otherwise.

It's hard to say if this particular instance qualifies as blind cost-cutting. I hope not. I just think people should not be so quick to applaud it. Let's see what it results in a couple of years down the road.

This entire discussion is about components, so cheaper and better would be the expectation. As for the whole. As for price per unit not decaying fast, it's hard to get good data because most of it is behind paywalls at market research firms but the few times I've been able to track a components price over a year or two 10% drops YoY have been a minimum except just before a product goes into end of life scarcity.

I'll keep looking to see if I can find any decent hard data though.


Ok - just googling 'Toyota Squeeze Suppliers' I immediately got this http://www.themanufacturer.com/uk/co..._CCC21_Squeeze

I'm pretty sure that Nissan did the same thing under Carlos Ghosn's reign of terror. In any case the car market and the IT market are utterly and profoundly different. Car makers have LOTS of small and medium sized suppliers mostly supplying small things that are not terribly capital intensive, and are generally more driven by material prices or labour prices.

Apple have a very small number of very big suppliers supplying large numbers of things that are very capital intensive indeed. The products being supplied are essentially commoditized and both parties know what the going rate is, what the profit margins are and how much the supplier needs to make to invest in the next generation of plant.

I'm pretty sure that Samsung can stick up for itself.

Edit: Managed to find 2010s data for Dram all modules tracked in this graph dropped by over 10% - it's so frustrating knowing that all the data is sitting on dramexchange.com and I can't bleeding access it

LOL

Microsoft is primarily a software company so exactly when were we supposed to read about them bullying vendors? Last time I checked a majority of their profits came from their own programmers. Sure the Xbox and peripherals are branded but I don't remember reading anything about IBM getting "bullied" over pricing.

LG was the display manufacturer on the original iPad launch. Samsung was a second supplier. Samsung fabs the A4 chip as a ARM licensee. What exact other Samsung parts are so magnificent and irreplaceable?

Took 15 seconds to find http://www.theregister.co.uk/2002/04...a_at_war_over/

I've no idea what people on this site where saying about that, but I remember laughing with a friend that if MS thought that NVidia would be pushover they clearly never actually read any technology papers Mostly we just wanted popcorn and tickets to watch the bunfight.

First rule of business. Get agreements in writing before investing in infrastructure.

...and didn't Apple buy a bunch of glass contouring machines for their suppliers so they didn't have to shell out?

Who said it was a law or regulation? Not me. Outside force? Maybe, but those are your words. It's business, and good business, at that.

Everything you just explained was another way of saying fiduciary responsibility. It's a responsibility (albeit, an unwritten rule) that a company takes on as soon as it goes public. If a company doesn't do well and strive for maximum profit, few will invest. Investors (the outside force) will look for a well managed, more profitable company to invest in. If no one invests, the company has no value. If a company has no value? Well, you figure it out.

Shareholders want the best return on their investment and they gravitate towards the company that will allow them to achieve that goal no matter who the company is.

You sound bitter. I'm sorry if you didn't invest in the right company at the right time. 12 years ago @ an adjusted-for-split price of ~$4.25, AAPL is one of THE best ones that I chose.

You can save 20% on everything by moving from NYC to, say, Des Moines.

In this specific case, the iPad 2, it may well be that the balance of power is tilting towards Apple: those are components that mostly are designed exclusively for the specific product, with a dedicated industrial equipment (some of which Apple helped finance). The suppliers have no alternate market to use that production capacity (no competitive tablet against iPad 2).

deleted

Sorry. Integrating. Even OS/2 bundled, but who can deny that the point of integrating IE was to kill Netscape.

Agreed. I avoided the whole short-term vs long-term in my original post. There is far more to responsibly running a company than maximizing profits.


Not bitter at all. Just think too many companies put too much emphasis on shareholder profits and not enough on running running the company with the long term in mind. The way some companies are run, you'd think the shareholders were the customers of the company. I've even seen one company's mission statement that talked about maximizing shareholder value and not once mention either their products or their customers. This kind of short-term greed is what helped led to the dot.com bust, the housing collapse, and many of the current economic woes.

Steve Jobs himself said as much in an interview in Fortune magazine (I think it was Fortune, might have been another biz mag) in the late 90s. That too many companies were overly focused on short-term profits and not enough on building a business. Apple is one of the few companies that do both very well. They have zero debt and huge cash reserves. If only more companies (and individuals) could have the same. And if you don't need to borrow cash, share price becomes a less critical issue in the running of your business...so you can spend more time focusing on running your company than the whims of shareholders. When stock prices plunged a few years back, how many companies were screwed because they could no longer borrow money to run their business?

Apple has managed this success on the long term. And you've benefitted from it. That's great. But sorry to break the news to you, you didn't benefit because Apple focused on your return on investment. You benefited because Apple focused on running their business. Yes, it's a fine line to draw, but an important one. Too many companies place too much emphasis on the "maximizing shareholder return on investment" to the detriment of the company as a whole. When Apple's stock price plunged with the rest of the market, it had nearly zero impact on Apple's operations. Why? Becuase Apple is not beholden to a fiduciary responsibility to maximize their shareholder's return on investment. They could have spent their cash to prop up the share price, but they didn't. They continued to focus on running the company responsibly, and that is their fiduciary responsibility.

Their fiduciary duty is to the shareholders and to shareholder value. That's distinct from share price or near term profits, but it is also very different from 'running the company responsibly' - because that phrase is so vague as to have no meaning at all.

It is my understanding that in some cases Apple paid for entire production lines to make sure capacity was brought on line quickly. My facts are thin here but this would not be surprising at all as it gives Apple exclusive access to product lines.

Now how much Apple has paid for directly can be debated but the fact is customers often own part of the tooling involved in the production of their product. Having worked in a job shop I know this is not uncommon, for example molds and secondary operations tooling is owned buy the company contracting to you. However it is not uncommon to see deal wrought that might have your customer taking an interesting in the tooling to run those molds.

As to this idea of more than normal market price, some of the stuff that we are talking about is brand new to market. There isn't a normal market price. The flip side of that is that even though it goes against common belief Apple isn't always getting parts at the absolute lowest price. There are other things that go into making a Mac that can justify a premium such as testing, specifying more robust parts or customization specific to Apple. Just look at any of the tear down sight where you can see the parts on the latest Apple device listed. There are often many custom numbered, that can mean there are alterations that are specific to Apple. it can also mean other things but the end result is that Apple may end up paying more for a part that is based off of something more generic.

You shouldn't speak about things you know naught about.

This is not supply and demand at work. It is economics of scale.

Apple is moving more components than expected so demand is higher. Higher volume automatically means lower cost per unit.

Second; electronics manufactures cover their development costs very early in the production cycle. So if you use bleeding edge hardware you pay a rather huge premium over what would be the case if you used two year old technology. It is the nature of the beast, if you don't cover your development costs when the item is new and shinny you are basically screwed because in two years your hardware is relegated to bargain basement hardware.

Actually after a year productivity should increase substantially. If it doesn't you either have problems with a design or your production crew sucks. Contrary to popular belief it takes a while to remove the bugs from a production line. You almost never start up a line and have it running at 100% of rated speed. Take this from somebody involved in the start up of several high speed production lines. In the second year if you are starting up additional lines the benefit of experience and the spread of talent across those lines can result in significant reduction in expenses.

Um. This is normal people. Apple isn't evil. People aren't starving.

Companies expect manufacturers to increase yield and find other cost savings over the life of a parts contract so they build in reductions to part costs into their contracts. Despite this not being as true these days, as manufacturing processes are pretty efficient from the start, this has not changed the contractual process. Because of this, parts companies make money at the beginning and tend to barely make a profit at the end of a contract.

Hope people learned something. <honestly, i'm not trying to be snooty>