Apple offering upfront cash payments to secure components, block out competitors

Posted:
in iPad edited January 2014
Apple has reportedly become more aggressive in securing components from overseas suppliers, making moves such as upfront cash payments to both ensure supply and block out competitors.



Analyst Brian White with Ticonderoga Securities said in a note to investors on Thursday that Apple began "aggressively attacking" the component situation in Japan following the earthquake and tsunami that struck the country. The iPhone maker reportedly sent executives to suppliers immediately to ensure adequate supply of components, and also began offering upfront cash payments.



Separately, White's contacts in Taiwan also revealed that Apple is allegedly securing component capacity using what is known as a "three cover guarantee," referring to capacity, stock and price. Apple's move is seen as one that could potentially block out competitors and prevent them from building ample supply of devices.



The information comes as a separate report out of the Far East suggested that a one-month delay for Research in Motion's PlayBook tablet was as a result of Apple securing most of the available touch panel production capacity. The delay has forced the PlayBook to go on sale after Apple's in-demand iPad 2.



Last month, it was said that Apple could agree to price hikes in order to secure touch panel supply, particularly in the aftermath of the Japan earthquake. Apple was said to be in talks with component makers about touch panel pricing, and allegedly considered some price increases in negotiations.



In the company's last quarterly earnings call, Apple Chief Operating Officer Tim Cook revealed that Apple had invested $3.9 billion of its nearly $60 billion in cash reserves in long-term supply contracts. He declined to reveal what components Apple had put its money toward, citing competitive concerns, but said that it was a strategic move that would position the company well in the future.



Analysts largely believe that the secret investment was related to touch panel displays that are the centerpiece of devices like the iPhone and iPad. One cost breakdown estimated that such an investment could secure Apple 136 million iPhone displays, or 60 million iPad touch panels.



It's a move similar to 2005, when Apple inked a major deal with Samsung to secure longterm supply of flash memory. NAND flash would go on to become a major part of Apple's products, including the iPhone, iPad and new MacBook Air.
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Comments

  • Reply 1 of 59
    macnycmacnyc Posts: 342member
    Quote:
    Originally Posted by AppleInsider View Post


    The information comes as a separate report out of the Far East suggested that a one-month delay for Research in Motion's PlayBook tablet was as a result of Apple securing most of the available touch panel production capacity. The delay has forced the PlayBook to go on sale after Apple's in-demand iPad 2.



    Please! RIM could have just taken all those unused Xoom panels!
  • Reply 2 of 59
    kerrybkerryb Posts: 270member
    I can hear the droids complaining that Apple is too aggressive protecting a giant lead in a product category they literally created. The 'me too" pads will just have to wait to get the components they will need to compete.
  • Reply 3 of 59
    crowleycrowley Posts: 9,327member
    Apple is certainly applying a lot of the leverage it has as the major buyer. It's a dangerous game, balancing the economies of scale that they've earned from making the best product with creating a perception of anti-competitive ring fencing of components.



    At the moment I think they're fine, and they're probably doing a lot of good by pumping money into Japan when they need it. Hopefully they won't be jerks about it.
  • Reply 4 of 59
    Money talks.... BS walks
  • Reply 5 of 59
    On the plus side, Samsung can say they sold out, and actually be talking about sell through rates!
  • Reply 6 of 59
    mac_dogmac_dog Posts: 933member
    Quote:
    Originally Posted by Crowley View Post


    ...a perception of anti-competitive ring fencing of components...Hopefully they won't be jerks about it.



    exactly. it's simply a perception.



    i'm sure apple's competitors will spin this so it looks like apple is being bullish and anti-competitive. yet they would do the exact same thing if the roles were reversed.



    all apple is doing is guaranteeing their supply. they have the capital and are using it wisely. if apple's competition has the money, they should do it too. the problem being their products aren't a guaranteed success, so they won't want to make that kind of commitment. they'd rather trash apple instead and hope it drives customers to their crap products.
  • Reply 7 of 59
    rhyderhyde Posts: 294member
    Quote:
    Originally Posted by addicted44 View Post


    On the plus side, Samsung can say they sold out, and actually be talking about sell through rates!



    Smooth move...
  • Reply 8 of 59
    solipsismsolipsism Posts: 25,726member
    Quote:
    Originally Posted by Crowley View Post


    Apple is certainly applying a lot of the leverage it has as the major buyer. It's a dangerous game, balancing the economies of scale that they've earned from making the best product with creating a perception of anti-competitive ring fencing of components.



    At the moment I think they're fine, and they're probably doing a lot of good by pumping money into Japan when they need it. Hopefully they won't be jerks about it.



    I can see how this might be seen as anti-competitive by some, but they seem to be selling as many as they can make. Are there laws that prohibit this sort of thing if you are selling your supply in a timely manner? I don?t think so or I?d think we?d have seen something already with the NAND market.
  • Reply 9 of 59
    Apple doesn't seem to be trying to 'block out competitors', Apple is just trying to secure parts for it's own products. Yes I understand the need to spice up the article in order to get more clicks, but this accusation of Apple trying to 'bock out competitors' isn't going to do any good for Apple's image and most likely just not true. I mean, there's nothing Apple does that would stop manufacturers from opening more plants to produce parts for other companies, it's not an exclusive agreement (like if a manufacturer produces for Apple then it can't produce for another company).
  • Reply 10 of 59
    wilwil Posts: 170member
    Quote:
    Originally Posted by drobforever View Post


    Apple doesn't seem to be trying to 'block out competitors', Apple is just trying to secure parts for it's own products. Yes I understand the need to spice up the article in order to get more clicks, but this accusation of Apple trying to 'bock out competitors' isn't going to do any good for Apple's image and most likely just not true. I mean, there's nothing Apple does that would stop manufacturers from opening more plants to produce parts for other companies, it's not an exclusive agreement (like if a manufacturer produces for Apple then it can't produce for another company).



    Considering that some of the parts are being made by their competitors vying the same markets, the phrase " blocking out competitors" makes no sense. Will Samsung say they are being harmed considering that Apple is buying the same parts they are making for their own products at cost??
  • Reply 11 of 59
    I think share holders should be happy on how Apple invest the money securing parts. Now more than ever we can see how smart and complex is Apple business. There is nothing wrong to buy in advance, more so if you have a product like the ipad2 that doesn't warm the shelves.

    Competitors are really in a big problem. Not only cause their products lack the appeal of the iPad but they can't build them in quantities.

    Sweet!
  • Reply 12 of 59
    charlitunacharlituna Posts: 7,217member
    Quote:
    Originally Posted by Crowley View Post


    Apple is certainly applying a lot of the leverage it has as the major buyer. It's a dangerous game, balancing the economies of scale that they've earned from making the best product with creating a perception of anti-competitive ring fencing of components.



    The issue is likely more the media and the analysts twisting the facts around to suit their own goals of either getting hits . Making Apple look like douchebags gets more talk than their sales figures



    When the truth in the matter could be simply that RIM took too long to get going and Apple had placed their order and said companies couldn't fill both. Contracts often have penalties for going way past promised delivery times (to offset any negative impart on the buying company). As awesome and magical as Apple is, they are a business and do likely practice such 'standard' tactics. And this sort of thing is probably why they don't talk too far if any in advance about what they are doing. If everyone knew what they had planned they could try to lock Apple out of parts etc. But Apple waits until it is done. Design is locked, deals in place, product already being produced in most cases. Even when it is something that requires FCC approval so they speak early there are rumors the whatever is already being made (and held until the approval is signed)



    As for this latest bit, it too is likely a little twisted. Apple is probably NOT acting to block out other companies as has been implied in some articles. As these are companies in Japan, Apple probably sent reps to the companies to assess their damage and find out if the companies can still function and finish their contracts and at what delays (also probably letting them know that all penalties are being dropped because they can't be blamed for Mother Nature having a really really bad day). And then, knowing the companies are in a bind they switched from payment on delivery as was probably in the contract to up front payments to help them get back in business and finishing the contract faster. Nothing more or less. No other intent involved
  • Reply 13 of 59
    alanskyalansky Posts: 235member
    The fact that Apple is proactively securing their supply of components does not mean that they have any intention of blocking competitors' access to those components. There is nothing stopping competitors from employing the same tactics except their lack of foresight.
  • Reply 14 of 59
    paxmanpaxman Posts: 4,683member
    Quote:
    Originally Posted by drobforever View Post


    Apple doesn't seem to be trying to 'block out competitors', Apple is just trying to secure parts for it's own products.



    Exactly. There is a big difference in between the two even if the net result is the same for Apple competitors. Were Apple to tell their suppliers they would loose Apple's business were they to sell to Apple's competitors at the same price (for instance), it would be a different story.
  • Reply 15 of 59
    cvaldes1831cvaldes1831 Posts: 1,832member
    Quote:
    Originally Posted by alansky View Post


    The fact that Apple is proactively securing their supply of components does not mean that they have any intention of blocking competitors' access to those components. There is nothing stopping competitors from employing the same tactics except their lack of foresight.



    Correct.



    If Apple needs 40 million units and the supply chain can provide 80 million units, Apple will order 40 million units. Their competitors are free to buy the other 40 million. They aren't going to order all 80 million just to 'block competitors' access to those components.' 40 million unused units will not positively affect their gross margin.



    However, if Apple wants 60 million units and the supply chain can only provide 40 million units, you better believe that Apple will say, "We'll take them all. Here's the contract. We brought cash. You're okay with that, right?" And the supplier will probably reply, "Where do we sign?"
  • Reply 16 of 59
    patranuspatranus Posts: 366member
    Quote:
    Originally Posted by Crowley View Post


    Apple is certainly applying a lot of the leverage it has as the major buyer. It's a dangerous game, balancing the economies of scale that they've earned from making the best product with creating a perception of anti-competitive ring fencing of components.



    At the moment I think they're fine, and they're probably doing a lot of good by pumping money into Japan when they need it. Hopefully they won't be jerks about it.



    What perception?



    Its supply and demand.



    Supply is low and demand is high.



    Apple decided to secure its components at a higher price.



    Nothing is stopping RIM from securing components at an even higher price.



    It is the free market in action.
  • Reply 17 of 59
    nagrommenagromme Posts: 2,834member
    Apple’s crime isn’t securing parts: clearly the demand is there and their users need those components.



    The crime is that they unfairly invented a touchscreen smartphone, touchscreen pocket tablet, touchscreen full tablet, touchscreen OS and touchscreen app platform—and made them great—before anyone else. Starting with porting OS X to ARM as the basis for iOS. What other company could do that, years ago? If Apple had any decency, they would have waited so that the other players could all begin at the same time, with no head starts for anyone. Now, we’re stuck with a situation where some people want a tablet, badly, and all they can get is an iPad, when what they really want is a bulkier copycat with worse battery life and less choice of apps (ironically, in the name of "choice").
  • Reply 18 of 59
    djmikeodjmikeo Posts: 179member
    Quote:
    Originally Posted by Wil View Post


    Considering that some of the parts are being made by their competitors vying the same markets, the phrase " blocking out competitors" makes no sense. Will Samsung say they are being harmed considering that Apple is buying the same parts they are making for their own products at cost??



    Great Point!
  • Reply 19 of 59
    john.bjohn.b Posts: 2,740member
    Quote:

    block out competitors



    ^^^ Whaddaloadacrap.



    If Apple is taking delivery of the stock they are pre-ordering, then I don't see that as blocking anybody. It's prudent to sew up your supply lines with long-term contracts, all of the new-aged "JIT delivery" mantras be damned. If a resource may be scarce, making sure you get it before anyone else does is just sound business practice.



    It might be more to the point to write the story from the angle that RIM didn't bother to properly secure hardware and parts necessary for their tablet, which possibly caused them to have to delay its release.
  • Reply 20 of 59
    ...because they know in advance where they are intending to take their product lines, and can advance purchase and build these agreements before any given device or update actually hits the market. Since most of their competitors are forced to react to what Apple produces, they are constantly caught short for components when Apple plans out and executes on their purchasing intentions. Any of these competitors can do the same thing if they can get out in front of Apple's development plan. So far none have that could capture mindshare or marketshare.



    For example, the whole tablet thing. Everyone else (largely) approached the tablet format as being just a laptop with a fancy lid - just as heavy, awkward to use, and with an OS which required a GUI overlay and a stylus in order to function properly. AND more expensive than a regular lappy or netbook. Apple took it in another, entirely different direction (which interestingly enough allows for later convergence if they so choose) and delivered a popular and successful product line in the midst of their existing products. The same situation existed (and has been flogged endlessly by detractors here) for the iPhone and iPod product lines as well. In each case Apple knew where it wanted to take the product line and moved to gain pricing control on components by contracting with sources to purchase in bulk, which lowers the existing price and protects against rising prices as demand for compenents increases. Strategic thinking and execution. Apple in several cases didn't innovate the concept but did refine, redefine or popularize it moreso than any of their competitors.



    All a competitior has to do to get around this is out-strategize Apple, and deliver the next great device and it's successors so they can do the same thing. Not holding my breath of course, but it could happen.
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