Capital Expenditures

Innovation at Tim Cook's Apple

November 14, 2013: 7:22 AM ET

Steve Jobs was focused on innovative products. His successor is focused on process.

Source: Asymco.com

Source: Asymco.com

FORTUNE -- At a Business Insider conference Friday, ex-iPod hardware chief Tony Fadell praised Apple (AAPL) CEO Tim Cook as an innovator.

But he wasn't talking about whizzy new products like the iPhone or iPad. Cook's expertise is in operations -- in the supply chain that produces those iPhones and iPads.

"The number of turns he did on the inventory was amazing," said Fadell, by way of example. "That's a kind of innovation."

As if to underscore that point, Bloomberg's Adam Satariano posted a long piece Wednesday about the record $10.5 billion in capital expenditures that Apple has earmarked in fiscal 2014 for things like aluminum milling machines, laser polishers and industrial robots.

"Apple deploys capital as a competitive advantage," says Asymco's Horace Dediu, who produced the attached chart comparing what Apple and Samsung each spend in a year with what the U.S. Navy spends in a dozen year to build a single aircraft carrier.

One of Dediu's commentators, writing under pseudonym Glaurung-Quena (literally, "dragon queen"), explained with admirable clarity what Tim Cook is up to:

Samsung owns big chunks of their supply chain -- if I recall correctly, they have their own fabs, they make their own screens, and probably a bunch of other parts too.

Apple doesn't own their supply chain outright -- they don't want to be in the semiconductor or screen making business, they don't want to have a camera or battery factory on their balance sheet.

But they want the control and vertical integration that Samsung enjoys. So they are signing oodles of partnership agreements and buying gobs of machine tools. Apple goes to a supplier and says, "Here is money to build a new factory building. Here, fill it with these machine tools that we own. Now what you make in this factory you will sell to us and only to us." And that company, or a branch of it, becomes Apple's indentured servant. Apple gets all the benefits and none of the liabilities of being a vertically integrated conglomerate.

And they're doing this across their entire supply chain -- from screens (sharp's IGZO tech) to those aluminum enclosures, about the only part that they aren't doing this with (yet) are the chips, and it's only a matter of time before they pay someone to build and operate fabs for them.

LINKS:

  • Apple's CapEx: $11 billion for plants, equipment and a spaceship

    Let's clear up some confusion about a closely watched number in Apple's 10-K.

    FORTUNE -- There was a frisson of excitement among Apple (AAPL) analysts Wednesday when they discovered in the company's annual 10-K report that capital expenditures for fiscal 2014 are forecast to be $11 billion, $4 billion more than than the $7 billion Apple spent in fiscal 2013.

    Apple's CapEx -- its spending on product tooling, manufacturing process equipment, corporate MORE

    - Oct 31, 2013 8:28 AM ET
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