With Apple holding more cash than most companies will generate in revenue, the question often becomes ‘who will they buy’. But Apple make fewer acquisitions than their competitors, and tend to hold the cash (they do generate a healthy return through an investment portfolio), so the question becomes: where does the cash go?
Over on Quora, an anonymous user posted very revealing insights on Apples’ investment activities. The answer: to stay ahead, they over-invest in their supply chain.
New components are not cheap. The upfront capital requirement to build manufacturing plans is huge, and the margins shrink so quickly as technology moves that manufacturers cannot raise capital. According to the anonymous responder, Apple pay a significant portion of the factory construction cost in exchange for exclusive rights to the output for a set period of time, and then for a discount once this period expires.Not only does this allow Apple to come out with new components long before rivals, but these components are impossible to duplicate (think of how long Apple had the touch screen monopoly for).
By the time competitors catch up on component production, Apples’ lower cost period is in play. That means that every time a competitor buys a component, they are potentially overpaying so that the factory can subsidize Apples discount.
Not only does Apple seemingly have a superior software, user experience and a higher price tag, but superior hardware that is sourced more cheaply than competitors. As competition increases and competitors catch up, it will be interesting to see how heavily Apple restrict their supply lines, especially with reports showing that Apple staked a consortium for the winning bid on the remaining Nortel patents.
It reminds me of the military strategy: control the supply lines, and if you must supply your enemy, make sure they pay (see how this is working with Libya and Oil.)