Which Macs Will Apple Bring Home First?

Investors already know that Apple (NASDAQ: AAPL  ) is bringing some Mac manufacturing back home. CEO Tim Cook confirmed it when he made his recent round of press interviews, adding that the Mac maker is investing over $100 million to make it happen.

What Cook didn't say is which specific Macs would be assembled stateside, but it's safe to say that it will be a Mac desktop product to be produced domestically instead of a laptop line.

Bring the Macs back home
First, let's acknowledge exactly what a consumer product must do to earn that status, according to the Federal Trade Commission: "A product that includes foreign components may be called "Assembled in USA" without qualification when its principal assembly takes place in the U.S. and the assembly is substantial. For the "assembly" claim to be valid, the product's last "substantial transformation" also should have occurred in the U.S."

Like most electronics these days, Macs feature plenty of foreign components. But if a Mac's final "substantial transformation" takes place domestically, it can still qualify as "Assembled in USA."

The rumor mill turns its attention
Just like all things Apple, there's been speculation over which Mac products might be the first to come home. Observers have already noticed that some of the new redesigned iMacs bear an "Assembled in USA" marking. Fortune makes the case why the Mac Pro is the only computer that makes sense, due to its higher average selling price and heftier weight (and shipping costs). DIGITIMES offers up the possibility that the Mac Mini is the family whose production is returning to the U.S.

Foxconn already has roughly 15 automated factories in the U.S. that could be possible destinations, and the company is reportedly looking to begin building its ranks of workers starting next year. Quanta, another manufacturing partner, also has a couple facilities here.

Hey, big spender
Investors should take note of a keyword there: "automated." That has important implications on Apple's cost structure, since it addresses the misconception that the company was about to face a monstrous rise in cost of goods sold related to labor.

It's certainly true that manufacturing labor costs are significantly higher here than in China. For example, the Bureau of Labor Statistics estimated average manufacturing labor compensation at $35.53 (link opens PDF) per hour last year. The last time that the BLS estimated manufacturing labor costs in China was 2008, when it was $1.36 (link opens PDF) per hour. That rate is now up to around $2.50 per hour, according to a recent Wall Street Journal estimate.

A fourteen-fold increase in labor cost would certainly hurt the bottom line, but the assembly we're talking about was always bound to utilize machine capital instead of human capital. Apple's capital expenditures have skyrocketed this last fiscal year, with the majority of those increases going straight toward product tooling and manufacturing equipment.

Metric

2010

2011

2012

Spent on retail store facilities

$404 million

$614 million

$865 million

Other capital expenditures, including product tooling and manufacturing equipment

$2.2 billion

$4 billion

$9.5 billion

Total capital expenditures

$2.6 billion

$4.6 billion

$10.3 billion

Source: 10-K annual reports. Fiscal years shown.

Only 8% of capital expenditures in fiscal 2012 were related to retail stores, with the rest going toward things like manufacturing gear.

Apple's been talking a lot about its recent advances in manufacturing technology, like the crystalline diamond cut chambers on the iPhone 5 and iPad Mini or the friction-stir welding used on the enclosure of the new iMac. That's a competitive advantage over other PC makers.

Don't expect Hewlett-Packard (NYSE: HPQ  ) or Dell (UNKNOWN: DELL.DL  ) to invest that heavily in manufacturing. HP's trailing-12-month cap ex is actually pretty close to Apple's at $10.2 billion, but HP counts its purchase of intangibles and software development costs as cap ex (and we all know its acquisitions aren't going so well lately). Dell's trailing-12-month cap ex spend is a measly $1.5 billion. Besides, if there's one thing that PC makers can't afford, it's a hit on margins.

These types of manufacturing processes cost a lot -- not just because Apple is licensing the patented friction-stir welding process from The Welding Institute -- and it makes more sense for it to leverage these automated processes than it does to buy a little bit of patriotic political credit in exchange for a monstrous increase in labor input costs.

Back to the Mac
Some increase in Apple's cost structure seems inevitable, but the good news for investors is that'll likely be negligible. Not only for the aforementioned reasons, but also because Macs simply aren't as important to Apple as they used to be, especially desktops.

Product

Sales (TTM)

Percent of Total Sales (TTM)

Mac desktops

$6 billion

3%

Mac portables

$17.2 billion

10%

iPod

$5.6 billion

3%

iPhone

$80.5 billion

46%

iPad

$32.4 billion

19%

Source: SEC filings. TTM = trailing 12 months.

At this point, the Mac desktop business is barely larger than the declining iPod segment. Regardless of which Mac lineup will soon appeal more to patriots, investors won't even notice the added costs.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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