Apple Is Strategically Spending in 2014

Apple CEO Tim Cook speaking at Apple's Oct. 22 keynote. Source: Apple.

Apple (NASDAQ: AAPL  ) will spend $11 billion on capital expenditures during 2014, up a whopping 57% from the company's $7 billion in 2013. Excluding retail spending, the figure is $10.5 billion, up 61%. A new Bloomberg report brings some color to Apple's strategy in boosting capital expenditure spending: outspend and outmanufacture its peers.

Taking manufacturing to the next level
While blockbuster products will always be essential to Apple's success, there's a flip side to the coin that consumers never get to see that's just as important for Apple to compete effectively. In 2014, Apple will boost capital expenditure spending in areas that could give Apple a strategic operational edge. 

"They're spending it on a lot of new technology that's really going to help them with their supply chain," said Bloomberg's Tom Giles regarding Apple's aggressive guidance for capital expenditure spending in 2014.

Sure, not all of Apple's $10.5 billion in spending will be related to improving operations. Some of the spending will also go toward corporate facilities and corporate infrastructure, according to Apple's 10-K. But every other item listed seems to confirm Giles' statement:

  • Product tooling equipment
  • Manufacturing process equipment
  • Information systems hardware, software, and enhancements

The tech behemoth plans to get ahead of competitors in 2014 by "spending more on the machines that do the behind-the-scenes work of mass producing iPhones, iPads and other gadgets," according to Bloomberg's unnamed sources "with knowledge of the company's manufacturing methods..."

Going further, Bloomberg's sources say, "Apple is increasingly striking exclusive machinery deals... outspending peers on the tools that it then places in the factories of its suppliers..."

This isn't a new approach for Apple. Operations has always been important for Apple. But with Apple's guidance for capital expenditures to rise so steeply in 2014, is Apple CEO Tim Cook planning to take the strategy up a notch?

Cook style
After the Steve Jobs era, Cook will see to it that Apple will always operate one step ahead of its peers -- a role he's executed almost flawlessly since he joined Apple in 1998. After all, before Cook took the helm, he was the company's chief operating officer, "responsible for all of the company's worldwide sales and operations, including end-to-end management of Apple's supply chain, sales activities, and service and support in all markets and countries." In other words, he knows a thing or two about efficient operations and supply chain management.

When Jobs recruited Cook, Apple immediately made giant leaps of progress. According to the Steve Jobs biography by Walter Isaacson, Cook reduced key suppliers from 100 to 24, negotiated improved supplier deals, convinced many suppliers to relocate closer to Apple's plants, closed more than half of the company's warehouses, and cut inventory from 30 days to just six days -- all in just nine months.

The Cook book
Apple's move to wield its operations expertise as a strategic weapon to get ahead shouldn't come as a big surprise. Cook, who reportedly distributed copies of Competing Against Time by George Stalk and Thomas Hout to colleagues, is an operations aficionado. The description of the book on Amazon, in fact, provides some intriguing tidbits that echo Apple's historical efforts to use an operational edge to stay one step ahead of its peers.

Today, time is the cutting edge. In fact, as a strategic weapon, ... time is the equivalent of money, productivity, quality, even innovation. In this path-breaking book based upon ten years of research, the authors argue that the ways leading companies manage time—in production, in new product development, and in sales and distribution—represent the most powerful new sources of competitive advantage.

...  the authors describe exactly how reducing elapsed time can make the critical difference between success and failure. Give customers what they want when they want it, or the competition will.

Moreover, the authors show that by refocusing their organizations on responsiveness, companies are discovering that long-held assumptions about the behavior of costs and customers are not true: Costs do not increase when lead times are reduced; they decline. Costs do not increase with greater investment in quality; they decrease. Costs do not go up when product variety is increased and response time is decreased; they go down.

Is Apple's enormous boost in spending during 2014 part of a plan to compete against time and get another step ahead of competitors? Is Cook playing the operations game more aggressively than ever before?

A competitive advantage?
Scale has its benefits. The massive boost in capital expenditure spending will barely budge the company's massive balance sheet. Even more, $11 billion is just a small fraction of the company's fiscal 2013 revenue of $171 billion. And even more telling, as a percentage of its 2013 net income of $37 billion, $11 billion still seems fairly conservative. The portion of this spending that will improve Apple's operations may hardly move Apple's balance sheet -- but that doesn't mean the spending won't play an important role in helping Apple challenge competition.

Are we just beginning to get a taste of Apple in the Cook era? Does the world's most valuable publicly traded company plan to wield its size behind the scenes as a strategic weapon? With capital expenditures soaring in 2014, Cook looks poised to draw the operations card once again. Will the strategy help Apple fortify its competitive advantage?

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 15, 2013, at 9:30 PM, DanManners wrote:

    I will give you that Cook is great at much of what he does. But he should not be CEO. He has no vision. He didn't start Apple from nothing. He didn't create Pixar. He didn't create Next Computer which was the foundation for the Mac Op/sys.

    This company was and still is Jobs company. All Apple can do right now is just mildly improve it. The software and the hardware. But nothing new. Nothing changed.

    No iTV, Iwatch, Bigger phones, Phablets, China Mobile deal, New Product Category.

    Nor will there ever be. If Apple ever does release an attempt at a new category, it will be laughed out of existence. Their iWatch will be a disaster. Heck Cook could not even launch Maps without a disaster.

    What about the stock price. $ 385? Nice work Cook. Now it is 525 but languishing. The great honest most loved Journalist Henry Blodgett who is most loved by the SEC says Apple blew it. But when talking about Carl Icahn he said Icahn should just go away and Apple is doing fine by itself. But now he says they are not doing fine they blew it.

    I am sure I could not do Tim Cook's job for 1 second. But I can tell that the shareholders are not getting a fare share. He should do the buybacks and pick the stock price up. Many companies do that. If he feels the company will do poorly and needs that cash to survive then he should not do buybacks and let the stock go to 200.

    Again, I can't see iWatch being a big deal. I dont see China Mobile happening. We all saw a poster that had a date. What happened. You have to assume it is mostly BS by who knows. I read alot of negative articles on Apple and they have to have some merit. They make sense.

    I have to say Samsung and Lenovo are not standing still. They are going to a new op/sys and will build their own ecosystems. Samsung has the money and Lenovo is just amazing on the low end.

    Apple also always has super supply constraints and I dont get why when they are only putting out 1 phone really and Samsung puts out 100. Cook is not as good as they say.

  • Report this Comment On November 16, 2013, at 2:53 AM, duuude1 wrote:

    Dan,

    You said about Tim Cook: "But he should not be CEO. He has no vision." Conversely, you are quite glowing about Jobs.

    But who picked Tim?

    Jobs died just about 2 years ago, Oct 5 2011 from pancreatic cancer. He was diagnosed with this lethal disease on 2003 according to Wikipedia. So he had 8 years to build a post-Jobs Apple, and to hand-pick his successor to run his baby.

    Do I believe you and the legions of Apple/Cook doubters? Or do I believe that Steve did an insanely great job on his single most important task of "succession planning" before he died? No contest - Steve.

    You said: "No iTV, Iwatch, Bigger phones, Phablets, China Mobile deal, New Product Category. Nor will there ever be."

    It's been two years since Jobs died. What happens in two years? Here are the revolutionary new products and the year in which Jobs launched them:

    iMac = 1998

    iPod = 2001

    iPhone = 2007

    iPad = 2010

    Do I believe you and the legions of Apple/Cook doubters? Or do I believe that Steve's hand-picked successor will launch insanely great new products? No contest - Tim.

    You said: "Cook could not even launch Maps without a disaster."

    Jobs left the following trail of product disasters:

    Apple III 1980-1981

    Apple Lisa 1983-1985

    20th Anniversary Macintosh 1996

    Apple eMate 1997-1998

    Apple USB Mouse 1998-2000

    Power Mac G4 Cube 2000-2001

    U2 iPod 2004

    iPod Photo 2004

    ROKR 2005

    iPod Hi-Fi 2006

    Apple TV 2007

    MobileMe 2008

    iTunes Ping 2010

    Final Cut Pro X 2011

    Do I believe you and the legions of Apple/Cook doubters? Or do I believe that Tim's record of product launches have and will include insanely great products and a couple of duds? No contest - Tim.

    You said: "What about the stock price. $ 385? Nice work Cook."

    Really?

    Do I believe you and the legions of Apple/Cook doubters? Or do I believe that, by almost any measure, $385 and $525 are insanely great prices for this company led by Tim? No contest - Tim.

    You said: "Cook is not as good as they say."

    Duuude, no contest. Sell your stocks in Apple. I've been buying them.

    Duuude1

  • Report this Comment On November 16, 2013, at 6:43 PM, duuude1 wrote:

    That said... Some time in the future, AAPL will stumble, languish, and perhaps eventually die. All companies eventually metastasize into some diseased state unrecognizable from it's flourishing beginnings. But that time is not now for AAPL. I believe you will regret not investing with this company. But hey, everyone makes their own choices. You've got your reasons - you just need to know that those reasons you've stated are not accurate ones. Keep poking at it and see if you can come up with some valid criticisms of the company - there are plenty.

    Best,

    Duuude1

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