Apple CEO Tim Cook speaking at Apple's Oct. 22 keynote. Source: Apple.
Apple (AAPL +0.33%) 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?
