In the Q3 conference call for analysts, Peter Oppenheimer reduced
margin expectations for the just reported quarter because of the "back
to school" promotion, component pricing firming up, and the costs of
transitioning to an unannounced product line. He forecast $7.8 billion
revenue, so each 1% less margin costs $78 million in profit. However,
the drop of 3.3% was nearly the same as last year, which was due to
"back to school".
A cynic might think Apple wanted to put the rumor mills back to
work.
Surprise! It worked!
Analysts expected the margin drop off from reduced pricing and got
into a feedback loop with bloggers with "reports" of ever lower prices.
On top of this, others dusted off wish lists and fantasised over Apple
entering yet another low cost market. On Tuesday, October 14, reality
set in as only the entry
level MacBook dropped by $100 and Apple continued with its highly
successful "value for money" strategy.
On October 21, Apple reported a drop in margin of 0.1%.
Obviously there are transition costs for the move to the new line.
Old MacBooks in the supply chain have to be marked down, but even this
helps to establish the value of the new range. The new product line had
to be set up. The CNC machines to shape the new MacBook and MacBook Pro body will
be paid for over their expected life, but since machining aluminum is
more expensive than injection molding plastic bodies, this will reduce
margins for some time, as reported in the Q4 conference call. The
investment in this new line also meant that Apple lost the flexibility
in having 2 production suppliers. According to
DigiTimes, Quanta will be handling all the production of the new
MacBook in 2009 - previously Apple balanced notebook orders between
Quanta and Foxconn.
This does give another sort of flexibility. The more automated the
production line, the easier and cheaper it is to do short production
runs. The 2.5 lb. aluminum brick is the same. So to change from MacBook
Pro to MacBook bodies, all Quanta has to do is change the program
running in a few CNC machines and some of the attached tools. This will
further strengthen Apple's top of the class inventory control.
The more rigid, more precisely engineered body may also help to
reduce mistakes in assembly. It should certainly help with warping as
the MacBook ages and lessen returns for cosmetic reasons, such as
discoloring. The gap in consumer satisfaction scores between Apple and
the rest should widen.
In many people's minds plastic means cheap, metal means expensive,
and flexible is cheaper than rigid. This way of thinking is reinforced
by the $999 entry level MacBook and cheap PC laptops. So for $1K+
laptops - about half of the US consumer market - the metal MacBooks
make similarly spec'd offerings from Dell, HP, and others look like
worse values.
The greenness of the new MacBooks may also improve Apple's share of
the Scandinavian and DACH (Germany, Austria, Switzerland) markets,
where green has a higher priority, as well as reducing Apple-bashing
from lobbyists such as Greenpeace. However, it's probably too much to
hope that Greenpeace starts to "walk the walk" and standardises on the
greenest PCs available. What could also help is adding a section to
Apple Environment
showing how Apple "makes Macs last longer", including a simple table
with each recent version of OS X and the oldest Macs (with their
release dates) that can run it.
When competitors see profitable markets move away from them, they
will respond. Apple took the time to prove the production process with
the MacBook Air before
scaling up with MacBooks, so this and the time to make a design that
works will delay any competition for a while. Other companies don't
have Apple's cash reserves, and while the economic turmoil lasts, they
will find it more difficult to make an expensive decision that will
reduce already tight margins even further.
If the delay is long enough and Apple's sales strong enough to
support another production line, will it make most sense to keep it
close to the current suppliers in China or to install it close to the
customers? For now this is another step towards the Jobsian vision of a
fully automated factory and, perhaps, another step towards Apple
restarting manufacturing in America. 
