Taking Back the Market

Apple's New Production Technology: Is It Worth It?

Tim Nash - 2008.10.27

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. LEM

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Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.

Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.

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