When Apple announced their Q1 2011 numbers on Tuesday, Apple’s Tim Cook made an interesting comment about what Apple plans to do with their massive, nearly $60 billion, war chest of cash. Apple will do the same for some ‘secret’ components, which is not dissimilar to the time that Apple bought all the flash memory. We think we might know what the secret is and here’s why.
When Tim Cook was talking on the conference call, he stated that “we’ve historically entered into agreements with others to supply; largest one was with flash memory suppliers back in 2005 that totaled over a $1 billion, because flash would become increasingly important across product line and industry.” And because of that Apple became the largest consumers of flash memory, at the time for use in iPods. Cook later commented that the ‘secret’ deal is just like the flash deal, that it is “focused in an area that we feel is very strategic.” Cook wouldn’t say just what because of competitive advantage. So what could the next strategy be?
An interesting note in the Q1 results call is that just three months Apple sold 7.3 million iPads — 14.8 total since April — and that number is only expected to grow, especially after iPad 2 release. Some estimates have topped 50 million. That’s a lot of iPads, and that means Apple better lock down supplies to keep up with demand. If any of the rumors about a possible Retina Display are true, the difficult to produces screens need to be ready. That is where Apple is spending its $3.9 billion.
Early in July 2010, when LG was struggling to supply iPad screens, LG CEO Kwon Young-soo said that “Demand (from Apple) keeps growing and we can’t meet it all. Apple may have to delay launches of the iPad for some countries due to tight component supplies and strong demand. We are considering increasing production lines for iPad products but overall supply is likely to remain tight until early next year.” If Apple learned anything from this, then they know that it is extremely important to secure more than one supplier for future screens.
In December of 2010, there were two reports that Sharp and Toshiba were investing, along with Apple, $1.2 billion on small to midsize LCDs. It was later confirmed that Apple would be using the screens for iPhones. So what about those midsize LCDs?
On a side note, Hon Hai, a big supplier for Apple, is also said to investing $1.2 billion in Hitachi’s LCD business to build a new factory in Japan.
So all the big screen makers are reportable spending $1.2 billion each on new facilities to manufacture LCD screens and all of the work with Apple.
At the beginning of Apple’s Q1 results, CFO Peter Oppenheimer stated that the $3.9 billion had already started to get spent, with contracts starting in September 2010 and December 2010; if you notice these were all right around the times that we began to hear of the LCD investments. September, right after LG stated they were struggling to meet demand and in December when both Sharp and Toshiba were tapped for their LCDs.
“During the September and December quarters, we executed long-term supply agreements with three vendors through which we expect to spend a total of approximately $3.9 billion in inventory component prepayment and capital expenditures over a two-year period. We made approximately $650 million in payments under these agreements in the December quarter, and anticipate making $1.05 billion in payments in the March quarter.”
While this gives us no clue as to the type of screen, Retina or not, one can only imagine.