I would argue that Apple's cost of capital is 0%. They don't have a better way to invest the money, which is evidenced by their almost $200B sitting in the bank doing nothing for their company or shareholders (seriously, how about a Microsoft-style massive one-time dividend). I would guess they ship their phones by air to keep delivery times fast and consistent.
I'd guess they use a hybrid approach ... the statement about iPhones always being on the verge of selling out is a red herring.
Whether you ship by air or sea, so long as you do it consistently, the number of phones you have available is a constant based on the rate you're manufacturing them. All the air versus sea argument does is change the lag in receiving them.
Assuming the rate they can be manufactured can be adjusted based on demand, you want to make sure you're always on the verge of selling out to avoid carrying more inventory.
So my guess is that they normally ship by sea but increase the manufacturing rate and ship some percentage of phones by air to keep the stores "just stocked enough".
That's what they borrow at, but presumably they're doing so because they can invest it at a higher return. It's the opportunity cost that we care about.
Apple has anounced they are returning 200B to there shareholders over the next few years. The somewhat shocking reality is that's only 5 years woth of proffits which is arguably a perfectly reasonable cash hoard.
However, the real issue is the depreciation on components makes shipping cutting edge electronics by sea untenable. Put another way Apple does not want to wait another 25 days before releasing their new phone or be forced to ramp up production on an even less proven technology.
PS: Another option is to ship the phones by air but the packaging by sea. However, phones are small enough that it would not be woth maintaining a U.S. factory for final assembly.
It's in "marketable securities" so not exactly cash but close. The other issue is that much of it is overseas money, so Apple will take at 35% tax hit if they repatriate it.
Repatriation is somewhat of a red herring. Money is fungible. Even if it is technically (on the books) "overseas", it can be (and usually is) invested in U.S. markets.
Remember every dollar not paid by Apple and the like is an extra dollar that some other poor US tax payer has to pay. Given that everyone wants the services that taxes pay for (if not move to Somalia) then the taxes should be raised in a way that causes the least amount of distortion to the economy. Letting some companies pay no tax and others 36% is highly distortionary.
I would also be more convinced of the idea of not taxing the money coming in to the USA if it had actually been taxed in the countries where the profits had been made - let me introduce you to the Double Irish Arrangement [1].
After the initial demand surge at product release, is supply really that constrained? istocknow.com shows the iphone 6 is currently widely available in the US. If they're not in short supply in stores, why not save some $15 million?
Sitting in a cargo container in the middle of the Pacific vs the back room of a store for 30 days doesn't seem that different to me.
The watch, however, is sold out until July, if not later for some models, so it would make sense to ship them by air.
Those aren't the only choices. You can simply manufacture them 25 days later, and owe your suppliers 25 days later as well. I'm sure Apple tracks and manages their stock as well if not better than anyone in the business. It helps that their product line is so slim.
I doubt there is 30 days of phone inventory, more like 1-2 weeks. They are keeping their supply below 4 weeks, as part of lean manufacturing. Thus their turnover in supply is less than the amount of time it takes for a shipment to cross the ocean.
This might still be doable, but demand shifts would mean that some models that are suddenly more popular (Eg: the white vs gold colors) would cause outages.
The goal is zero supply- the phone arrives at the store just as the customer spontaneously walks in to buy it.
According to their most recent investor conference call, they are at about 5 weeks of channel inventory for iPhones. (Essentially at the low end of the range that they said that they want to be in)
There are many problems in this article.
The biggest problem I see is in the value of an iPhone and in the capital that is locked while it is in transit. Although there is little information on Apple's operation, a quick look at their balance sheet provides some insights. For instance their 2014 10-K (http://www.sec.gov/Archives/edgar/data/320193/00011931251438...) list 112,258 million $ as CoGS and 2,111 million $ as inventories. These give us around 53.2 as inventory turnover or, better around 7 days. It is a very short time even for air shipping, and this value is an average of all the product. It is highly probable that Apple ships FOB destination making the choice between air and sea not important for them (or better, choosing the preferred one on other consideration).
Another aspect to consider is that when the product is registered in the book is not necessarily when the product is paid for. If we take from the 10-K the Account Payable turnover ratio we get 3.7, so apples pay on average after more than 90 days. That's a pretty impressive value.
So Apple put the iPhone in their inventories only when he receives them and pays them 90 days after he received them. My guess, seeing this numbers, is that the immobilized capital is not the biggest issue for Apple and their shipping strategy is a little more sophisticated.
P.s: this is a quick analysis of publicly available data. If you check my calculations, you could find that I simplified them. The conclusion doesn't change if the correct formula is used.
I'd guess Apple did a mixture - air freight for the peak of the demand (aka early adopters), and ships for the time when initial demand has settled (if existing stock is enough to cover the demand, why expensive air transport when restocking can be done for cheap).
Counting the capital cost of the inventory in transit is not a way I'd sure to determine it, as the inventory is not counted to the purchasers book in most cases until its received, not when it enters transit.
That said, there are many other reasons why apple wouldn't want to ship by sea, mostly the longer lead time to correct problems, and the potential for a large amount of defective inventory in the chain, not the mention the vagaries of market demand, and other factors.
Apple almost certainly takes ownership of the freight at the origin--either at the airport or maybe even at the factory. The reason for this is it allows Apple to use their buying power to negotiate much lower freight rates with carriers and track incoming shipments better than their manufacturers can. Large importers generally want to exercise more control over their supply chain because it saves them a lot of money and gives them opportunities to optimize it.
Source: I work for a logistics and freight forwarding company.
First of all, I'm not totally sure a huge seller like Foxconn has less negotiating power with logistics company than Apple (actually is probably higher). Then, Apple could negotiate the logistics but still account the merchandise as FOB Destination.
Source: negotiated this kind of deal for consumer electronic products.
You're right that Foxconn is a powerful company too, and they do have their own rates/contracts in place with logistics companies. And for any big company with a complex supply chain like Apple, there is probably a mix of different INCOTERMS happening. That said, in my experience the general industry trend is for the importer to try to gradually and strategically extend their control over their supply chain further toward the origin over time. When a buyer signs up a brand new vendor they may buy CIF or even DDP at first, but as the buyer/seller relationship matures they will tend to move toward FOB or even EXW terms. So I'd be really surprised if Apple weren't taking ownership of most of their products at the origin side, at this point. Also, with air freight the inventory carrying costs from transit time are not nearly as great of a factor as with ocean freight, so the impact on cashflow is minimal.
This is not a valid line of reasoning. Why not use boats in the main and planes in an emergency? You get the same lead time for much less. It also seems not to understand the continuous nature of supply/demand... the reasoning only works for one shipment in isolation.
Maybe it's easier to use only planes and never boats or something... but it's certainly not cost effective
Also, why is the watch sold out for over a month if this is true?
The entire premise of this argument is flawed. Cost of capital (or even of shipping) likely has nothing to do with the decision:
- the value of an extra 25 days of product development for one of the most successful consumer products in the world exceeds shipping costs by orders of magnitude
- $20M is completely negligible on $58B revenue. 0.03% or so. It would be insane to wait 25 days over that.
