Apple And Renesas; The Economics Of What Apple Is Doing With That Cash Mountain

Apr 3 2014, 8:44am CDT | by

There’s talk that Apple might be about to purchase a unit of Renesas, a unit that designs and manufactures the chips that drive the displays of smartphones. This gives us an insight into the economics of what Apple is going with that vast cash mountain it has to hand. In the technical jargon it is looking to “vertically integrate” but there’s a twist being applied to this old strategy.

Here’s the actual report :

Renesas SP Driver, the largest maker of chips used to control mobile device screens, supplies all three of the companies that make displays for the iPhone , industry sources say: Sharp, Japan Display Inc and South Korea’s LG Display Co Ltd.

“There’s no doubt that, for Apple, the question of who buys Renesas SP is a matter of grave significance,” said one Japanese display industry source, who asked not to be identified due to the sensitivity of the matter.

Control over the supply chain has become increasingly crucial among smartphone makers.

It’s true that security of supply is a possible motivation for such a deal. But it’s also true that no one is going to buy a company that supplies Apple and then refuse to supply Apple. For the Apple supply contract is part of what provides value to the company being purchased. And again, no other smartphone maker would purchase it just to deny Apple those chips. All the supply lines across the industry depend much too heavily on each of the other players for one part or another of the build set that becomes the finished phone.

However, there’s more to this than just Apple’s possible desire to secure the supply chain. Apple does, as we know, have a vast cash pile. It remains outside the US simply because to bring it into the US would trigger a large corporate income tax bill (perhaps as much as $35 billion if all of it were brought in). So, that cash pile isn’t going to be used to pay dividends or to conduct stock buybacks: that tax bill pretty much precludes that. So what is Apple going to do?

They’ve certainly got enough cash to purchase pretty much anyone they want to. They could, for example, buy GM if that interested them: but that wouldn’t be very sensible, given that there’s no obvious logic behind the two companies joining forces. Apple could buy a record company or two and thus make iTunes the exclusive source of certain “must have” music. Ditto film production and Apple TV and so on. But that’s not the way that they seem to be thinking about their opportunities. These are examples of horizontal integration.

Rather, Apple seems to be using that cash to do a form of vertical integration. The classical version of this is that you keep buying the producers of your inputs. If you use a lot of steel then you buy a steel plant. If you buy a lot of chips then you buy a chip fabrication plant. And Apple could certainly do this. However, the Apple management seems to me to be being cleverer than this. For example, there’s no doubt that Apple could afford to purchase a silicon fab plant, or build one of their own. But they also know that the skill set within Apple isn’t particularly suited to running a fab. Design and marketing Apple does very well indeed, running manufacturing plants not so much (all those assembly plants are run by Foxconn and Pegatron etc for example). So Apple has, for example invested in the design of its own A7 chips (the A6 and earlier were designed for them by Samsung) but still contracts out the actual manufacturing to independent fabs like Samsung and soon to join the list TMSC.

Similarly, when Apple wanted to get more involved in sapphire they didn’t go and build their own factory. Rather, they teamed up with a company that has the requisite skills and then used their cash pile to finance the building of a new factory. Apple gets the first $500 million or so of material off the production line, the sapphire company gets the $500 million now to build the factory.

The mooted deal with Renesas fits in with this sort of strategy. Apple secures its supply, yes. It also gets tighter integration of its own design efforts with those producing the chips that drive the displays, to the presumable future benefit of the technology. And Apple also deploys some small part of that cash pile to gain this. It is vertical integration but not total and whole such. They’re not, for example, buying the screen manufacturers themselves. Leave that to people who observably have greater skills at that task than Apple does.

All in all it seems like a sensible plan for using that cash balance. No marching off into areas where Apple has no particular skills, nothing extra to add. And using their financial might (as with the sapphire) to improve the production of the raw materials that the company uses. And here, with the chip purchase, securing and being able to more closely integrate with a supplier of a small but vital part of the overall technological experience. Seems a reasonable and well thought out strategy.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Apple TV Is A Huge Cash Cow, Which Is Why Apple Is In No Rush To Make It Better
Apple TV Is A Huge Cash Cow, Which Is Why Apple Is In No Rush To Make It Better
There is one thing standing between Apple TV and being the number one media player, and that’s the enormous pile of money it’s making. According to the firm, Apple TV has now made $1 billion in media sales. These are...
 
 
Every iPhone Has A Security Backdoor. Apple Denies It Is A Threat
Every iPhone Has A Security Backdoor. Apple Denies It Is A Threat
iPhone and iPad users have long been able to laud the superior security of their devices over rivals. But it seems one crucial aspect has been forgotten: what if the hacker is Apple? Responding to an eye opening talk...
 
 
Apple posts monster Q3 profit on $37.43 in revenue, beats estimates
Apple posts monster Q3 profit on $37.43 in revenue, beats estimates
Apple’s stock has been soaring lately, up more than 24% over the past three months. Shares took off in late April when Apple announced a 7-for-1 split that would take place in early June, and the stock has kept...
 
 
Why Apple’s iPhone 6 should launch on September 12th
Why Apple’s iPhone 6 should launch on September 12th
While some reports say the next-gen iPhones will be launched on September 19th – not to mention that some retailers already offer pre-order options of the iPhone 6, despite the fact that it doesn’t yet exist – Business...
 
 
 

Latest from the Network

Kevin Spacey offered donation to turn vegetarian
Los Angeles, July 23 (IANS) Actor Kevin Spacey has been offered a donation of $6,000 to his theatre company by animal rights campaigners if he switches meat for vegetarian food at an upcoming fundraising barbecue. The...
Read more on Celebrity Balla
 
22 killed in Baghdad bomb attack
Baghdad, July 23 (IANS) At least 22 people were killed and 45 were wounded in a car bomb explosion in the capital Baghdad Tuesday, a source from the interior ministry said. A suicide bomber blew up himself at a...
Read more on Politics Balla
 
Apple TV Is A Huge Cash Cow, Which Is Why Apple Is In No Rush To Make It Better
There is one thing standing between Apple TV and being the number one media player, and that’s the enormous pile of money it’s making. According to the firm, Apple TV has now made $1 billion in media sales. These are...
Read more on Apple Balla
 
Every iPhone Has A Security Backdoor. Apple Denies It Is A Threat
iPhone and iPad users have long been able to laud the superior security of their devices over rivals. But it seems one crucial aspect has been forgotten: what if the hacker is Apple? Responding to an eye opening talk...
Read more on Apple Balla
 
Katie Price still loves cheating husband
London, July 23 (IANS) Former model Katie Price wanted to "throttle" her cheating husband Kieran Hayler, but that doesn't stop her from loving him. She was left broken hearted when she discovered her husband had...
Read more on Celebrity Balla
 
Lana Del Rey: I've 'slept with a lot of famous guys'
Lana Del Rey claims she's ''slept with a lot of guys in the industry''. The 27-year-old singer admits she's been romantically involved with a number of famous people in the past but none of them helped kick-start her...
Read more on Celebrity Balla
 
Shia LaBeouf wants to stay sober for Brad Pitt
Shia LaBeouf is determined to stay sober for Brad Pitt. The troubled star - who is currently on an outpatient program for alcohol abuse - is trying hard to kick his addiction to booze as he's afraid of embarrassing his...
Read more on Celebrity Balla
 
Kate Hudson has 'unconventional' life
Kate Hudson thinks she has an ''unconventional'' life. The actress insists her life is far from normal but she tries to make sure her children, Ryder, 10, whom she has with ex-husband Chris Robinson, and Bingham, three...
Read more on Celebrity Balla
 
Snoop Dogg smoked cannabis at White House
Snoop Dogg smoked cannabis at the White House. The 42-year-old rapper - whose real name is Calvin Cordozar Broadus Jr. - admits he once puffed on marijuana in the bathroom at the official residence of president Barack...
Read more on Celebrity Balla
 
Iceland donates humanitarian relief funds to Palestinians
Rekjavik, July 23 (IANS) Icelan's Foreign Minister Gunnar Bragi Sveinsson announced here Tuesday that his country will donate $104,000 to the Palestinians suffering from the humanitarian crisis in Gaza. The funds will...
Read more on Politics Balla