Apple's Dominance in Semiconductor Buying Is a Competitive Advantage

 
 
By Jeffrey Burt  |  Posted 2012-07-25
 
 
 

Growing demand for iPhones, iPads and other products is driving Apple to rapidly grow its dominance as the world€™s top semiconductor purchaser, enabling it to offer products at a better price and with greater reliability than its rivals.

According to analysts at market research firm IHS iSuppli, Apple is not only spending more than anyone by a large margin, but its rate of spending growth is almost three times more than that of the next fastest-growing semiconductor buyer.

Apple this year will spend almost $28 billion on semiconductors, almost twice the $14.9 billion second-place Samsung Electronics will spend. In addition, that $28 billion is about 15.2 percent more than the $24 billion is spent on semiconductors in 2011. By contrast, Canon was the next fastest-growing semiconductor buyer, with a 4.6 percent increase, raising the amount it€™s expected to spend to $7.2 billion.

The insatiable appetite for semiconductors is giving Apple a key competitive advantage over other OEMs, enabling it to better dictate chip prices and availability for itself and to translate such advantages to the products it puts on the markets for customers, according to Myson Robles-Bruce, senior analyst for semiconductor spending and design activity at HIS.

€œIt€™s well known that Apple has already conquered the smartphone and tablet segments€”but behind the scenes the company is engaging in another kind of conquest: the dominance of the electronics supply chain,€ Robles-Bruce said in a statement. €œSuch a dominant position provides critical benefits, allowing one to dictate semiconductor pricing, control product roadmaps and obtain guaranteed supply and delivery. For Apple, these benefits translate into competitive advantages, letting it offer more advanced products at lower prices, faster and more reliably than the competition.€

The key reason for Apple€™s growing budget for semiconductors is the continuing demand for its products, the IHS iSuppli analysts said. In the second calendar quarter this year, Apple executives said the company sold 26 million iPhones, a 28 percent increase over the same period last year. And that was considered a quarter where sales slowed, as consumers held back buying current iPhones in anticipation of the next model expected to come out in the fall.

"It's difficult to sort this out,€ Apple CEO Tim Cook said July 24 during a conference call with analysts and journalists to discuss the company€™s quarterly financial numbers. €œThere's incredible anticipation out there for future products, given what we've been able to deliver in the past.€

Apple also sold 17 million iPads during the quarter€”an 84 percent increase from the same period in 2011€”and 4 million Macs, up 2 percent. The company saw a 10 percent decline in the number of iPods sold, though Apple still shipped 6.8 million units.

Apple became the world€™s top semiconductor buyer in 2010.

Along with demand, Apple also is maintaining strong relationships with more than 150 suppliers that sell components or manufacturing and assembly services, according to IHS iSuppli.

That rapid growth in semiconductor purchases won€™t slow down anytime soon, according to the analysts. They expect Apple to increase its spending on chips by 12.3 percent in 2013, more than any other OEMs in the top 10.

€œApple will continue to outgrow the other major OEMs in chip purchasing because of its clear vision of the future, which extends a few years out,€ Robles-Bruce said. €œThis vision includes a strategy to not only update currently popular products but also achieve success in other areas of interest like the television segment.€

This year, Apple€™s torrid pace of spending growth is faster than other systems and device makers in most regions in the world, giving it an advantage in regard to the manufacturing of its electronic products. The company will be the fastest growing semiconductor buyer in two of the four major electronics production regions€”the Americas and Middle East and Africa (EMEA)€”and second-fastest in the Asia-Pacific region, the world€™s top electronics producer. Japan was the only region in which Apple wasn€™t the among the fastest-growing chip buyers.

Apple is a top 10 semiconductor buyer in three of the four regions€”it€™s No. 1 in Asia-Pacific, No. 2 in the Americas and No. 6 in EMEA. It€™s also expected to close the gap in the Americas, where it trails networking giant Cisco Systems. Cisco, the seventh largest semiconductor buyer in the world, is expected to see a 5 percent decrease in semiconductor purchases this year, though its lead over Apple in the Americas is at more than $1 billion.

Cisco's lead in the Americas is due to a larger number of design centers in the region, higher spending on chips for set-top boxes, and large semiconductor purchases for its business in wired communications equipment. 

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