The Tyranny of Average Cost - part the sixteenth

Well, well yet another episode in this continuing series, a paean to the controlling power of amortization. Naturally, Apple is the culprit; of its own designs. Hee, Hee.

Well known, the point of this series is that increasing the capital fraction of a production process reduces the flexibility of production. There's only so much non-amortization (of that capital cost) in the BoM to cut if output has to fall.

Apple also benefited from enormous economies of scale. Because the iPhone is one of the most profitable products ever sold, the company could afford to invest billions in a custom chip operation — and then to repurpose its iPhone chips for the iPad, the Apple TV and now the Mac.

Apple's investments have helped spark a new race in the chip business. Intel is investing $20 billion on new chip-making plants, and other chip manufacturers — Samsung and TSMC, which manufactures processors for Apple — are collectively investing hundreds of billions of dollars to increase capacity.

Even Apple will be caught between a rock and a hard place if iPhone, etc. demand falters even a tad. It would be a gas to be a fly on the wall during negotiations betwixt Apple and TSMC/whoever with regard to chip output; how many units is Apple obligated to suck up no matter what and who is forced to eat the unit amortization cost should demand for Apple products, and thus chips, declines? Welcome to the dilemma of capital. It's also worth noting that the processor architecture wasn't developed by Apple, but by ARM over the last couple of decades. Near as can be determined, Apple has, mostly, just made various hardware manifestations of the sub-units wider/longer/shorter as needed. And it's worth noting that Apple has leveraged the production facilities of others. The fiasco with sapphire is instructive. Would they be bold enough to try such a gambit with a corporation the size of TSMC? Intel, being dogged, didn't take advantage of TSMC/Samsung. Until very recently.