12 October 2017

Balance the Scale

Here's some of a comment on a Seeking Alpha piece on Apple's new iPhones
Perhaps you aren't familiar with a manufacturing concept called economies of scale. Apple produces hundreds of millions of iPhones a year, while most analysts believe Google built no more than 1 million units of the Pixel and Pixel XL in the past 12 months. Something tells me Apple spends a whole lot less on each iPhone than Google does on each Pixel phone.
-- Bradmeister

A rookie mistake, naturally. Non-quants generally view EoS as, at least, infinitely linear to 0 average cost. That's stupid, naturally. EoS is determined by sector/company specific factors. And there's no evidence that EoS follows a linear trend, rather that it reaches minimum at some asymptotic value. (oooooh!! that notion again!!)

To put it another way, there are four generalist parts of production: capital equipment, input materials/assemblies, power, and labor. EoS is a result of technological advances, not just higher production, it's not some magical side effect of simply making more widgets. Imagine a semi-conductor production cell. It takes in sand at one end and spits out finished chips at the other; that's fanciful, to some extent, but close enough. Now how are there EoS for such a closed world production method? There aren't, naturally. With such a fixed capital stock, there's no average cost advantage to make more chips than 24/7/365 use of such a cell. You have to buy/build another cell. If you can't run it 24/7/365, i.e. sell its full output, your average cost/chip overall goes up, not down. Since this cell demands little to no labor, there's nothing much to be gained through labor saving. Supply of input materials/assemblies may or may not in total decline based upon outside factors.

So, in sum, it's unlikely that Apple or Samsung has much production cost advantage, especially given that the vast majority of iPhone is built by others than Apple. To the extent that EoS exists, Apple benefits just as much as Samsung et al since they all buy from the same underlying vendors who build to satisfy all comers. A falling tide lowers all boats. The notion that Apple will in-house production is foolish; they'll slide down the EoS to higher cost. There's a reason Apple has never made much of what it sells.

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