Apple Inc. (NASDAQ:AAPL) to buy or not to buy? CLSA is out with a report today that looks at Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) from a different angle. The report addresses the rising opex and capital intensity for Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) and compare/contrast both companies’ investment commitments in these areas. The contrast reflects different business models and strategies rather than just increasing pressure to spend. Rather than looking at the absolute money spending, CLSA recommends thinking in terms of brand strategy and visibility where the gap between Apple and Samsung Electronics Co., Ltd. (LON:BC94) versus all other smartphone brands keeps enlarging to the point where the ability of smaller brands to spend comes into question. We highlight the main points from the report below.
Opex varies widely, but so do strategies
- Opex: Apple Inc. (NASDAQ:AAPL)’s opex has declined from ~10% of sales in 2007-08 to 6.7% in CY 2012, while Samsung’s has been steady at 16.5% over past 3 years.
- Some wonder why Samsung total opex is 3x that of Apple (CY 1Q-3Q12 US$21bn versus US$7bn) when revenues are roughly similar over the same period (Samsung US$129bn versus Apple US$110bn).
- CLSA thinks that this is the result of both choice and necessity for Samsung. Choice as Samsung pursues its strategy of global brand dominance in consumer electronic, encompassing phones, TVs and related audio-visual products, notebooks and also white goods, while Apple’s product range is very compact. Samsung’s component business is comprised of hundreds of products and clients, with complex distribution and inventory management. Samsung’s geographic footprint virtually covers the world and relies on fragmented electronic retail channels, whereas Apple’s footprint is smaller and relies on concentrated distribution (including own stores and online) that are certainly very cost efficient.
- It is also possible that Apple’s unique brand positioning requires less sales expenditures, in part supported by regular media frenzy, celebrity management and flagship stores reminiscent of luxury brands.
R&D gap is narrowing for Consumer Electronics
- Samsung’s R&D expenditures are 3-4x higher than Apple’s as Samsung designs a wide range of semiconductors and develops semicon manufacturing processes. Samsung’s R&D represents 6% of revenues, less than TSMC’s 7.5%.
- If one were to assume that Samsung’s semi R&D is equivalent to TSMC’s, Samsung R&D on Consumer Electronics was US$4.2bn in 2011 versus Apple’s US$2.6bn, but the gap is narrowing down as Apple R&D expenses are increasing by +34% in CY12 versus Samsung +13%, reflecting that Apple semicon (app processor) design efforts are intensifying along with a heightened focus on internet services.
Apple’s surging capex
- In CY 1Q-3Q12, Apple’s capex was US$7bn versus Samsung’s US$16bn. q 65% of Samsung capex is dedicated to Semi, 20% to LCD and 15% to “others” or US$2.7bn. Samsung’s capex is a function of the semicon business, stable at 12- 14% of revenues.
- In contrast, Apple has invested US$7bn YTD and will invest US $10bn in the next 12 months. Apple invests in retail stores, technology development (touch panels, casing materials) and often co-finances the capex of its suppliers (Hon Hai, Sharp). Apple’s capex has increased from 3% (2008) to 6% (CY2012). CLSA analysts believe that most of the increase comes from heavy investments in tooling equipment for many of its new products (with new form factors) as well as automation equipment that are both situated in its manufacturing partners’ and component suppliers’ facilities.
- Backing-out semi R&D for Samsung, Apple and Samsung R&D expenditures on mobile phones are not materially different, in their opinion, and CLSA expects the gap to close (in $ terms) as Apple is increasing its App Processor design efforts.
- More significantly, the cost of mobile phone R&D is within a 2-3% of revenue range, much lower than Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM), Nokia Corporation (NYSE:NOK) and LG-E at 7-9%.
SG&A and Sales-Marketing
Apple’s SG&A spending is surprisingly low compared to all other smartphone makers at 6-7% versus 10-20%. Korean firms LG-E and Samsung are at the higher end of the spectrum with 22% and 17%, respectively. CLSA thinks that this reflects a larger product mix, fragmented distribution channels and point of- sales promotions rather than inefficiencies.
Cost of sales (marketing, advertisement, promotion) is reported by Korean firms and Nokia Corporation ADR (NYSE:NOK), but on different basis. Apple only reports cost of advertising. Comparisons are therefore hazardous, but the key point is that Apple and Samsung outspend smaller brands, LG Electronics Inc. (KRX:066570), HTC Corp (TPE:2498), Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM)) by a factor of 3-5x in US$ terms.
This is core concern for the smaller smartphone brands, which can hardly compete in terms of consumer mind share but are still
spending 7-9% of revenues on sales and marketing. With deteriorating ASP and/or margins, for how much longer can HTC Corp (TPE:2498), LGE, Nokia Corporation ADR (NYSE:NOK), Research In Motion Limited (NASDAQ:RIMM) (TSE:RIM), etc, keep spending ~15% of revenues on sales and R&D?
Samsung’s SG&A expenditures are close to US$22-23bn, an astonishing amount by any measure. While some investors seem to worry about the increasing $ spending. However, CLSA believes the opposite, and is positively impressed by Samsung’s strategy and its execution to remain the dominant global consumer-electronic brand; for example, Samsung smartphone geographic footprint in 150 countries and with 300 carriers.