Why Apple Sends All iPhones And iPads By Air: It's Cheaper

The Guardian has one of those lists of things you didn't know about Apple . There were three founders, not two, Macintosh is a type of Apple, things a lot of us have heard before. But there's one that while I've heard it before is worth explaining. That's that Apple sends all of its iPhones and iPads around the world by air, not by sea transport. The reason is that it's cheaper for them to do it this way:

Apple is Cathay Pacific’s biggest freight customer, as it prefers to move most of its stock by air instead of boat. The benefit is being able to move stock quickly rather than cheaply, with stock moved from China to the US in 15 hours instead of 30 days. It means that less money is tied up in stock (normally on credit) before it can be sold on.

It also means that phones, tablets and computers all worth in excess of £500 each are not sitting in a container at sea which might sink or get hijacked.

That's not quite true for Apple isn't a great user of credit. Given its cash piles it would be a strange thing if it were. What actually happens is that Apple Ireland, where all the profits end up, goes out and purchases the components that are then made into the Apple iKit at Foxconn etc. So it's not actually credit that is the issue: it's the time value of money that is. What else could Apple be doing with that money if it were not tied up in that valuable iKit? I had a stab at answering this earlier:

With gas at $4 a gallon, that’s a whole 1.2 cents per iPhone/iPad in transport costs if they move by sea. But Apple’s actually paying around 54 cents each to ship them by air. Why pay 50 times more than you have to for transport?

Which is where that time value of money comes in. There’s three ways that we can look at this and none of them are entirely correct. But all do rely upon the time value of money as an explanation of why Apple doesn’t move the iKit by boat but by air. That reason being that the boat takes 30 days while the plane takes 15 hours.

Of our three ways of looking at this the first is the simple cost to Apple of having to finance that 30 days on the boat. Yes, they’ll almost certainly be getting credit from their suppliers but they’ll also be offering it to the companies that buy from them. So the time difference between one day and 30 days of transport has to be financed. Apple has vast cash reserves, as we know, and is making something like 3% on them at the moment. So, in order to finance the shipments they must give up making that 3% a year on their cash. Or, if we prefer, 0.25 % per month, a month being that 30 day period that has to be financed. An iPhone costs $600 or so so the financing cost of shipment by boat is $1.50. We can also say that Apple’s profit margins are 40% or so, call that 50% to make our math easier and this knocks it down to 75 cents.

We could also look at the cost of capital for Apple. That’s more like 9%: that’s not a number specific to Apple at all, it’s just a reasonable guess at the cost of capital to a large corporation. As we can see this is three times that lost interest cost and so the time value in that seaborne shipment is $2.25 to $4.50.

That's the reason why Apple ships everything by air. Because it's cheaper to do so. Yes, the direct costs of sea shipping are lower but the time value of money then reverses the calculation.