October 7, 2008

Apple’s Brick: A Radical New Laptop?

When they're not hand-wringing over the recent drop in Apple's share price, Mac enthusiasts have been transfixed lately by the mystery product, code-named "brick," that's due for release later this month.

Some bloggers and pundits have suggested it might be a new iteration of Apple TV or an updated Mac Mini. But according to a report on 9to5Mac.com, "brick" refers not to what it is, but how it's made. The Web site, which cites an anonymous source, says the code name has to do with a manufacturing process for Apple's MacBook and MacBook Pro lines of laptops. Apple (AAPL) will build the notebook out of a single piece of carved-out aluminum -- a brick.

Whatever it signifies, the new computer may be precisely what Apple Chief Financial Officer Peter Oppenheimer meant when he referred to a "new product transition that I can't talk about yet" during Apple's most recent earnings conference call in July. The transition is among the reasons Apple said it expects to make lower gross profit margins [BusinessWeek.com, 7/22/08] during the next several quarters.

But if the new product does prove to be a notebook made from a block of aluminum, how much pressure are Apple's margins likely to undergo? More to the point, would Apple's brick be a brick?

Savings on Materials and Labor A radically different production method might well boost costs, at least at the outset. But there could also be savings from the change, says Kevin Keller, an analyst at market research firm iSuppli. "If you're working with one single unit of metal, you're reducing a lot of the materials costs and also a lot of labor time on assembly," he says.

Using a single piece of metal would also provide the opportunity for the kind of design flourishes that distinguish Apple and its chief executive, Steve Jobs. Screws might be minimized or eliminated entirely. Seams joining different pieces of metal would disappear. In short, these notebooks would be unlike anything else on the market in appearance and design.

Apple has been known to push the envelope on notebook design over the years. Its metallic MacBook Pros have inherited a distinctive look and feel that dates to 2001 when Apple launched its PowerBook G4 product line. Since then, there has always been a metal notebook, sometimes boasting a titanium shell, sometimes one of aluminum.

But coring out a block of aluminum, while fairly common in some products, such as types of wireless telecom gear, is a slow process, Keller says. "The issue for Apple, which would presumably be doing it millions of times, would be speed," he says. "It's very time-intensive." Presumably, Apple could bring innovation aimed at streamlining the manufacturing process, he adds.

Patent Filings Apple declined to comment on its plans, but the company has made patent filings related to the design of notebook enclosures. In May 2007, it filed for a patent on a design for "enclosure parts that are structurally bonded together to form a singular composite structure. That is particularly useful in portable computing devices such as laptop computers."

Another important factor in the success of these new laptops is where they would be made. 9to5Mac's informant suggests that Apple might bring final assembly of the product in-house. In a world where notebook PCs are made almost exclusively by third-party manufacturers because of labor costs, the thought of Apple getting back into the business of manufacturing notebooks would send shivers up the spine of any shareholder. "I'd be shocked if they started doing any of their own assembly," says Andy Hargreaves of Pacific Crest Securities in Portland, Ore. "That's the kind of drastic step that would hurt profits. I'm just not sure what the advantages would be."

Then there's the expense of setting up a factory, purchasing the equipment, securing the real estate, and hiring the labor. None of this could be done on the cheap, though Apple at last count had nearly $21 billion in cash and could easily absorb the expenditure. Apple owns a 305,000-square-foot manufacturing space in Cork, Ireland, that also houses a customer-support call center. It also owns an 805,000-square-foot warehouse and distribution center in Sacramento. Building and ramping up a factory is an enormous project that takes a lot of time and a considerable effort around logistics. Parts have to be shipped in, and finished products have to be shipped out.

Buying Real Estate There's no evidence Apple has undertaken the construction of a new facility, though in recent years it has been purchasing real estate near its headquarters in Cupertino, Calif., for a second corporate campus. On the off chance Apple wants to do some of its own manufacturing, the company would most likely be considering a site in China. "If they're doing this at all, there is no doubt in my mind that it would have to happen in Asia," Keller says.

Apple stock rose 1.07, to 98.14, on Oct. 6, though it has been hammered in recent months on concerns that the economic slowdown and financial market crisis gripping Wall Street will crimp demand for its products. Whatever form its brick takes, Apple will want to ensure that it can be manufactured as efficiently as possible -- and hold plenty of appeal for consumers.