from the January 2012 issue

Apple to set up Israel development center

Apple Inc. (Nasdaq: AAPL) has decided to open a development center in Israel focusing on semiconductors. The decision was taken even before the company entered into talks to acquire Herzliya-based flash storage solutions provider Anobit Ltd..

Apple has hired Aharon Aharon, a veteran player in Israel's high tech industry, to lead the new development center.

Although Apple is a global innovation leader, the company is a relatively small investor in R&D. The producer of the iPad and iPhone invested $2.4 billion in R&D in 2010, which was only 2% of its revenue, much less proportionately than other high-tech companies.

Apple's deployment of R&D activities is in line with this policy and the company has only one technology development center, which is at company headquarters in Cupertino, California. All activities outside of company headquarters revolve around marketing, sales and support. Strategic development is carried out at home. The planned Israel center will therefore be the company's first such center outside of its California headquarters.

Apple corporate VP R&D Ed Frank is currently visiting Israel. Frank's background is in semiconductors and he has spent most of the last decade in senior positions at Broadcom Corporation (Nasdaq: BRCM), where he has managed communications chips activities and R&D generally. Frank has been meeting with Israeli companies and high tech business people, although the purpose of the visit has probably not been to identify acquisitions.

Apple's strategy over the years has been to have full control over most of the components in its products. Apple's history with chips began in 2008 with the acquisition of P.A. Semi, which today forms the basis for all the company's computers and phones. Having control over its chip components enables Apple to produce whatever it wants while maintaining maximum secrecy and controlling expenditure.

The company has a unique strategy that includes securing ahead of time a large volume of electronic components such as memories, communications chips, flow management and the like. Ordering in advance requires large amounts of capital but allows Apple to neutralize seasonal fluctuations in demand and to keep prices from rising. The fruits of the strategy can be seen in Apple's gross profit margin, which is 40.5% of revenue - far higher than that of other hardware companies.

This strategy is what stands behind Apple's desire to acquire Anobit, which develops systems for improving NAND flash memories. Apple spends billions of dollars annually on buying flash memories for the range of products it manufactures. Anobit's memories, which are already inside Apple's products, would result in savings of 10-20% for the computer giant in its purchases of memories. Apple's new CEO Tim Cook, who replaced the late Steve Jobs, has been stressing streamlining the supply chain; setting up an Israel development center sits well with this strategy.

Reprinted from the Israel High-Tech & Investment Report January 2012

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