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Tim Cook: What's Good For the US Dollar Is Bad For Apple
theodp writes: For years," Charles Erwin Wilson famously said back in the day, "I thought what was good for our country was good for General Motors, and vice versa." That was then. This is now. The Washington Post reports that a strong U.S. dollar is the biggest threat to Apple's business around the world. "The dollar has shot up about 22 percent against a trade-weighted basket of other currencies since the middle of 2014," explains Matt O'Brien. "And in Apple's case, that's meant what would have been $100 of foreign sales in September 2014 was just $85 by the end of 2015. That's not good when you get two-thirds of your revenue overseas." Apple blamed the strength of the dollar compared to other currencies for costing it $5 billion in revenue, "For perspective, that difference is the size of an average Fortune 500 company," quipped CEO Tim Cook.
Oh wait, you're serious, let me laugh even harder.
Having a strong currency is not always entirely in the national good. Sure, it's generally better than a weak currency (which is often a sign of political instability and a lack of international confidence in a country's prospects), but it does cause its own kind of problems. In particular, it can hurt exporters, as it costs overseas customers more to buy their goods.
The strength of the Deutsche Mark was often problematic for German industry. That's one of the reasons why Germany has been so enthusiastic about adopting the Euro, which gives it a significantly "weaker" currency than it would have otherwise, and locks it into currency parity with most of the rest of its regional bloc.
I'll be cautious and save my answer for the next time we discuss these same news in a couple of days.
Any second now I'll be able to dredge up some sympathy for them.
Any...
second...
now...
Ah crap.
*Pokes self in eye*
There! Is that close enough to tears?
Fuck Apple.
Chas - The one, the only.
THANK GOD!!!
Maybe businesses should keep an eye out for foreign governments that manipulate their currency so much that they get a false sense of reality.
Actually, Apple et al. have known about this all along. Now I'm trying to figure out what they are trying to extort by way of tax breaks to make up for their "losses".
Tim, iPhone sales are down for two reasons
1. The smart phone market is over-saturated.
2. Every bugger that wants an iPhone, has an iPhone.
Stop trying to claim that things like sotck market fluctuations, El Nino, IS or Zika are to blame.
Summation 2
It doesn't improve margins. The existence of a margin at all means that the absolute effect on sale price is larger than the effect on build cost. The margin as a percentage remains identical, but the absolute value of that margin drops.
They produce all their products overseas, they sell most of their products overseas, and they hide all their money overseas.
What part of this company is American anyway?
Somehow I don't have sympathy when the richest company in the world complains that they're not making as much money as before.
"What the American public doesn't know is what makes them the American public." -Ray Zalinsky (Tommy Boy)
Further Apple doesn't bring its foreign profits home anyway, so what does it care how much its earnings would be in USD? It has Irish bank accounts rammed full of iPhone money (that the nice Irish govt didn't charge them tax on either), while constantly moaning that it can't bring any of that into USD unless Uncle Sam gives a big tax discount.
To confuse the Apple Troll mods, I'll add that Google is just as bad, and recently got exposed for doing a 'deal' with the UK govt to contribute a little bit towards us plebs.
Sheesh.... talk about first world problems.
File under 'M' for 'Manic ranting'
more like a prelude to doing an inversion with Apple Ireland. Should've been the McIntosh. I hear that Apple, an Irish company, will keep a nice R&D facility in the Republic of California.
My God, it's Full of Source!
OUTSIDE_IP=$(dig +short my.ip @outsideip.net)
As an IT person, it is hard to have any sympathy for Apple. They have so much cash, and could step into so many markets... but they have all but abandoned the enterprise sector (no XSan, no XServe, no rack-friendly models [1].)
Apple has been a toy maker for so long, they think they can continue to do so. Sony had this attitude back in the late 1990s... but then just got steamrollered. If Apple is to have long-term stability, they need to use some of that large cash stash, and either spin off an enterprise company or make a division for this. Think desktops, servers, and applications that can replace Exchange, Active Directory, and other items. Apple would also need to work like other sane companies and give roadmaps out. (For example, I can go to IBM, Oracle, HP, sign a NDA, and see what is going to happen in the next 3-5 years, product-wise. With Apple, you can't do this.)
With people related to the Fed like Marc Faber saying that there will never be a bull market in his lifetime, Apple needs to start battening hatches for the oncoming storm. Regardless of the economy, enterprise sales are a solid income, and it is easier to convince one CFO to pay for 100,000 Macs than it is to convince 100,000 consumers to buy one Mac apiece in a bad economy.
I hate doomsaying, even as an AC, but winter is coming, and the handwriting is on the wall. Apple needs to shift from iPhones and consumer toys back to meat-and-potatoes products (not just Macs, but infrastructure) in order to stay relevant in 5-10 years.
Perhaps virtualization. Build ESXi into the BIOS, slam some DRAC/iLO functionality onto machines, and this might shake things up in that market. Especially if Apple added Infiniband or Thunderbolt connections between blades and chassis, and Isilon-like OneFS functionality, so each blade could use another's HDD, with redundancy by drive, blade, and chassis built in. This is what MS is doing with Storage Spaces Direct, but the difference between 10gigE and Infiniband or Thunderbolt for cross-connects is significant.
Apple is sitting on a lot of cool stuff. Not just for making toys, but actually being able to play in the adult world where regardless of the economy, businesses still will be upgrading.
[1] No, a Mac Mini is not an enterprise geared machine. A Mac Pro can be racked with a third party kit (and take up a ton of space)... but that is a lot of kludging compared to a 1U XServe, or a rack and blade system. Especially if Apple actually went balls-out and used some of that cash to turn OS X into a virtualization platform (The XSan filesystem is still present and usable for clustering), or made some applications that could compete where MS is only present.
It has Irish bank accounts rammed full of iPhone money
And that's why a strong US dollar hurts them; it's not just lost revenue on future sales, its lost value of past revenue.
while constantly moaning that it can't bring any of that into USD unless Uncle Sam gives a big tax discount.
And good ol' Uncle Sam's response was to bolster the local economy and boost the value of the US dollar, basically saying "it's better to pay taxes when the exchange rate is high than play stupid games until it tanks".
I don't say it often, but when I do, I mean it: The US Government made the right call. I'm sure Apple has lost more value in the money they've kept overseas by now than they'd have paid in taxes, hopefully that is a lesson learned.
APK quotes people (including myself) without context and should not be trusted. Just thought you should know.
This affects all American businesses doing business overseas -- and that's a lot of businesses, not just Apple. American goods are selling at a considerable price premium versus competing goods in those markets. Long term, that's not a fantastic place to be as it acts like a export tariff on US goods and makes them less competitive. Also when you are selling overseas what sales you make take a cut due to exchange rates. It's demoralizing to see your sales force bust their ass to log a big YOY sales growth in their country but then have exchange rates eat that up and make it a 0% growth (or a loss) on the bottom line.
And I know we all like to throw barbs at Tim Cook sleeping on his mountain of cash, but this applies to all US business, not just Apple.
XServe died because it was useless and nobody was buying.
Incorrect. Xserve was a great product line and it made money, but it just wasn't big enough for Apple to keep around.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
Tim Cook has fucked Apple up since he has been in charge and he needs to resign.
You're an idiot. Tim has done a brilliant job of leading Apple, and they've grown at an incredible pace for a company their size. I remember people like you saying the same thing about Steve.
-jcr
The only title of honor that a tyrant can grant is "Enemy of the State."
I hear you about diverting resources IF you are working under the premise that you must keep your costs fixed (aka not add to the resource pool). However, 99% of the time, you need to increase your resources to be able generate new products.
just like people do.
No actually people don't. Many people aren't in fact sociopaths and are happy to simply earn a normal living and pay taxes in the normal way without attempting to jump through vast hoops with offshore accounts and etc to avoid contributing to society.
Many people actually understand that civilsation is built on taxes and can think beyond MINE MINE MINE MINE.
SJW n. One who posts facts.
Until they force and update which kills performance
My eyes reflect the stars and a smile lights up my face.
Those foreign profits are stored in Dollars so it has no effect on their stored cash either. Grand Cayman and all the other "hide money offshore" tax havens uses the dollar.
just like people do.
No actually people don't. Many people aren't in fact sociopaths and are happy to simply earn a normal living and pay taxes in the normal way without attempting to jump through vast hoops with offshore accounts and etc to avoid contributing to society.
Many people actually understand that civilsation is built on taxes and can think beyond MINE MINE MINE MINE.
You're missing the point here. People are those that are rich enough to also hide their money overseas to avoid taxes. The rest of us are just consumers (i.e. not people). 8-)
Corporate customers are absolutely horrible, margin destroying machines. Can you blame them? Two of my employers derived the majority of their revenue from enterprise sales, and both of those companies are shadows of their former self. Unless you have a monopoly (or near to it), you will be nickled and dimed into obsolescence, which is a good market for China where tehy can compete with each other on equal footing, but US based companies get run out quickly.
On the other hand, individuals still have an eye for a good product, and will pay a lot of money for a good product. We don't have to report out quarterly earnings, nor do we even have to necessarily make the financially optimal solution. That's a much better market for American (or European) companies to be in. Unfortunately, because of our other economic woes, very few people can often afford to pay for the good product over the cheap shit, so the best one can hope for is to have a small but significant market share.
Toys are a good market for Apple, Enterprise is a good market for China.
The stronger US dollar also means that Apple's capital now has more purchasing power overseas.
Which means that Apple's production costs should be moving down, since most Apple devices are not made in America.
It's all too easy to look at flat numbers and come to erroneous conclusions.
The bulk of Apple's capital is not in the US denominated in US dollars, it is in places like Ireland. Thus Apple's asset/capital structure is "dollar-lite". It hold about $40B in cash and short term notes, but about $164B in overseas "investments" that are mostly denominated in foreign currency. The reason it can operate cash-lite is that it issues bonds backed by its foreign holdings to finance it's operations instead of repatriating the money
As the value of the basket of foreign currency declines relative to the US dollar, the purchasing power overseas remains relatively constant meaning their margin is relatively constant (revenue-cost)/investment. However, the net return denominated in US dollars per share goes down when the margin is unaffected.
That combined with the fact that the global downturn will likely result in lower net demand, they just can't invest the any "savings" (if there were any) in more inventory to make more money at that same margin to improve net return on investment per share likely because of the price/demand curve for their products (e.g., they couldn't really sell more at the same price unless they were capacity constrained and in that case they should have raised their prices and sold few units which mitigate the effect of production costs on their profitablity).
and either spin off an enterprise company or make a division for this.
Enterprises buy based on performance, not on shiny. Apple can't win in that market.
That assumes two things. First, the tax rate to reimport the money is around 40%, so the $200B Apple has would turn into $120B re-imported. The second this is Apple may be keeping things in US dollars "natively" - i.e., that $200B Apple has is still worth $200B - because Apple kept it in US dollars offshore. This is a really common thing - many companies use a foreign currency as their "primary currency" because that's the currency they deal with. If you're an international company, you'd probably use US dollars, or Euros for that reason - you do everything in the currency your customers are used to.
The real problem is that it makes Apple's goods more expensive. For example, Apple does things in US dollars. So if you write an app for $0.99, Apple converts that to other currencies for you. Right now, in order to pay the app developer their $0.70 owed when someone buys that app, Apple raised their prices elsewhere - that US$0.99 app is now CAD$1.39. That is not ideal, since it makes apps more expensive, hurting hardware sales, plus, it makes hardware sales more expensive - that iPad that cost $999 would now be $1399,or more.
So no, repatriating the money may not work at all because the currency exchange may not have hurt Apple if they've kept everything in US dollars the whole time (which they probably have). However, what does hurt is everything they sell - the rise of the US dollar means iPhones, iPads, Macs and everything else jumped in price, and anyone with even the simplest sense of supply and demand curves know that will hurt sales.
Apple and everyone else is really stuck - they could choose to keep prices in US dollars and hope it's a temporary problem, or they could eat some of the increase and make a little less margin. Some people already have - if your business relies heavily on foreigners (i.e., tourism), they've already cut rates - airfare, hotel, etc have plummeted because visitors from elsewhere simply are not coming, and tourism-dependent businesses are hurting.
While there are always outliers on any list of people or behaviors....I would posit to you that the number of people that are completely altruistic and would never take deductions or anything that could legally reduce their tax burden is very close to nil.
I would also give you, that most likely the majority of folks in the US (if not the rest of the first world) have no real problem paying what they consider to be a reasonable tax, for required governmental services, although the definition of what is truly required by the govt is debatable by those tax payers.....
Taking every legal deduction and every legal means offered to you as a tax payer, to decrease your tax burden is not the sign of a sociopath, but someone who is actually fiscally cognizant, It only make sense to take advantage of any laws available to you, to keep as much of your hard earned money for yourself...unless you 100% agree that the government knows better how to spend your money than you do, which again, I would posit is a very low demographic number.
I think the only way to make things fair...is to actually throw out the old code and make it simpler. It really should NOT take more than a post card, or at most 1-2 pages to fill ones annual tax statement out. It should be as simple for individuals as:
For businesses it should be something like:
Now..if you did this and had no deductions, no loopholes, etc...then I think most would be happy with this to see exactly that everyone is paying a fair level share.
However, this would take a lot of power away from those in governmental power, take away their ability to manipulate the populace, etc. So, I doubt we'll see this type of thing in my lifetime...hence, most everyone will bitch and moan about taxes and how unfair and unequal it is...
Light travels faster than sound. This is why some people appear bright until you hear them speak.........
Software development and engineering are not marginal expenses (they don't vary with the number of items sold).
Software development and engineering account for a tiny fraction of Apple's costs. Something like 10-15%. Look at any software company's financial statements. You'll find that their development costs are always somewhere between 10-20% of total cost. It's true for Microsoft, Oracle and any other software company. You are correct that they are fixed costs but their effect on the bottom line in this case is relatively minor.
Apple's manufacturing is done in Asia (where costs have fallen in dollar terms) but Apple's development is mostly done in America.
Look at Apple's financial statements. You'll find that Apple's Cost of Goods Sold is almost 10X their SG&A and 15X their R&D costs. Cost of Good Sold is the direct cost attributable to making the physical products Apple sells - direct labor and materials. Engineering falls under SG&A and/or R&D. The costs aren't even close.
What you are missing is that even though Apple's manufacturing is done in Asia, what is important is that at the end of the day Apple's revenues and costs are in dollars. Since 2/3 of their sales are outside the US, a strong dollar hurts Apple on a net basis because it makes Apple's products more expensive outside the US.
Disclosure: I'm a certified accountant.
You uncover a key flaw in Cook's reasoning; if they're not bringing those foreign dollars home, then they've no reason to convert them to dollars, and this isn't money they're losing at all. It is just the imaginary "if we brought it home" ticker in his office that is showing a reduced high score.
What did the government do? Devalue the Canadian dollar against the US dollar. Bastards, all.
While there may have been some policy factors that have directly influenced the Canadian dollar value, they have been very small in comparison to the impact that resource prices (I'm looking at you, Barrel of Oil) have had. The failure to diversify the economy away from such a heavy resource weighting has been a shortcoming of every government since confederation both provincially and federally.
The problem is, in terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich. We're already currently concentrating wealth upwards; what you're describing would accelerate that process.
I've learned that they're worthless, so I don't read AC comments anymore.
All resource extraction was less than 10% of the Canadian economy in 2014, smaller than manufacturing and real estate.
I don't really have a great picture of what parts of the economy drive properity, but while I can see that healthy manufacturing can lead to everyone having more stuff, I do wonder how "real estate" enters into it. Real estate can change hands, and go up (or down) in value, but nobody is making any more of it, so having a healthy real estate "sector" would seem to be more of an indicator of prosperity rather than a creator of it.
In any case, if you have any links you can share explaining that resoure extraction isn't such a big deal to Canada I would be interested in learning.
It does seem like oil is Canada's biggest export (about 27% of the total). Vehicles are #2 at just under 13%. Combined with Precious metals (#4), Plastics (#6), Wood (#7), and Aluminum (#9) that makes up about 39% for "resources", while the Vehicles, Machines, Electronics and Aircrafts add up to about 25%, so it looks like "resources" are significantly larger than "manufacturing" on an export basis at least.
One can see that dropping the price of the biggest export by 70% is a pretty significant event. All other things staying the same one could imagine oil going from number 1 to number 3, droping the overall export total by 80 or 90 billion dollars, or around 20% of the total.
These look like 2014 figures:
http://www.worldstopexports.co...
1 Oil: US$128.6 billion (27.2% of total exports)
2 Vehicles: $59.7 billion (12.6%)
3 Machines, engines, pumps: $32.6 billion (6.9%)
4 Gems, precious metals, coins: $20.3 billion (4.3%)
5 Electronic equipment: $13.6 billion (2.9%)
6 Plastics: $13.2 billion (2.8%)
7 Wood: $12.7 billion (2.7%)
8 Aircraft, spacecraft: $12.4 billion (2.6%)
9 Aluminum: $8.9 billion (1.9%)
10 Cereals: $8.7 billion (1.8%)