
Apple should shrink its finance arm before it goes bananas - hvo
https://www.economist.com/news/business/21730631-worlds-biggest-firm-has-financial-arm-half-size-goldman-sachs-apple-should-shrink
======
ksec
People continue to say Apple makes huge profits. But in reality they have a
world wide market share of 20%, with Gross Margin at ~40%, Net Margin ~20%.

Both Gross and Net Margin figures have been very consistent over the years,
And increasingly many profits are from the financial arms, and other services.

One way to look at it, is that despite iPhone has been getting more expensive
over the past years, Apple are actually earning less % on each unit.

In some ways, this is worrying.

~~~
valuearb
They still take the vast majority of profits from three enormous markets,
smartphones, tablets, and PCs. Long way from trouble.

~~~
ksec
Sorry I should have word it more carefully, Not that I think it is worry for
Apple, but and overall general Economy.

The only reason why Apple is earning 85-95% of profits of smartphone industry
per year is because all other manufacturer are posting loses. When everyone
decide not to make a dime like Amazon, ( or they cant ), the ones who do will
obviously emerge as winner from a Profits POV.

What I find worrying is

1\. Apple is obviously working in diseconomy of scale, i,e they aren't paying
less per component unit with their massive scale, they are likely paying more
then everyone else.

2\. It is very clear there is an inflation in component ( Or everything else
in Asset ) happening. From NAND, Wireless, Memory, Fabs, Screen, everything is
getting more expensive, which we wont quite used to because we expect the same
Screen, memory or CPU with similar characteristic or performance will cost
less 3 - 4 years down the road, but this has not happen.

Both point relates to interest rate, the way those company were sustainable
because they are making some profits in a likely stable or monopoly
environment, and getting very cheap cash flow.

That is what i am worry about. I wish someone could tell me what happens when
too much liquidity is injected into the system..... but it seems history
hasn't written a page on this yet.

~~~
valuearb
Pretty much all your assumptions are wrong. There is no evidence 1 & 2 are
true, in fact the opposite. Apple sells more single models of phones and
tablets than virtually anyone. Almost every phone they sold the last year was
a 7 or a 7+.

And the reason for their profit dominance isn’t other companies losses, it’s
they are competing against commodity makers with compelling unique products
and value. Beyond iOS and iTunes is their custom SOCs, which are years ahead
of their competitors.

------
qaq
people like to through notional value of derivatives because those numbers
look huge but are generally meaningless "the notional value of JPMorgan’s
derivative trading could be as high as $70 trillion" makes for a eye catching
statement. Apple most likely is holding derivatives to hedge currency risks
and their exposure has very little to do with notional value.

~~~
twic
> In theory losses on derivatives would be offset by gains in the value of
> Apple’s underlying business.

That is, in fact, exactly the point of them. If the derivatives are hedging
currency exposure, then a move in exchange rates should lead to a change in
their value equal and opposite to the change in value of the overseas assets.
The whole idea is that they neutralise the effect of changes in exchange
rates.

------
mankash666
What should the corporate tax rate, currently at 35%, drop to, for Apple to
repatriate foreign cash?

It seems like a no brainier to drop the rate when the alternative is financial
skullduggery by the Apple capitals of the world. All while the local mom &
pops pay the 35% and bear the financial burden of the nation

~~~
MoBattah
> It seems like a no brainier to drop the rate when the alternative is
> financial skullduggery by the Apple capitals of the world.

Absolutely not. Just because an entity will try to work around your well-
intentioned and globally standard laws does not mean you should give up on
those laws.

In addition, it's quite an elitist and anti-democratic statement -- Apple is
by far the world's most profitable public company, to give them a 'tax break'
is to add icing onto their cake.

Apple is doing what it thinks is best -- taking on debt with the assurance of
foreign assets, no matter if those assets are readily available or not.

The current US president has tossed around the idea of taxation amnesty for
corporate asset repatriation -- if I was Apple, I'd lobby for that while
continuing on their current practice.

Lastly, there's no real fear Apple won't be able to borrow at a handsome rate.
Interest rates are still incredibly low (historically) and the Fed doesn't
raise rates by full percentage points, they do it slowly and incrementally.

~~~
mankash666
Disagree. Apple is one among thousands of companies avoiding tax, while Mom-
and-pop companies pay exorbitant rates. No one's working around laws - they're
following it diligently while maintaining their fiduciary duty to investors.

US corporate tax rates are among the highest in the world - even Canada -
having a reputation for being socialist - has a lower rate. You're forcing
companies to pay 0% tax in the US if they can get away paying only 5% in
Ireland. And Ireland is benefiting disproportionately from American innovation
- because of onerous tax rates

~~~
pjc50
The US is the only country to apply a _global_ income tax to its non-resident
nationals. It should apply a global tax to its businesses as well.

~~~
valuearb
That would drive US corporations to reincorporate overseas and cost the US
most of its corporate tax revenue.

~~~
toomuchtodo
You install tariffs on the products and services of those corporations
attempting to subvert the taxing authority, utilizing payment networks if
necessary to capture the tariff.

~~~
matt_wulfeck
So person A sells an iPhone to person B in China. The phone was manufactured
there and never left the country. Can you tell me the reasoning that our
federal government owns 35% of that sale?

There’s a reason other (more “progressive”) countries don’t tax overseas
business. It’s stupid and anticompetitive.

~~~
toomuchtodo
The same reason I owe the government taxes when a non US company pays me
directly when I work outside of the US. That’s what I owe the US government
for their services I receive as a US citizen regardless of where my business
activity took place.

You think it’s stupid and anti competitive. I think that it’s a race to the
bottom otherwise and fully support the current model (although 35% is a tad
too high; 20-25% is more reasonable IMHO).

~~~
wbl
There is only one other country that agrees with you: Eritria. Almost all
other countries tax only residents.

~~~
toomuchtodo
To each country their own model. This works for us. Probably helps to be one
of the largest economies in the world. You get to make your own rules at that
scale.

~~~
valuearb
Except it doesn’t work for us. It makes the US a lousy place to invest and
drives capital overseas. The US economy is huge because of most of its first
200 years, it’s been stagnant every since.

~~~
toomuchtodo
And yet, investment in the US continues unabated.

~~~
valuearb
“investment” will continue as long as we run large deficits, if you count
funding our rapidly growing federal debt as “investment”. It’s the “benefit”
of our trade deficits.

------
likelynew
Apple has big volume of cash. What exactly is the downside in investing it in
riskier assets?

~~~
mark212
I think the assumption of the author is that the folks who run Apple will be
seduced by profits generated by the financial arm and start emphasizing that
more. Which if anyone knows anyone who works at Apple is ridiculous in the
extreme. Alternatively, they take on more balance sheet risk and then the
whole company is jeopardized by a financial volatility event, e.g., a big jump
in interest rates.

Tim Cook and others do seem to be playing a game of chicken with congress. How
long can the US division continue to borrow to find the dividend while those
enormous piles of cash remain offshore?

~~~
MaysonL
How long? At least as long as the pile of cash overseas grows faster than the
debt.

------
erikpukinskis
To what extent can Apple leverage internal research to make these investments?
They have sales data and supplier numbers for their products... this could be
useful not-public information, no?

~~~
timthelion
Is it really fair to use such non-public information? How far can you go till
it becomes insider trading. I'm aware that some investors have been looking at
parking lot volume via satellite imaging in order to predict the performance
of retail companies. Is that fair? Would it be insider trading if Amazon
trades stocks of companies which sell through Amazon? Amazon would then
ACTUALLY KNOW their sales numbers. Perhaps this whole insider trading thing is
a broken idea to begin with. What if I figured out the sales numbers for a
cell phone manufacturer by analyzing MAC addresses using a network of wifi
sniffers, sales numbers for car manufactures by analyzing traffic camera data
using ML. Used security camera footage from stores that I own to figure out
what kind of hand bags people caried and then shorted Prada when I knew fewer
people were bringing Prada bags into the store...

~~~
wannabag
Funny enough that Google is exactly in that position. Google owns a company
called double click who does adword bidding optimization in between other
things. As I work in the business, one thing that is clear is that the only
way to do that efficiently is to keep track of conversion data. This puts
Google in a highly unfair position since they manage the auction and own the
data which drives the auction. That said, this is not even close to what
Google knows about businesses in general...

~~~
timthelion
But the really interesting thing is not what Google can do with the ad
exchange. But what they can do with that ad buy data in order to reconstruct
the sales numbers for a company and unfairly play the derivitives markets
around it's earnings call. When I say unfairly, I mean that ONLY google is
privy to such knowlege. If there is any reason to think that insider trading
is wrong, then Google would be similarly in the wrong here.

