Apple should shrink its finance arm before it goes bananas
economist.com
economist.com
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.
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.
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.
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.
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
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.
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
There’s a reason other (more “progressive”) countries don’t tax overseas business. It’s stupid and anticompetitive.
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).
We previously would take taxes by force remember.
If you think it’s ok that someone who has never lived in a country can be taxed as a citizen against their will by that country, then you can’t believe in any individual rights.
You are describing a system that would give Samsung an even far lower tax rate than Apple. You can’t trap capital, it will flow overseas to where the best opportunities are. We are already making this happen with the highest corporate tax rates in the world. Adding foreign corporate taxes as a third layer on every dollar of profit would make our slide to uncompetitiveness go that much faster.
It also makes US companies more prone to acquisitions from abroad, because those acquirers can save a ton more in tax than any company could with a US holding company at the top.
If Apple directly sold in France it would first pay French corporate taxes, then on the remaining profits, pay another 40% or so as corporate taxes to US and California. They might have 40% left for reinvestment and dividends.
Instead they create Apple France, which pays the French corporate taxes on its profits, but doesn’t send the rest to Apple USA. By holding those profits Apple can defer the day of taxation until a tax holiday (hopefully) so they can reinvest or pay shareholders as much as 50% of their French profits.
This ignores other wrinkles such as moving the French after tax profits to Ireland so the interest earned while they hold it is only taxed at very tiny rates.
There are certain rules for US controlled companies about what they can and cannot do with the money held in those tax deferred subsidiaries. But if a US company is not US controlled (e.g. a corporate group with a holding company not based in the US) these (anti avoidance) rules do not always apply or are applied differently.
Second, if you have an EU company acquiring a US domestic entity, they will generally be able to save more on taxes due to the high corporate tax rate.
In its simplest form: say an entity that is taxable at 20% acquires a business paying 35%, they'll be able to convert a significant portion of that 35% by legally stripping earnings in various ways (loans, consulting agreements, ip license agreements, etc).
I'm not so convinced. That's a huge cash pile. If they brought some back and handed it out as dividends, I'd feel the benefit. I'm not inherently averse to them investing it instead of giving it to me straight away, but at some point I do want it.
Second to that, Apple can pretty much borrow funds indefinitely to do buybacks and declare dividends. I don't know what their borrowing rate is, but say they pay between 2 to 4% on their bonds, then they shouldn't have a problem achieving a similar (or even higher) yield on their offshore cash, meaning it will cost them absolutely nothing to keep it all offshore.
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?
The author though is trying to get across that certain financial instruments can have a negative multiplier effect.
Imagine a day where the S&P 500 drops by 10%, perhaps during it Apple Capital starts to liquidate a few investments. Let's say the next day is worse and we see another 12% drop. Depending on their hedging, diversification, asset class, investment type and liquidity, it could turn out to be a very bad day for Apple Capital enough to where it affects Apple Inc.
Obviously the above example is extraordinary and we're talking about highly sophisticated financial engineers but we are technically living in an extraordinary time. US Equities have not performed this well in a long time - perhaps since 1997.
However, I'm not sure why this wouldn't be fair. More accurate valuations seem like a positive thing.