Wednesday, March 21, 2012

An Apple Reader - iPad$, iPhone$ and iWorker$

Big Profits Bring Out All the Advice

Of course, total failure also tends to bring out plenty of advice, too.  

However, Apple's announcement of startling profits, possible dividends and even a big pile of cash in the bank didn't really catch anyone by surprise.  The iPad and iPhone stories seem to be the newest addition to Adam Smith's Wealth of Nations. Dr. Smith's central arguments of division of labor and industrial advantage have matured remarkably since his death in 1790. (From Wiki: The Wealth of Nations)

Although this MeanMesa post is not specifically about the corporation's good fortune, the proposition presented here still requires a glimpse at the "big picture" of current conditions.  The volume of recent "news" about the business is predictably large.  With corporate profits in this scale, every analyst is infatuated with the possibility of breaking out with some new "cleverly expanded subtlety" which had been overlooked by his competitors.

In keeping with the "Primer" idea in the title of this post, we can review a little of three interesting accounts of this business phenomenon.  

1. CNN - The CNN article outlines the general story concerning the announcement of profits and dividends.

2. A very nice, scholarly paper (from the University of California, Irvine & Berkeley, and Syracuse University) titled "Capturing Value."

3.  A quick "taste" of the public image problems Apple Corporation has encountered with respect to working conditions in its supplier factories in China.

1. The CNN Story
Take a look at a few excerpts of the CNN report about the company. (Read the whole article here.)

Apple announces dividend and stock buyback
NEW YORK (CNNMoney) -- Apple on Monday announced plans for much of the $97.6 billion in cash it has accumulated from massive iPod, iPhone, iPad and Macintosh sales.

The company said it would begin giving shareholders a quarterly dividend of $2.65 per share sometime its fiscal fourth quarter, which begins in July. Apple last offered a dividend in 1995.

Apple (AAPL, Fortune 500) will also buy back $10 billion of its own shares over three years, beginning in October.

"We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure," Tim Cook, Apple's CEO, said in a prepared statement. 

- ... -

The company said it expects the dividend to cost the company $2.5 billion per quarter, making it one of the largest dividend payers in the United States. Combined with the repurchase program, Apple said it will likely utilize $45 billion of its domestic cash through 2015. 

It's significant that Apple is using its domestic cash, rather than the much heftier stockpiles it holds overseas, because foreign cash would be subject to a sizable "repatriation tax" if brought back into the United States. Cook said the company didn't want to pay that tax.

- ... -

"Investors have been wresting with the question of, 'Who is left to buy the stock?'" said Alex Gauna, tech analyst at JMP Securities. 

Cook said he hopes the dividend will open up Apple's stock to a new investor base. 

Apple's dividend yield -- the percentage of a company's share price that it pays out in annual dividends -- is currently 1.8%. That's higher than the dividend yields of other technology giants, such as IBM (IBM, Fortune 500), Cisco (CSCO, Fortune 500) and Oracle (ORCL, Fortune 500), but it's lower than the yields of more direct rivals like Microsoft (MSFT, Fortune 500) and Hewlett-Packard (HPQ, Fortune 500).

Apple's dividend yield is nearly twice the average for the tech companies in the S&P 500, but a bit less than the 2.1% average for the overall S&P 500.

2. Capturing Value in Global Networks:
Apple’s iPad and iPhone

This very readable and scholarly paper analyzes the distribution of Apple's costs and profits with respect to iPad and iPhone sales.  (Read the whole paper here.)  The entire paper (8 pages) is fascinating!  While reading through this remarkably objective economic analysis of Apple, the iPhones, the Apple supplier, FOXCONN, the wages of Chinese workers, the sources and destinations of Apple profits and even the wide spread of Apple costs, a very new picture emerges.

Capturing Value in Global Networks:
Apple’s iPad and iPhone
Kenneth L. Kraemer, Greg Linden, and Jason Dedrick
University of California, Irvine, University of California, Berkeley and Syracuse University

It is unexpected, but this is not the picture that MeanMesa and many other Americans had developed about Apple's business practices.  You are encouraged to spend a few minutes with this paper.

Here are a few excerpts from the paper.

from page 3:
Who captures the financial value?

Like the iPod, the iPad and the iPhone are big money makers for Apple. While other companies are thrilled to be part of the supply chain for these highly successful products, their benefit in dollar terms pales in comparison to Apple’s. Among countries, China’s economy continues to play a surprisingly small role in comparison to the U.S., Korea, Japan and Taiwan.

In the case of the iPad, Apple keeps about 30% of the sales price of its low-end $499 16GB, Wi-Fi only model (and more if the unit is sold through Apple’s retail outlets or online store). We estimate that Apple keeps a healthier 58% of the sales price of the iPhone 4. In both cases, these are far greater than the amounts received by any other firms in the supply chain.

- ... -

The iPhone also benefits from the fact that the price received by Apple, at least until the recent availability of “unlocked iPhones”, is not paid directly by the consumer because of a subsidy offered by the carrier in exchange for a contract. This brings us to the question of whether carriers exert market power over handset suppliers as we anticipated. Our analysis [5] of the smartphone value chain showed that carriers in fact earn gross profits over the life of a typical 2-year contract several times those earned by handset vendors. This suggests (and industry analysis further supports) that the carrier’s primary market power is exercised over its subscribers. The carrier then negotiates over the distribution of the resulting profits with handset suppliers that can help it to attract and retain subscribers.

After Apple, the next biggest beneficiaries in the iPad and iPhone supply chains are Korean companies such as LG and Samsung, who provide the display and memory chips, and whose gross profits account for 5% and 7%, respectively, of the sales price for the iPhone and iPad.3 U.S., Japanese and Taiwanese suppliers capture 1-2% each. But overall, the story remains the same, with Apple’s success benefiting its shareholders, workers, and the U.S. economy more generally.

The two charts below show the breakdown in detail. In each case, we provide the geographical distribution of the gross profits received by the first-tier suppliers. We break down the remaining cost of inputs into materials and labor.

The main difference between the two charts is that the iPhone, shows no amount for “Distribution and retail” because Apple is paid directly by a cellular company, such as AT&T or Verizon, which then handles the final stage of the sale.

The role of China

It is a common misconception that China, where the iPad is assembled, receives a large share of money paid for electronics goods. That is not true of any name-brand products from U.S. firms that we’ve studied. The breakdown of value in these two iconic Apple products shows why.

First, our assignment of profits (which exclude wages paid) to first-tier suppliers is based on the location of their corporate headquarters. There are no known Chinese suppliers to the iPhoneor iPad. The iPhone and iPad are assembled in mainland China factories owned by Foxconn, a Taiwan-based firm.

That means that the main financial benefit to China takes the form of wages paid for the assembly of the product or for manufacturing of some of the inputs. Many components, such as batteries and touchscreens, receive their final processing in China in factories owned by foreign firms. Although hard facts are scarce, we estimate that only $10 or less in direct labor wages that go into an iPhone or iPad is paid to China workers. So while each unit sold in the U.S. adds from $229 to $275 to the U.S.-China trade deficit (the estimated factory costs of an iPhone or iPad), the portion retained in China's economy is a tiny fraction of that amount.

3. Dividends Emerge in Pressing Apple 
Over Working Conditions in China

Even before Apple's profit statement, iPad and iPhone consumers were beginning to be concerned about working conditions in the firm's supplier factories.  These are excerpts from a New York Times, "Business Day,"  article reviewing protests focused on working conditions in a major Apple supplier, FOXCONN, in PRC.  (Read the entire article here.)  

Dividends Emerge

in Pressing Apple Over Working Conditions in China


Beck Diefenbach/European Pressphoto Agency
A protester, Dana Johnsen of Santa Clara, Calif., outside Apple's shareholder meeting last month in Cupertino

The American sweatshop opposition movement was born the day we discovered how our Nikes were stitched together. Two decades later, we are discovering how our cherished iPhones are made, giving Apple a “Nike moment” of its own.  

Worker suicides at Apple’s main Chinese supplier, Foxconn, in 2010, followed by reports of forced overtime, child labor, minimum wage violations and unsafe working conditions at its suppliers, have contrasted with Apple’s status as creator of hallowed devices and its spectacular $13 billion in profit — 30 percent of sales — in the first quarter. 

The reports have fueled a budding protest among students and labor unions who call for Apple to compel its suppliers in China to improve the conditions for hundreds of thousands of workers who assemble its products — workers whose wages contribute a mere $10 to the cost of a contract-free $549 iPhone 4. 

But if the troubling conditions at Foxconn’s assembly lines raise anew fundamental questions about the responsibility of corporations in this age of global capitalism, the outcry raises a basic question too. Does pressure by consumers and governments in the West to improve multinationals’ behavior in poor countries do more harm than good? 

Sweatshop opposition in the past offers limited hope. But Apple is different in some ways than the garment and shoemakers of earlier campaigns. Its high profile and deep pockets suggest that consumer pressure might indeed effect change for workers at Apple’s suppliers in China. 

- ... -

This poses a quandary for would-be activists in the West. They see their task as convincing multinationals like Apple that whatever the cost of improved working conditions at its suppliers’ plants, it is less than the potential cost to its reputation of allowing workers to toil in sweatshop conditions. But they must not forget that the No. 1 priority for most of Foxconn’s workers is to keep their job. While outside pressure might improve their lives, it could also persuade Foxconn to replace them.  

- ... -

Consumer pressure and bad publicity have already led Apple to make some big changes. In 2005 it created a code of conduct for its suppliers, monitored regularly. Last month it became the first electronics company to join the Fair Labor Association, a group set up in 1999 by companies, universities and nonprofit groups to monitor working conditions at garment makers in the third world. Over the last two years, Foxconn has announced repeated wage increases at its plant in Shenzhen. 

These are early days. Who knows, if activists keep up the pressure, they might help lead to significant improvements in the lives of Foxconn’s workers and make us feel better about how our iPhones are made.

 A MeanMesa Suggestion for Apple

Today, a profit reserve of almost $100 Bn, plans to distribute some of that profit as dividends to shareholders and long range "buy back" policies fill the picture of Apple as a corporation.  Considered from the point of view of an executive strategy for the company, all these factors practically glow amid a still dismal national economy which is still only tentatively parked in the hall way outside the ICU.

At first glance, it looks very much like the "rising tide is, in fact, lifting all boats," at least all of the boats tethered close within the ownership of the company.  But, it is right here that a remarkable opportunity can also be found, an opportunity for "boats" tethered a little further from the corporation's board room.

A cursory look at the numbers reveals a little more about the "opportunity."

Let's say that there are 10,000 China workers at FOXCONN and other PRC Apple supply chains.  10,000.  The corporate management has already indicated that they are prepared to "utilize" $45 Bn of its domestic cash reserves between the dividend and the buy backs.  Looking closer at the $45 Bn figure,


we can see that it represents 45 thousand million dollars.

If Apple, partly out of decency, partly out of the hope of inspiring supply chain workers to even more efficiency and partly out of trying to calm the growing "sweatshop" criticism were to write a check for $500 to every one of those factory workers, a solution to a number of looming problems and another collection of intangible, but possible, future benefits might materialize over night.

10,000 workers X $500 each = $5,000,000 

Now, although this sum certainly seems like a lot of money to MeanMesa, Apple's check book [for dividends and buy backs] balance would still remain at $45 Bn - $5 Mn, or


or, 44 thousand 995 million dollars plus a quieter consumer market and a string of corporate suppliers with an eager, energetic work force.

Get the idea?

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