Wednesday, April 4, 2012

Apple’s profitability

There are two types of companies that exist. Those that don’t want to compete on cost and those that compete on cost. The companies that don’t want to compete on cost are usually market leaders that may be first out with a product and use tactics to drive you away from measuring them based on cost. They will focus on building a brand name that drives the feeling of prestige with the purchase of their product. They will add new or different features to make their product distinct in the marketplace and provide benefits the others can’t provide. They will have slick designs with great appearance. Their products will be designed in a manner where they are intuitive and simple to use. They will also focus on providing excellent service and support. Their intent is to create a loyal following of customers. Apple is a company that doesn’t want to compete on cost.

I don’t know how many of you have ever been to an Apple store, but if you have its easy to see how Apple became so successful in recent years and how they were able to generate close to 100 Billion dollars in profit that they hold. They use all the tactics they can use to get customers to focus less on cost or competition. How do they do that?

They focused on having their product be intuitive, simple and easy to use.
They designed their software to be reliable.
They created markets where markets didn’t exist such as the IPod and IPad.
Where markets existed, such as cell phones they adding features to expand their functionality.
They enabled developers to write applications to provide even more functionality.
They made updating the software simple.
To upgrade the operating system (which allows you to use newer functionality) they priced in inexpensively.
Their designs are innovative and great in appearance.
When you go to one of their stores, you can see touch and try their products.
You are surrounded by a number of knowledgeable sales people.
If you have a problem there is the knowledge bar where you can get help.
It’s all about the experience.

The simple fact is by doing all of these things, they have almost locked their customers into using them and their products in the future. Purchase an I-Pod and you buy music on I-Tunes. Want to change to a different player? You would need to convert all your mp-4 formats to Mp-3. Buy an application on I-Phone or I-Pad, that won’t work on non-Apple device. What a great example of how you make it costly or difficult to change suppliers to protect your pricing and retain your customers.

How did Apple become so profitable and how did they wind up producing products in China? While most people would say it’s the lower labor cost they would be wrong. The real answer is the United States corporate tax rate has driven companies to produce product and provide services outside the United States. It has driven those same profitable companies to not invest in traditional manufacturing and service jobs in the U.S. It has further created companies having huge profits held off shore because the cost to repatriate those profits back into the U.S. is also too high. That prohibits investment in the U.S. At a time where the United States borrows money from China there are billions and billions of dollars of profits that U.S. Corporations are holding off shore rather that pay tax to repatriate those profits. This means the tax rate has not only driven jobs out of the U.S. it has also providing a large financial dis-incentive to use those profits to invest in the U.S. to create jobs. Apple alone has some sixty-billion dollars $60,000,000,000 in profits that they hold outside the U.S.

While human rights organizations focus on the conditions of Foxconn workers in China who build products for Apple, who is focused on doing what’s needed for the American people? One in every two American homes has an Apple product. I’m sure that Apple has done everything legally in managing their taxes so they are not the problem, the problem is the U.S. tax rates and laws that have driven the export of jobs out of the U.S.

I’m not a political person, but in an election year where the creation of jobs is a critical issue, why is no one is talking about how to change the corporate tax rates and close all loopholes that have been the primary cause for job loss in the United States? My opinion is that if it weren’t for the taxes and the tax management strategies, there would be more jobs in the U.S.

If you would like to read about how tax management is done I wrote a separate post called “Tax Management contracting strategies” where I described how they legally do it.