Apple’s greed knows no limits. The company has more than 237 billion dollars in its bank accounts. According to the IMF, this amounts to roughly the GDP of Ireland, Finland or Sri Lanka in 2016.
Meaning that Apple could buy the domestic production of each of those countries for one year. Everything that is produced within their borders. Every hotel room booked throughout the year. Every manufactured piece of machinery. Every cabbage sold in supermarkets.
How is that even possible? Isn’t Apple hoarding that much money because it is a greedy company? Or is there something else to this whole story?
I ask these questions because I’ve seen them come up more than ever in the last few months. Today we are going to have a look at Apple’s greed and why does it have so much cash in the bank.
What Do We Mean When We Say Apple Has $237B in the Bank?
Well, it turns out Apple doesn’t have that much money in cash. In fact, cash doesn’t even represent 10% of those $237B. Let us have a look at Apple’s latest 10K (all figures are in millions of dollars):
- Current assets:
- Cash and cash equivalents: 20,484.
- Short-term marketable securities: 46,671.
- Long-term assets:
- Long-term marketable securities: 170,430.
If you do the math, these figures add-up to a total of 237, 585 millions of dollars, the exact same amount people tend to use when making the argument of Apple’s greed.
It turns out, a fraction of that amount (20,484) is cash, while the rest is invested in either short or long-term marketable securities. Meaning it is not cash but it can be easily sold. In terms of liquidity, it is the next best thing right after cold hard cash.
Where Is All That Money?
According to iMore’s transcript of January 2016 conference call, Luca Maestri said that Apple had a 93% of its cash and marketable securities was located overseas. We can assume that this percentage has remained more or less the same and that Apple now has about $220B in countries other than the US.
Can Apple Dispose of Its Money Anyway They Want?
No. When I said earlier that Apple could buy Ireland, Finland or Sri Lanka, I was lying. So does everyone that says something like that just to make a point as to how much money Apple has and how greedy it is.
No matter what people say, Apple can’t buy these countries. Even if it wanted, it has made some decisions that are tied to the money the company has.
For starters, Apple is returning money to its investors through dividends and stock buybacks. By March 2018, Apple has to return $250B to its stockholders, via dividend or stock buyback. This program was announced in 2012 and by April of 2016 Apple claimed to have returned as much as $163B. Apple still has a way to go in order to return the remaining $87B and can’t use their money as they wish.
Besides this, the company currently has over $75B in long-term debt obligations as well as more than $36B in other non-current liabilities.
That adds up to a total almost shy of $200B.
There is a big obstacle for Apple to do as they please with their money. As we saw, most of it is overseas in other subsidiaries. The thing is that Apple can’t bring that money back to the US without paying the federal government a 35% chunk of it.
If you do the math, that is up to $77B Apple would have to pay in taxes from an amount already taxed in foreign countries, something to take in mind when someone brings Apple’s greed to the conversation. Apple is not going to do this unless the federal government brings a tax holiday.
This may happen during Trump’s new administration.
Tax debate aside, Apple can’t do whatever they want with their money. Because most of that money has already been promised to someone else.
Aren’t Its Tax Avoidance Troubles Proof of Apple’s Greed?
As we discussed in a previous post, Apple is already the largest taxpayer in the world. Its effective tax rate is around 26%. Even though Apple is facing a prominent tax investigation in the EU, the company has stated it has done nothing wrong.
My guess is that the EU is using Apple and other tech companies for two things:
- Enforce a Union wide tax policy, which some countries are not willing to embrace. Especially smaller ones which have to rely on lower taxes to attract companies, create jobs and wealth. Just like Ireland, the country accused to have given Apple a special deal (oddly enough, Ireland says Apple paid every last euro of taxes it owed).
- Protect European companies and tech startups from American ones, waging taxes and investigations as a weapon. European jobs are at stake and so do hundreds of European companies. Talking about unfair advantages.
Apple’s greed narrative seems to have worked perfectly well within Europe’s citizens, which claim the company is stealing from their welfare system. But that is another whole story too.
International tax laws need to change and become much simpler. They are extremely complex and one can argue states have done it in purpose to serve their own interests. On the one hand, you keep multinational firms happy because they can lower their tax rate. On the other hand, you can throw them under the bus claiming they are taking advantage of the very loophole you created.
It is brilliant.
What About Apple’s Margins?
Apple’s gross margins have been steadily moving between 37% and 44% in the last few years. This is often used as proof of Apple’s greed.
While other tech manufacturers “enjoy” having gross margins in the lower teens and frequently end-up having single digit profits or even loses, Apple has several times that. Making it easy to say that they charge way too much money for their products.
Every year, the internet goes berserk as several news sites publish their traditional “This is what costs to make an iPhone” articles. Companies like IHS Markit conveniently publish their bill of materials analysis that claim Apple’s latest flagship is worth only $219.80 in components, with an estimated $5 in manufacturing costs. Retailing for at least $649, that turns out to be some serious money.
These assertions are extremely myopic and overly simplistic.
Forget about all the R&D and software efforts Apple has done and needs to do in order to develop future devices. It all comes down to keeping the machine running, returning money to stockholders and fulfilling the promises (debt) Apple has incurred in order to keep churning millions of devices each quarter.
It’s kind of like a virtuous cycle so long Apple keeps the machine working. And that is another topic too.
Shouldn’t Apple Sell Cheaper Devices?
If you’re good at something, never do it for free – The Joker.
This is one of my favorite quotes. I think it pretty much sums it up perfectly. Besides, why should Apple lower its prices when they can’t seem to match their own supply with the demand of their products? Lowering the price would only exacerbate the problem.
The Real Reason Behind Apple’s Greed
I believe that the best way to understand Apple’s greed is to think about our own passions. Most people would love to earn a living doing something they like. But are trapped in jobs they can’t quit in order to fulfill their dreams.
They are stuck in jobs they don’t like and make a career they are not necessarily passionate about. Most of the times, the lack of money is a problem. By quitting their jobs they lose the only thing that sustains their livelihoods.
That is why it’s risky to follow one’s heart.
What if money weren’t a problem? One would be free to do as it sees fit, focusing all its energy in doing stuff they like and feel passionate about. Money, in this case, is just a means to an end.
Money makes people free and independent. And so does Apple. Having this much money, even though it’s not totally Apple’s as we’ve seen, allows it to do what it thinks is best.
This is the reason why Apple decided to face the disruption of the Mac. The company was able to do it because it no longer depends on the Mac to survive. The iPhone is such a big business now that it allows Apple to be more daring and keep placing bets.
This is the first time in Apple’s history that they can take their products to places no-one else even imagined. Make the choices no-one else has.
We are really pleased with our revenues, but our goal isn’t to make money. It sounds a little flippant, but it’s the truth. Our goal and what makes us excited is to make great products. If we are successful, people will like them, and if we are operationally competent, we will make money, – Jony Ive.
Make good products and people will buy them. Be operationally competent and you will make money. Easy peasy lemon squeezy.
I’ve been following this company for years and after a while, it seems evident that Apple is a machine with only one purpose: create great products. More often than not, Apple succeeds.
Jony Ive’s role is to make those great products. Tim Cook’s role is to make sure Ive has all the resources it needs to create those products.
Image | Marco Arment.