|“Designed by Apple in California, Assembled in China”. Cutting the Apple|
Friday, 02 December 2011 17:52
What are the characteristics defining the big success of a big company like Apple?
Or it other words, what does it take to change the world.
My theoretical framework aims to present the successful business strategy undertaken by Apple (through the creation of innovative in its concept business models for products and services), the importance of this business strategy in the creation of a value chain network of various market players, the connection in between that value chain network and the national and global economy, and last but not least the role of innovation and knowledge for the industry and the society.
With a little historical background and current state review, I'd try to touch upon the following questions: How important is the innovation in the macroecnonomic context? How a business model of a company can create a domino effect over the other stakeholders on global scale? How does Apple continue to grow despite of the exceptional crisis situation in its homeland the USA? Is it possible for the company to become a global giant without violating the US antitrust policies? How the microeconomical decisions of a single enterprise can work against the national interests?
A little historical background
Technology as Art has always been the representation of the American multinational corporation Apple Inc. All of the Apple products have been mass-consumer oriented by creating a feeling for community engagement among their customers, feeling that they are part of a hi-end technology society owning unique products and services. Apple invests as much in innovation capital as in anything else. The company sees change as a key-part of being a market-leader and the main feature of a change is finding new solutions and expansion over new domains and territories. Innovation in creating the right mix between user-experience driven devices and strong marketing. And although both have been in the top list of success characteristics of Apple, probably the good understanding about the globalization and liberalisation of markets, the global production networks and trade models have been the key reason for the success of the enterprise.
Apple of today and yesterday
During his keynote speech at the Macworld Expo on January 9, 2007, the company icon Steve Jobs announced that the initially named Apple Computer, Inc. would from this day on be known as Apple Inc. The company shifted its main focus from computers to mobile electronic devices and that was the beginning of a new era.
The financial crisis, today and tomorrow
The general overview in the recent years' history of Apple shows that in the 5 years between 2003 to 2008 the company share value increased 25 times, from $7.5 to $180 per share.
If we compare Apple with companies with adequate market dynamics including, for instance, market growth and profitability before after the financial crisis, we would see an interesting trend.
Following to the comparison graph of Dirk Schmidt, before the crisis Apple has been valued above the peer group average with a P/E ratio of 33.9x. The data is for the calendar quarters 1/2005 to 1/2008. At July 2008 prices, before the US financial crisis, Apple stock market capitalization was $160 billion.
During the crisis stock prices declined across industries, which resulted in price decline on average more than 80% among the shown players.
For a 2 year period after the financial crisis on average all companies are continuously trading almost 40% lower.
Despite Apple’s higher-than-average discount of 47% to pre-crisis valuation level, the corporation is valued above the peer group average and on top of the mobile phone and PC vendor group, show the statistics of Schmidt.
In January 2010 Apple shares topped the $210 mark and the current (November) shares are valued on $386. The next innovation expansion thanks to new television set – iTV on which the company is working aims to bring in 2012 shares worth $500 to Apple.
The microeconomic business modeling in regards of the industry stakeholders
One of the biggest reasons for the Apple success which these statistics represent is thanks to the presented in 2007 iPhone with which the company entered in the smartphone market. 3 years later the company was holding the 4th place on the market.
The 1st reason behind their vast success is the good understanding about how the “.com” companies, which failed in the dot-com bubble. Opposite to the idea of creating a platform using the ICT to impose the rules of a trademan in 1-sided market business approach, Apple took the better decision to become the facilitator and owner of the market itself. Apple was one of the few companies which understood the value of platform management and hence, control of the core of the market flows.
By saying platform we understand the combination not only of an internet-based platform such as Facebook but also in the case of Apple the device itself.
iPhone was the representation of a new approach towards setting the rules of an value-network of stakeholders, most of which owned by the company. Just as Marx defined it power is equal to the capacity to change situations.
Apple holds more than 90% of the building blocks of iPhone system, both business and technological: development of the iOS, testing and verification, the device, marketing, payment and etc. There are only few externally outsourced elements and few with shared responsibility, which are again strongly dependant on Apple's decision. The corporation's business model for the iPhone (and for the other products as iPad and probably the coming iTV) represent a network with a core, top-down faciliation of external competition.
Although Apple is dependant for example on external mobile developers for their applications, they are the ones who decide the rules of their AppStore.
Nearly all of the value-network actor roles are covered by Apple for the iTunes App Store. The only exception is the mobile network connection, which is necessary for end users to utilize their smartphones with 3G+ connectivity, clarifies the paper “A Comparison of Inter-Organizational Business Models of Mobile App Stores: There is more than Open vs. Closed”.
Even without owning the rest of the functions on the value-network, the corporation still manages to influence the other parts on the value-network through contracts with network operators for several years of exclusive distribution in return for a revenue share on the monthly charges towards end users.
The microeconomic business modeling in regards of the macroeconomy
All described in the previous paragraph represented the process flows between Apple and the rest of the industry representatives, having worth in the iPhone (in this example) value-network from production through content creation to sales.
However, focusing on the device production phase, it is surprising the impact on the national and global economy of a microeconomic decision such as that where and thanks to whom iPhone is being manifactured.
Despite the fact that the smartphone is designed and marketed by Apple, the primarily device production takes place in China. Its manufacturing involves 9 companies located in PRC, Korea, Japan, Germany, and the US. According to the paper “How the iPhone widens the United States Trade Deficit with the People’s Republic of China?” from December 2010, some of the major producers and suppliers of iPhone components and parts are Toshiba, Samsung, Infineon, Broadcom, Numunyx, Cirrius Logic and etc.
All of the components produced by these companies are shipped to Foxconn, a company based in Taipei, for assembly into final products and then exported to the US and the rest of the world.
From inventor to importer
So, the American inventor Apple becomes also the importer of their own product back to the US, where actually the largest number of sales are being made. Instead of producing them in the US, where the costs would create a margin of just 50% after sales, Apple prefers to assembly them in China, have a margin of around (or more) than 75%.
Reasoning is simple: the China's exchange rate and cheap Chinese labor, which if exchanged by US workers would have to be much more expensive. Opposite the crisis, if you look into the iPhone sales in the US from 2007-2009, you'd see that there was a positive growth in the iPhone sales. Along with this Apple uses the products of established companies such as Toshiba and Samsung.
Since the phones are completely assembled in China, the shipment of the end-products back to the US is recorded as the China's exports to the US. Hence, becoming a part of the US trade deficit with China.
According to the paper, in 2009 the iPhone alone had contributed 1.9 billion dollars to the U.S. trade deficit, which is about 0.8% of the US trade deficit with China.
This includes also the sending of American components to China and then getting them back to the US implemented in the ready-to-use iPhone doing a shipping back and forth.
Further more, the paper offers simulation with appreciation of the renminbi to the US dollar, which would improve the GDP in China. This would mean growth in the purchase power of American products such as iPhone in China, where until this moment such hi-tech devices were poorly sold.
Not going any deeper than that, the conclusion is that the internal decision of a multinational corporation as Apple has a great impact over the economics of their own homecountry. Although innovative and hi-tech products are perceived as drivers of growth their owners easily become a thread. A smart network-model for externalization of production can move capitals away in order to guarantee the profit maximization and cause disturbance in your own markets without even overstepping the antitrust policies.
The decision which trade-off has to be made especially in times of crisis, can be a two-sided knife, especially if there are not enough employed people in the location where your main buyers' stream is. But if you invest in human capital without a loss for yourself but still with a less profit, you can boost your national economy in the long-run and create a nation of trusted buyers and brand ambassadors.
The innovation of Apple is not just a technological novelty. It is a transfer of typical Apple design innovation to the business innovation. It leads to the creation of a new type of markets with a decentralized building blocks and centralized decision-making based on the features of an economy driven by the globalization.