Why Apple Needs China: Page 2

Suddenly, China is the key to Apple’s continued profitability and growth.
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Yet very few companies are getting a huge percentage of their business from the Chinese market. For example, only 7% of Coca Cola's sales are in China. Only 4% of McDonalds' sales are in China. Apple is apparently among a very small number of foreign companies who know how to succeed in China.

Apple is also driving another curious trend in China: Investment in its suppliers. Because Chinese citizens are not allowed to invest in foreign companies like Apple, they have to invest in suppliers to Apple instead. This gives Apple extra leverage over these companies for ever lower prices, because if they stop working with Apple, a lot of their Chinese investors would pull out.

One of the many milestones Apple reached in the just-reported quarter was the size of its pile of cash. The company is now sitting on $110 billion.

A new report published this week says such “cash hoarding” is connected to Apple’s offshoring of manufacturing to China and doesn’t really benefit Apple.

The report, issued by University of Manchester's Centre for Research on Socio-Cultural Change (CRESC), estimated that the total cost of building an iPhone 4G was $178.45 per phone, which Apple sells for about $630. The cost of building the same phone in the United States would be $337.01, according to the report. That would still give Apple a gross margin of 46.5%.

The difference, according to CRESC, is that instead of top Apple executives and top investors keeping all the rewards for Apple’s business, a lot more of it would be spread around in the US economy. The hundreds of thousands of jobs created at American wages, which are much higher than in China, would have a social impact. With the current process, there is no social benefit in the United States or China, as factory workers there barely make any money.

But it’s unlikely that Apple will listen to such nonsense. In fact, one of the reasons Apple reported such high per-share profits was the unexpectedly low cost of its super-efficient supply chain. Commodity costs were lower than expected.

The bottom line is that China is suddenly Apple’s second most important market, and the manufacturing key to Apple’s enormous profitability.

China will probably become even more important to Apple in the years ahead, as the Chinese economy grows and more Chinese phone buyers are able to afford expensive Apple products.

In the meantime, Apple’s report will fuel a new rise in Apple’s stock price and valuation. And it’s all because of China.

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Tags: iPhone, iPad, China, Apple

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