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Apple is facing rising logistics and employee payroll costs in countries around the world, and many consumers may pause upgrading their iPhones as economic incomes decline. In addition, the outbreak in parts of China has affected the supply chain and could cost Apple an $8 billion loss in operating income this year.
In times of inflation, many businesses, especially the dominant ones with pricing power, can raise commodity prices and pass the cost on to consumers, especially when demand for certain commodities is still strong.
So far, Apple has not raised product prices in the U.S. market. In the past, the company has mainly fine-tuned product prices on a regular basis based on changes in the exchange rates of various countries. For many years, Apple has often adjusted the price structure of its entire product line after releasing new products in the fall.
In addition, Apple itself can absorb some of the rising costs (but will affect profit margins), so that product prices remain basically stable and will not dampen consumers’ desire to buy.
At the earnings analyst meeting in April this year, Apple CEO Tim Cook said that from an inflation perspective, Apple does see inflation, and inflation has been reflected in various indicators, such as Apple’s Gross margins and operating expenses for the second quarter, and the CFO’s earnings outlook also factored in inflation, “So, we do, like everyone, see some level of inflation.”
rising costs
Cook emphasized that there are two areas where Apple’s financial statements already show inflationary factors: gross profit and operating expenses.
Data show that in the first natural quarter, Apple’s gross profit margin was 43.7%, higher than Wall Street analysts expected, but slightly lower than last year’s fourth natural quarter (gross profit margin hit the highest level since 2012).
Apple Chief Financial Officer Luca Maestri said that in the second natural quarter of this year, Apple’s gross profit margin will decline to between 42% and 43%. However, during the global new crown epidemic, Apple’s profit margins have risen, so it remains at a high level compared to history.
In the last quarter, Apple’s operating expenses reached $12.58 billion, a year-on-year increase of 19%. For the second natural quarter, Apple forecasts a sequential increase in operating expenses of approximately $12.8 billion.
Among the various rising costs, shipping is one of them.
Cook said that logistics is a huge challenge, both from an inflation (price) perspective and from a resource acquisition perspective.
In the first half of this year, the outbreak of the epidemic in some parts of China has also caused a shortage of chips, especially non-advanced chips required for the production of some products. Cook also mentioned that the prices of some components have dropped.
Apple is also facing rising labor costs. Earlier this year, Apple’s rivals such as Google, Amazon and Microsoft raised salaries to help attract and retain talent, and Apple has since increased salaries for retail store employees and other company employees.
After the release of Apple’s earnings, Morgan Stanley analyst Katy Huberty said in a research report that with rising costs, the profit margins of some listed companies that Morgan Stanley is concerned about have declined, but Apple’s overall Costs remain stable, with lower commodity prices offsetting higher labor and logistics costs.
may affect sales
For Apple, rising costs aren’t the scariest thing. The company’s biggest concern is that inflation and macroeconomic conditions will affect consumers’ desire to buy Apple products.
Economists point out that consumers have traditionally held off on buying durable goods, including electronics, in recessions or when people’s purchasing power has declined.
For Apple, this may mean that consumers who bought an Apple phone two or three years ago may not upgrade to a new model this year, but wait for the economy to improve.
Jim Wilcox, an economist at the University of California, Berkeley, said that in general, consumers will be more cautious and suspend purchases. In special times, staying on the sidelines is a wise household financial strategy.
In the past, investors generally believed that Apple consumers were more loyal and would continue to upgrade their consumer electronics products. However, inflation and a recession could invalidate that assumption, further impacting Apple’s price-to-earnings ratio and stock price.
In a recent interview with the media, Toni Sacconaghi, an analyst at Bear Stearns Research in the United States, said that Apple has a very strong ecosystem, and its fans are very loyal, but Apple’s revenue comes from product sales, which also comes from For fruit fans, during a recession, fruit fans will suspend purchases and upgrades, so some income may be affected, but this impact is not permanent.
Apple has yet to show signs of weakness. In April, the company said that market demand for its products remained strong and that it did not see a drop in consumer confidence. The main problem for Apple is to produce enough products to meet the needs of the market.
Looking at the industry, however, the smartphone and laptop markets are already showing signs of deceleration. However, although the big smartphone market is starting to slow down, Apple’s high-end mobile phone segment is relatively stable.
Last week, Micron Technology, which supplies memory to Apple, warned that it expected sales of smartphones and PCs to decline more than previously forecast due to lower consumer demand. One reason for the sluggish consumption is global inflation.
According to a report by technology market research firm Counterpoint, global shipments of high-end mobile phones (above $400) fell by 8% in the first quarter, slightly less than the 10% decline in the overall smartphone market.
Wealthy consumers cushion the blow
Apple has the ability to absorb some cost increases. Apple’s continued growth in sales over the past two years and the current healthy profit margins are the envy of many hardware makers.
Plus, Apple doesn’t necessarily have to bear all the cost changes alone.
Buyers of Android smartphones have traditionally been more price-conscious, while buyers of iPhones have higher financial incomes.
According to a report by Counterpoint, Apple had a 66% share of shipments in the first quarter of the “super premium phone market” priced above $1,000.
The research firm pointed out that with global inflation, entry-level and low-end products bear the brunt.
A survey by Morgan Stanley in June found that 70 percent of U.S. consumers decided to cut back on spending in the next six months because of inflation. But wealthy households (often fruit fans) have a more positive view of household finances and economic development.
U.S. households earning more than $150,000 a year are more resilient in spending, with middle-income households preparing to cut spending, analysts at Morgan Stanley said.
In fact, Apple has raised smartphone prices several times over the past five years.
In 2017, Apple launched a high-end flagship phone priced at around $1,000, which was so popular that many fans were willing to pay more for a more powerful phone. In 2020, Apple has raised the starting price of the best-selling main model, the iPhone 12, from $699 to $799.
It is also reported that Apple has recently raised the price of its flagship mobile phone by 20% in the Japanese market, and the price of the entry version of the iPhone 13 is equivalent to $870 after conversion.
This year, Cook has not ruled out whether Apple will increase prices on a large scale.