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When Will Apple Stop Screwing the US Economy?

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Ty Cobb was a famous baseball player. Infamous, really. He set 90 Major League baseball records, some of which continue today. He was skillful but also mean; he had a reputation for playing dirty. Cobb was known for spiking other players: sharpening his cleats and sliding into them. Nobody much liked playing against him.

Apple is the Ty Cobb of corporate America. Like Cobb, Apple has set some impressive records. Nine years, a trillion dollars in sales, and almost no taxes paid. Apple risks having a legacy of tainted success and isolation.

 The Apple Way

There’s a story I heard about electronics company Sharp. The company was about to go bankrupt and default on some major debt. This put Apple at risk, since Sharp was a major source of Apple’s LCD screens. The story goes that rather than come to Sharp’s aid, Apple instead approached the bankers and offered to buy the factory assets after bankruptcy – for pennies on the dollar of course. Talk about kicking someone when they’re down! True or not, when I share that story with others who have dealt with Apple, they shrug their shoulders and say that they aren’t surprised. That’s the Apple way.

Business is not a popularity contest, but when the winner-take-all, cripple-the-other-guy approach goes too far and begins to damage the economy, it’s time to rein things in.

The issue at hand is the way Apple’s relentless greed has undermined the US economy and damaged its future industrial competitiveness. All so Apple can make $5 more per phone.

After oil and cars, smartphones are the US’ biggest import. Almost $100B of phones was imported in 2014 (per the Census Bureau). Half of them were Apple iPhones.

The trade in smartphones cuts two ways:

  • It is singlehandedly keeping afloat the economies of China, Taiwan, Korea and Vietnam.
  • The flip side is that it is steadily hurting the US economy, as I’ll show in a moment.

The Winners’ Circle

Korea: Roughly half of Korea’s IT exports are cell phone handsets or semiconductors. Thus Korea’s total exports are growing only as long as IT exports do. For Korea, with a slowing economy, the smartphone is the only thing standing between them and a big recession.

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Taiwan: It’s the same story but even more so because Taiwan’s portfolio of exports is more tied to high-tech (unlike Korea which also sells ships and cars). Taiwan’s economy depends on exports which in turn depend on smartphone sales.

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China: While China has a much larger and more varied economy than Korea or Taiwan, its growth is also now driven by smartphone exports to the US. China’s total exports to the US now rise and fall on the US consumers’ appetites for the next phone.

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The US’ Loss is Everyone Else’s Gain

It’s like an unintended Marshall Plan for the 21st Century. The US is transferring $100B a year to three Asian economies, creating over a million jobs and helping them accelerate up the high-tech manufacturing ladder so that US jobs are now in jeopardy. In other words, the standard complaints about corporate America off-shoring production. But there’s a twist: the high-tech competitive advantage that we are losing has bigger, costlier consequences.

“Hold on a minute!” you might say. Assume that handing a $100B+ high-tech industry to Asia can’t possibly be in the US’s long-term economic interest. Why blame Apple? For starters, because Apple started the hollowing out of American semiconductor dominance and made certain that the critical jobs and manufacturing went offshore. Secondly, with 50% of the US smartphone market, Apple is the only company which can make an impact, but it won’t because that means losing $5 per phone.

Apple Undermining US Manufacturing

Nine years, a trillion dollars in sales, and almost no taxes paid. That’s just the starting point for wondering about Apple’s actual contribution to the US economy.

Apple’s success drags down the US GDP.  The behemoth that is Apple sold almost 200M phones last year, none of which were made in the US or used components made here. Instead of exporting $100B in iPhones, the US imported $50B. That $150B swing matters in terms of balance of trade, GDP and jobs. If you wanted to improve the US economy, there’s no better place to start than with Apple and smartphones.

Apple undermines the US manufacturing base. Assembly matters and manufacturing matters more. There was a time when Apple could have assembled phones and tablets in the US, but that would mean spending an extra $5 per phone since that’s approximately the extra labor cost to build that $700 phone here instead of in Vietnam or China. Assembly may not be a competitive, value-add step but it does employ a lot of people.

Unfortunately, it would also cut Apple’s profits by $1B, shrinking the company’s annual net income from $45B to $44B. Apple wouldn’t notice a drop in profits of $1B because it’s not putting its cash to use: Apple has $200B in cash conveniently parked outside of the US, not doing anything. On the other hand, assembling in the US would employ tens of thousands of people. A bit more productive use of capital, I believe.

Semiconductor manufacturing is more important in the grand scheme of things. It’s a fact that higher-skilled high-tech jobs create more wealth for an economy because they lead to innovation and new product development. Again, Apple could have its chips made in the US, by Intel for example. Instead, Apple turned to Samsung (Korea) and TSMC (Taiwan), going offshore to save another few dollars.

With a healthy dose of Schadenfreude, one notes Apple’s struggles to compete with Samsung, its past and present chip manufacturer. When Apple turned to Samsung to manufacture chips, the company also transferred vital intellectual property. Samsung learned everything it needed to know to design its own chips and phones. Apple saved ~$2B per year. In return, Samsung gained $100B a year in smartphone market share.

But while Apple’s greed makes it penny wise and pound foolish, it’s the US that pays the price. Shifting manufacturing of the most cutting-edge chips has permanently eroded our manufacturing base and high-tech competitive edge.

Should the US offer a $1B annual manufacturing subsidy to Apple? Well, it actually already does, except the amount is closer to $15B. As part of Apple’s ‘Zen and the Art of Freeloading,’ Apple has found arcane tax rules that funnel sales through Ireland and dodge US taxes. The Senate found that in 2011 Apple paid the IRS just $2.5B in taxes on $128B in sales. Before someone points out that Apple’s success boosts US employment by a few thousand workers, the US economy would get much more of a boost if Apple didn’t work so hard to dodge its fair share of taxes.

Intel and US Economy Struggle Together

Intel, on the other hand, is a positive contributor to the US GDP. Intel’s factories are largely US based. Its $50B in annual sales means more US exports and fewer imports, the exact opposite of Apple.

Sadly, Intel is struggling. Its sales have been flat for four years in a row and the company’s product line doesn’t fit consumer demand. The PC world continues to stagnate and Intel’s semiconductor offerings are not used in the tablet, smartphone and wearable device world.

A big part of Intel’s problems is that it faces competition from the very companies that Apple directly employs (Samsung, TSMC). The result is falling production and a loss of competitive edge, both of which directly reduce the US economic strength. Last year Intel canceled a new factory in Austin. That was the first tangible sign that market share loss to TSMC and Samsung was taking a toll on Intel: lower demand for Intel products meant no need to expand production. Fast forward to this month: Intel’s latest earnings announcement included a steep reduction in capital spending – a 15% cut.

Intel tried to spin the CAPEX cut as a harmless thing when in fact it is a big blow to the company’s future. Intel’s entire competitive edge is determined by its ability to out-produce the competition and to be the technology leader. Ultimately Intel is just a manufacturer. Its issues are the typical problems plaguing economies of scale that come with improving production yield.

In the semiconductor world, yield is a real estate game. Semiconductors are built on 300mm silicon platters (aka wafers) and the manufacturing process follows a modern form of the lost wax casting technique: light-sensitive chemicals are layered on the silicon and ‘melted off’ via light. This creates channels that get built up like a layer cake and eventually become the transistors and resistors. The smaller you make that wavelength of light, the smaller the channels and the more transistors you can pack on that wafer. I call it a real estate game because it’s the equivalent difference between building 10-story and 40-story apartment buildings: same land, more money.

Intel has always been ahead of the pack when it comes to shrinking the light wavelength. It can crank out more chips per wafer, and has more factories to do the cranking. This enabled Intel to control the pace at which the industry shifted to smaller wavelengths. For Intel, it meant profit maximization because the company effectively dictated pricing and timing.

Well, not any more. Today, Intel faces stiff competition from Samsung and TSMC, both of whom can produce at similar volumes and using similar cutting-edge technologies. That’s really what the CAPEX cut meant: Intel has lost control. It’s incredibly difficult to regain control when you have not one, but two aggressive rivals.

How the US Has Fallen Behind

The big problem here is that the US lacks an industrial policy. China, Taiwan and Korea’s governments very clearly understand the economic importance of high-tech design and production. The US government… not so much. China fully understands the importance of high-tech jobs and especially semiconductors: it has ear-marked $10B in direct subsidies (or investments, as they euphemistically deem them). This isn’t steel or cement. Whoever produces the semiconductor chips has an edge with high-tech devices, and that means trillions of dollars.

I’m not suggesting that the US become protectionist. In some ways this is just another industry where our trading partners subsidize and incentivize local design and development and penalize foreign imports and production, all while the US government does nothing.

Except this time it is different. The US’ ability to make more or fewer cars was an economic and jobs issue. The US’ ability to stay competitive in the semiconductor space is a national security issue. Semiconductors are the engines for high-tech products, like super computers. Having the most powerful super computers is the linchpin of the US national security platform. (This is why it’s also an area of prime focus for the Chinese government.) With high-tech determining the economic growth of every country, enabling another nation to be more competitive makes no sense.

What is the burden of having Apple be the best it can be? Nine years, a trillion dollars in sales, and almost no taxes paid. And while Apple helps Samsung and TSMC build factories in China, Intel is shuttering factories in the US.

I have no issue with corporate greed per se; more often than not there’s a balance with the public good (lower prices, better products and services). When things become imbalanced, it falls on us, as a society, to re-align things. We need to step in here.

What to Do?

First, boycott Apple products. If you buy an Android phone you can take comfort in knowing that some of that money comes back to the US via Google, which does a lot to support the US economy. Second, let’s encourage Congress to close the tax loopholes that let companies like Apple hide from taxes. Third, don’t support a one-off tax moratorium on cash brought in from offshore. These companies are dying to bring the money back anyway. They dodged taxes to get it offshore, and now they want to continue dodging them to bring it back? No way.

41 Comments

  • […] Submitted by Andrew Zatlin via Moneyball Economics, […]

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  • TG says:

    It should be noted that ‘automation’ is not responsible. Apple used to assemble its computers in automated assembly lines in the United States. While some processes are automated to increase precision, for the most part Apple products are today assembled by hand in large sheds by people paid a buck an hour – cheaper by far than the amortized cost of any existing industrial robot. I mean, if ‘automation’ is driving down wages, if human labor is now irrelevant, why are the big companies still so hungry for cheap labor? The whole ‘it’s automation that is driving down wages’ is just another red herring.

  • Ron says:

    You seem to think the problem is that Apple is a “bad” (=insufficiently pro-American) corporation, whereas it is, in fact, behaving precisely as corporations are designed to, i.e., it is an especially “good” corporation from that perspective.

    • admin says:

      Ron,

      The problem here is that this is no ordinary example of off shoring.
      Business is not a popularity contest. Capitalism is about greed and the byproduct is that we get to enjoy cheaper and/or better things. In theory, we don’t need government intervention because companies are smart enough not to kill the host. In reality, they aren’t.

      For example, the anti-trust rules were established under Teddy Roosevelt because slaughterhouses were selling rotten meat, literally poisoning consumers, and they were oligopolies. The only way to stop them was for government intervention.

      But I am not crying about the mean old Apple and asking Mommy and Daddy Government to step in. No – if we decide Apple is a problem, it’s easily solved by voting with our wallets.

      The problem as I see it is that nobody seems to recognize that Apple’s behavior is a problem. Too many people ignore the specifics and fall back on the meme of “that’s just good business.”

      See, Apple isn’t just better than a lot of top companies at maximizing the bottom line. They have found a way to suck money out of the US consumers pocket and not re-distribute it in the economically beneficial ways (jobs, spending, taxes). They are a Vampire Squid a la Goldman but they are also giving away the family jewels to get there (high-tech capabilities).

      To begin with, smartphones are no longer a discretionary product. We as a society and economy have to buy a smartphone. And there are only two flavors: Apple and Android. Back in the day when we could only buy gas from a couple of oil companies, it was almost impossible to force them to change their polluting ways because we couldn’t vote with our wallets. We had to buy gas even if it was killing and poisoning us.

      So what is the damage of buying Apple? The US has a few competitive advantages and high-tech is one of them. Unfortunately, in its race to get $5 more per phone, Apple is literally giving away that edge. This isn’t steel and how many jobs we lose if 1 million tons get made in China versus made in the US. That’s ultimately just a jobs issue. With high-tech, the issues go far beyond jobs.

      Google at least recycles the profits from Android phones. Apple just takes and sits on it like Smaug and his golden horde. Worse, to get it’s extra piece of gold, Apple is essentially giving away high-tech secrets.

      I don’t support companies that are deliberately ruining my economy. Not when I have a choice

      • Mark j says:

        Everyone should read Adam Smith’s one passage from the WEALTH OF NATIONS where he uses the actual phrase “the invisible hand” as it has little to do with the econ textbook explanation of what he meant. In fact, it is an expression of his belief that investors would prefer their home country for a no-longer-relevant reason. The invisible hand of Smith was the hand of prudence not greed. And, it assured that the prudent investors would not harm their home country. It did not say that everyone would automatically benefit from their greed. Smith believed that investors would want to invest in their home country to keep track of that investment. In today’s world of total dominance by capital of the world’s governments, investors do not worry about being prudent but in the long run, their greed may be the undoing of the current system of all-encompassing capitalist-totalitarianism.

    • lordkoos says:

      That isn’t the point of this piece.

      • Mark j says:

        Please reread. Here’s the crux: “The issue at hand is the way Apple’s relentless greed has undermined the US economy and damaged its future industrial competitiveness. All so Apple can make $5 more per phone.”

  • Gigabob says:

    how soon we forget. Steve Jobs once stood before Congress asking to depreciate a state of the art American Apple manufacturing site over 2 years instead of the normal 20 due to the rapid obsolescence of technology investments. Jobs was spending at the time what GM would throw at a rust belt plant and Congress of course denied the request. Is it any wonder that with the Feds completely unable to understand the future of manufacturing – they have become a major obstacle to its cultivation and growth in the US. Don’t go blaming tthe messengers – certainly not Apple – which has rowed it’s boat upstream and in the face of entrenched competition for over 30 years.

  • JTS Philly says:

    Can you show me where the support for your “almost no taxes paid” comes from?

    • admin says:

      (Read to the bottom for a punchline of sorts)

      You can google the topic of Apple’s extraordinary tax dodging, but here’s a Forbes citation of the Senate investigation two years ago
      http://www.forbes.com/sites/connieguglielmo/2013/05/20/apple-used-loopholes-to-skip-paying-44-billion-in-u-s-taxes-senate-committee-claims/

      I like the quote from Levin which underscores the way Apple turns tax-dodging into an art form unlike any other company.

      “Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” Sen. Levin said in today’s statement. “Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.”

      Apple tried to dodge the tax dodging issue by claiming they paid $6B in taxes. In fact, the committee determined that this was a lie: they paid only $2.5B that year.

      In addition,Apple tries to claim that they are a big indirect payer of taxes because they have a lot of employees.
      Which is the heart of the US tax code: companies pay minimal taxes and individuals pay the bulk.
      But the emphasis is on minimal, not where Apple goes – almost none.

      As for contributing their fair share via taxes, Apple’s US employee base hasn’t grown much in the last year. But, at the same time, their sales have jumped to ~$220B and their net income grew $48B. And almost no taxes.

      Here’s the punchline.
      Apple wanted to get their cake and eat it too. They wanted to avoid taxes in both the US and EU. To the US, they said “we are in the EU and pay taxes there.” To the EU, they said “we are in Ireland, not the EU, so we don’t have to pay much in taxes.”
      Well, the EU is calling BULLSHIT. Buried in Apple’s recent earnings release: they acknowledge that they are on the hook for billions in back taxes to the EU.

      Why can’t the US step up to the plate?
      Probably better paid lobbyists.
      Maybe Apple can back date some more stock options to further enrich those exceptional lobbyists.

  • […] life is finding material that makes me exclaim, “I wish I’d written that!” So reading Andrew Zatlin’s new post on Apple Computer’s exploitation of offshoring-friendly U.S. trade policies has gotten my […]

  • Punit Jain says:

    I see Apple as a shining example of American innovation, a market leader. Look from another lens, its a MNC with HQ and leadership in USA, manufacturing in China/Asia, buyers in USA/ China/ worldwide and shareholders primarily in USA. In other words it has global sales, global manufacturing but USA ownership.
    I am quite sure any attempt to force manufacturing back to USA will whittle away at its competitiveness. The finance team of Apple too has obviously optimized its tax paying to the minimum legally allowed, something they are paid to do.
    Instead of coveting the Goose that is laying the Golden Eggs, why not
    a) Make manufacturing in USA more attractive for all firms with incentives.
    b) Make it attractive for US firms to bring in foreign earnings / cash.
    In a market economy, the most attractive offer wins.
    Coercion and high Tax can have a side effect – what if Apple decides to relocate their HQ to Ireland?

  • don says:

    Haters gotta hate. I guess Zatlin voluntarily pays more tax than he’s legally required to do…… Hypocrisy abounds…..

    • admin says:

      That’s it? That’s your best shot?
      I’ve identified and quantified several significant ways Apple is actively hurting the US economy and your rebuttal is to ignore all of them and argue that I am a hater?
      Go back to your sandbox, kid, and let the adults talk.

      Yes, I seek to minimize my taxes. Apple seeks to avoid them altogether. Big difference.
      But you ignore the other points. It’s like looking at a career criminal who happens to also smoke Meth and say “well, you like to drink Bourbon.” Yes I do, but I don’t steal, cheat and terrorize the neighborhood.

      To repeat the key points:
      1. Apple is single-handedly responsible for a $150B export gap
      2. Apple has sold $1T of goods and paid almost no taxes
      3. Apple does not take their income and re-invest in the US. They horde, Smaug-like.
      4. Apple has handed over the crown jewels of technology for 30 pieces of silver (well, $5 per phone, actually)

      Conversely, Google (the developer and enabler of Android phones/tablets) actively invests in the US and pursues activities in the public good:
      1. Major investor in solar power
      2. Major investor in lowering broadband costs
      3. Major donor

      and so on.

      You can love Apple’s products, but understand that buying them directly contributes to economic problems for you and your family and your children.
      This is not an exaggeration. It is documented fact.

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • Everything is very open with a clear clarification of the challenges.
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  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • California Bob says:

    You say don’t buy Apple products because the money ends up in Asia. Americans are sending a hundred times more money to Asia for other things, almost as fast as the US Treasury / Fed Reserve can print (or type) dollars up out of thin air. Meanwhile, other phone makers were around before Apple but are still scraping by. Why? Because people think iphones are special and are willing to pay much for them than it cost to make them. Same is true for Asian buyers as well as Americans. But let’s say Apple brought all that money home and paid 10s or 100s of billions in taxes so the federal govt could then spend it or use it as a base for 10x leverage on reserves for even more printing. Or to hire another million bureaucrats. Or start another war in some place they haven’t managed to invade yet. Are you sure it’s a good thing for people to pay taxes to the US govt? In case you haven’t figured things out yet, our masters don’t care if there is business in America or if the middle class has jobs and good prospects for the future. They want obedient slaves and, sadly, modern Americans are willing to go along with that to get along for a little while longer. Here’s the take-away: Apple makes stuff, Govt breaks stuff.

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encour­ag­ing big cor­po­ra­tions to do what is right for the Amer­i­can peo­ple, our sys­tem greatly rewards com­pa­nies like Apple that proudly send jobs off­shore.  The fol­low­ing is an excerpt from an out­stand­ing arti­cle by Andrew Zatlin… […]

  • […] When Will Apple Stop Screwing the U.S. Economy? by Andrew Zatlin for Moneyball Economics.  Hat tip to Mike the Mad Biologist […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore.  The following is an excerpt from an outstanding article by Andrew Zatlin… […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore. The following is an excerpt from an outstanding article by Andrew Zatlin… […]

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  • […] the massive closures of big box retail stores and the outsourcing of US manufacturing and assembly (ahem… Apple), but a more critical problem is job skill mismatch. The market wants software programmers. Demand […]

  • […] But instead of encouraging big corporations to do what is right for the American people, our system greatly rewards companies like Apple that proudly send jobs offshore. The following is an excerpt from an outstanding article by Andrew Zatlin. […]

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