Tim Cook: What's Good For the US Dollar Is Bad For Apple 270
theodp writes: For years," Charles Erwin Wilson famously said back in the day, "I thought what was good for our country was good for General Motors, and vice versa." That was then. This is now. The Washington Post reports that a strong U.S. dollar is the biggest threat to Apple's business around the world. "The dollar has shot up about 22 percent against a trade-weighted basket of other currencies since the middle of 2014," explains Matt O'Brien. "And in Apple's case, that's meant what would have been $100 of foreign sales in September 2014 was just $85 by the end of 2015. That's not good when you get two-thirds of your revenue overseas." Apple blamed the strength of the dollar compared to other currencies for costing it $5 billion in revenue, "For perspective, that difference is the size of an average Fortune 500 company," quipped CEO Tim Cook.
Apple complaining about financial engineering (Score:5, Funny)
Oh wait, you're serious, let me laugh even harder. [youtube.com]
Manufacturing costs also fall (Score:2)
A strong dollar also reduces manufacturing costs, since manufacturing is overseas. This improves margins. I'm not seeing the issue.
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It doesn't improve margins. The existence of a margin at all means that the absolute effect on sale price is larger than the effect on build cost. The margin as a percentage remains identical, but the absolute value of that margin drops.
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You've assumed the production costs are in the foreign currency and the sales revenue are in domestic currency. The problem is sales revenue in the foreign currency when converted to income in the domestic currency.
Re:Manufacturing costs also fall (Score:4, Informative)
You uncover a key flaw in Cook's reasoning; if they're not bringing those foreign dollars home, then they've no reason to convert them to dollars, and this isn't money they're losing at all. It is just the imaginary "if we brought it home" ticker in his office that is showing a reduced high score.
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Why would sale cost go down at all?
Because the value of the dollar is rising. So if the price in Euros, Yuan, or Yen stays the same, then the sales price is going down in dollar terms.
But talking about marginal costs is silly, because most of Apple's expenses are fixed, not marginal. Software development and engineering are not marginal expenses (they don't vary with the number of items sold). Apple's manufacturing is done in Asia (where costs have fallen in dollar terms) but Apple's development is mostly done in America. Apple has been
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Apple's margins have been going strong at 40% for many, many quarters. Sure, US employees are now paid more, but Apple is also making more from the US market. The margin overseas remains constant as both the production cost and the selling price move down together. Again, I see no margin pressure and this is a non-issue unless you care more about absolute dollar revenue than gross margins. Which would be stupid.
Cost of Goods Sold (Score:3)
Software development and engineering are not marginal expenses (they don't vary with the number of items sold).
Software development and engineering account for a tiny fraction of Apple's costs. Something like 10-15%. Look at any software company's financial statements. You'll find that their development costs are always somewhere between 10-20% of total cost. It's true for Microsoft, Oracle and any other software company. You are correct that they are fixed costs but their effect on the bottom line in this case is relatively minor.
Apple's manufacturing is done in Asia (where costs have fallen in dollar terms) but Apple's development is mostly done in America.
Look at Apple's financial statements [google.com]. You'll find that Apple's Cost of Goods Sol
Re:Manufacturing costs also fall (Score:5, Insightful)
Further Apple doesn't bring its foreign profits home anyway, so what does it care how much its earnings would be in USD? It has Irish bank accounts rammed full of iPhone money (that the nice Irish govt didn't charge them tax on either), while constantly moaning that it can't bring any of that into USD unless Uncle Sam gives a big tax discount.
To confuse the Apple Troll mods, I'll add that Google is just as bad, and recently got exposed for doing a 'deal' with the UK govt to contribute a little bit towards us plebs.
Re:Manufacturing costs also fall (Score:5, Insightful)
It has Irish bank accounts rammed full of iPhone money
And that's why a strong US dollar hurts them; it's not just lost revenue on future sales, its lost value of past revenue.
while constantly moaning that it can't bring any of that into USD unless Uncle Sam gives a big tax discount.
And good ol' Uncle Sam's response was to bolster the local economy and boost the value of the US dollar, basically saying "it's better to pay taxes when the exchange rate is high than play stupid games until it tanks".
I don't say it often, but when I do, I mean it: The US Government made the right call. I'm sure Apple has lost more value in the money they've kept overseas by now than they'd have paid in taxes, hopefully that is a lesson learned.
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Those foreign profits are stored in Dollars so it has no effect on their stored cash either. Grand Cayman and all the other "hide money offshore" tax havens uses the dollar.
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That assumes two things. First, the tax rate to reimpor
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The real problem is that it makes Apple's goods more expensive. For example, Apple does things in US dollars.
If that were the case, they'd be claiming to have lost $5b in sales to localized price increases, rather than having lost $5b in revenue from the sales they made. But they're claiming to have lost $5b on the sales they made, not $5b in sales, which indicates that they were not pricing their hardware in that way but, rather, pricing based on what the market would bear. They still made the same number of sales in foreign markets and pulled in the same amount of each respective foreign currency, it's just that
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Further Apple doesn't bring its foreign profits home anyway, so what does it care how much its earnings would be in USD?
Profits don't need to be "brought home" to be affected by the USD. Most international companies account everything in USD regardless of where the profits start or where they are ultimately accounted for in taxation terms.
Re:Manufacturing costs also fall (Score:5, Insightful)
just like people do.
No actually people don't. Many people aren't in fact sociopaths and are happy to simply earn a normal living and pay taxes in the normal way without attempting to jump through vast hoops with offshore accounts and etc to avoid contributing to society.
Many people actually understand that civilsation is built on taxes and can think beyond MINE MINE MINE MINE.
Re:Manufacturing costs also fall (Score:5, Insightful)
just like people do.
No actually people don't. Many people aren't in fact sociopaths and are happy to simply earn a normal living and pay taxes in the normal way without attempting to jump through vast hoops with offshore accounts and etc to avoid contributing to society.
Many people actually understand that civilsation is built on taxes and can think beyond MINE MINE MINE MINE.
You're missing the point here. People are those that are rich enough to also hide their money overseas to avoid taxes. The rest of us are just consumers (i.e. not people). 8-)
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While there are always outliers on any list of people or behaviors....I would posit to you that the number of people that are
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Almost any change includes good and bad aspects; ergo, almost any change is an excuse to cry 'poor me' about the pain - and conveniently forget to mention mitigating factors.
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Sort of.
People are largely xenophobic, which leads to things like a hatred of all foreign species (a few invasive species are not classified as such because they're seen as native due to traditions involving them, while a *lot* of benign species are labeled invasive for being foreign). One of the more subtle xenophobias is a hatred of a weak local currency in the global market: they want us to be *strong*, stronger than foreigners, and thus have a dollar that commands *many* foreign dollars.
This has a
Exchange rate risk (Score:2)
A strong dollar also reduces manufacturing costs, since manufacturing is overseas. This improves margins. I'm not seeing the issue.
Foreign exchange is often counter intuitive. In crude terms a strong currency helps importers but hurts exporters. If Apple in this case is the exporter. The stronger the currency gets the less units per dollar Apple's customers can buy. Since 2/3 of iphone sales are international Apple customers are unable to buy as many iPhones for the same amount of money.
It doesn't have anything really to do with manufacturing costs. Apple's manufacturing costs are mostly contracted well in advance for large volume
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You're forgetting the part where Apple signs long-term sourcing agreements to buy parts for $X over Y years. If the dollar becomes more valuable through exchange rates, they're now paying more for the same part.
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The dollar's rise has been gradual, and in fact it hasn't really moved much in the last year. And yet Apple's gross margin has been stable at around 40%. I just don't see the effect you describe.
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There's a name for that: The cost of doing business.
If Apple doesn't want the risks, they can dissolve the company and pay out a megadividend to the stockholders. As long as you are active in international business, valuta risks are part of the game.
It's the typical whining of the modern Wall Street Wellfare Queen: they want all the profit, and society to bear the risk.
Re: Manufacturing costs also fall (Score:5, Informative)
What did the government do? Devalue the Canadian dollar against the US dollar. Bastards, all.
While there may have been some policy factors that have directly influenced the Canadian dollar value, they have been very small in comparison to the impact that resource prices (I'm looking at you, Barrel of Oil) have had. The failure to diversify the economy away from such a heavy resource weighting has been a shortcoming of every government since confederation both provincially and federally.
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All resource extraction was less than 10% of the Canadian economy in 2014, smaller than manufacturing and real estate.
I don't really have a great picture of what parts of the economy drive properity, but while I can see that healthy manufacturing can lead to everyone having more stuff, I do wonder how "real estate" enters into it. Real estate can change hands, and go up (or down) in value, but nobody is making any more of it, so having a healthy real estate "sector" would seem to be more of an indicator of prosperity rather than a creator of it.
In any case, if you have any links you can share explaining that resoure extrac
Hardly a new concept (Score:5, Insightful)
Having a strong currency is not always entirely in the national good. Sure, it's generally better than a weak currency (which is often a sign of political instability and a lack of international confidence in a country's prospects), but it does cause its own kind of problems. In particular, it can hurt exporters, as it costs overseas customers more to buy their goods.
The strength of the Deutsche Mark was often problematic for German industry. That's one of the reasons why Germany has been so enthusiastic about adopting the Euro, which gives it a significantly "weaker" currency than it would have otherwise, and locks it into currency parity with most of the rest of its regional bloc.
Re:Hardly a new concept (Score:5, Informative)
Apple is in an interesting position here since it's both an importer and exporter, but it sounds like the balance of those accounts is still negative to Apple when the dollar is strong. It's probably a little more complex than that too, since you've got both the Yuan-Dollar and Dollar-Other currency (Euro, Pound, etc) ratios to consider.
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It's probably a little more complex than that too, since you've got both the Yuan-Dollar and Dollar-Other currency (Euro, Pound, etc) ratios to consider
as well as all of that money they've been refusing to bring into the US because they don't want to pay taxes on it. They're really taken it in the poo over that, with exchange rates taking such a dive. Guess they should have brought it home and paid those taxes, eh?
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Repatriation is not relevant here. (Score:2)
as well as all of that money they've been refusing to bring into the US because they don't want to pay taxes on it. They're really taken it in the poo over that, with exchange rates taking such a dive. Guess they should have brought it home and paid those taxes, eh?
You are conflating two issues. Yes Apple has been incentivized to keep their currency reserves in other countries to a substantial degree. That has little to do with this problem. 2/3 of Apple's sales come from outside the US and their base currency is the dollar. When the dollar gets strong people in other countries can afford to buy fewer Apple products for the same money because their currency buys fewer dollars. Apple is effectively a net exporter of their goods and a strong dollar hurts exporters
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Imagine you have 1,000,000 customers with over $250 to spend on your product and 10,000,000 customers with over $150 to spend on your product.
If your product has a manufacture cost of $220, you can sell it for $250 and get 1,000,000 customers. That's $250,000,000 of revenue and $30,000,000 of profit.
If your product's manufacturing cost falls to $140, you can sell it for $150 and get $10,000,000 customers. That's $1,500,000,000 of revenue and $100,000,000 of profit.
Weakening the dollar essentially doe
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Cautious (Score:5, Funny)
I'll be cautious and save my answer for the next time we discuss these same news in a couple of days.
Okay! Let me shed a tear for Apple! (Score:4, Funny)
Any second now I'll be able to dredge up some sympathy for them.
Any...
second...
now...
Ah crap.
*Pokes self in eye*
There! Is that close enough to tears?
Fuck Apple.
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As an IT person, it is hard to have any sympathy for Apple. They have so much cash, and could step into so many markets... but they have all but abandoned the enterprise sector (no XSan, no XServe, no rack-friendly models [1].)
Apple has been a toy maker for so long, they think they can continue to do so. Sony had this attitude back in the late 1990s... but then just got steamrollered. If Apple is to have long-term stability, they need to use some of that large cash stash, and either spin off an enterpris
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Wish you had not posted this as Anon because I think you have some good ideas.
Personally, I think a good avenue is to get into the markets that smaller business's really require. As an example, provide some type of cloud based email/calendaring solution for smaller businesses (think Google for Business here). Most of which seem to like using their Macs so that would support their existing products. They could provide something like Google does for Outlook so the PC people could make use of as well. With tha
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I hear you about diverting resources IF you are working under the premise that you must keep your costs fixed (aka not add to the resource pool). However, 99% of the time, you need to increase your resources to be able generate new products.
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I would agree that I am speaking without knowing all of the facts. I do find it interesting that Apple has a hard time finding talent to work for them though. I just wonder if they thought about opening an engineering center somewhere else than Cupertino since that is obviously an area where good talent is at a premium due to so many tech businesses.
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I don't think the xServe and xSan sold very well. After all, had they been runaway successes, I doubt Apple would have discontinued them. No public corporation is going to throw away easy money "just because". If the server products were really thriving, and Apple *really* wanted to just be all about consumer hardware; they'd have just spun the business off into a subsidiary, like they have in the past with FileMaker and Claris.
And really, Mac OS X doesn't make much sense as a server anyway, Unix underpi
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XServes and XSans were decent entry-level products.
And they actually sold moderately well.
However, there were some valid criticisms of the platforms. And Apple didn't want to invest the time and effort into addressing them, nor scale their offerings.
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I don't think the xServe and xSan sold very well.
Apple should have called them iServe and iSan. Then they'd have sold well.
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No public corporation is going to throw away easy money "just because".
Yes they will. For some reason there are these useless twats called MBAs who think that they are god's gift to management. They tend to run companies and I have seen cases where they wouldn't do something not because it didn't make money, but instead because it didn't make enough money. The company I am at had an opportunity a couple of years ago to make 5% on something with 0 effort and expense (things would be drop shipped from the actual manufacturer or something like that) but didn't do it because they
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Corporate customers are absolutely horrible, margin destroying machines. Can you blame them? Two of my employers derived the majority of their revenue from enterprise sales, and both of those companies are shadows of their former self. Unless you have a monopoly (or near to it), you will be nickled and dimed into obsolescence, which is a good market for China where tehy can compete with each other on equal footing, but US based companies get run out
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The thing is, Apple simply doesn't WANT this business sector.
They have no real understanding of it, and no real desire to become a real, enterprise-grade support organization. It's too important to them to be these foofy, artistic, independent "fuck the man" mavens.
Plus, enterprise, while a lot of money flows around, is EXTREMELY cutthroat. So the margins tend to be smaller than you'd think.
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and either spin off an enterprise company or make a division for this.
Enterprises buy based on performance, not on shiny. Apple can't win in that market.
Comment removed (Score:5, Insightful)
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It made money, but not enough for Apple to keep spending the R&D cash to upgrade it.
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No (Score:5, Insightful)
Tim, iPhone sales are down for two reasons
1. The smart phone market is over-saturated.
2. Every bugger that wants an iPhone, has an iPhone.
Stop trying to claim that things like sotck market fluctuations, El Nino, IS or Zika are to blame.
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You forgot margin. They have incredible margin on their products. Their concern is total profit, not units sold. They could easily drop their prices in other markets to keep market share, but the net profit to them might be lower. It isn't like iPhones prices are anything relative to their cost. Their price is based on what people will pay.
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They're in competition with Android and with tablets, phablets, and laptops. They're winning the competition against tablets and laptops. It's not just based on what people will pay, but on what people want to buy and how much they have. You have $100; do you by Crocs or an iPhone? iPhone drops their price to $100, but... Crocs are still a huge fad, and 70% of the population pays $100 for Crocs. What if everyone has $350 and the iPhone drops from $600 to $250? 70% of the population buys Crocs *and* a
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People keep saying businesses just take profit and making things cheaper never brings prices down (look at gas stations and oil), but then they immediately claim competition will lower prices in the next sentence. I had to figure out how it really works, since people simultaneously arguing opposite behaviors as absolutes are obviously wrong.
Absolutes != generalizations. Saying "always" and "never" with respect to how businesses operate is silly, as you point out, because even the smallest of businesses still deal with hundreds of variables.
Here is how the two principles you're talking about harmonize:
Sprockets n' Things can sell a sprocket for $50, and sell them well, despite the markup of $10, as the total cost of making them ends up being $40. SnT has learned that selling them for $50 is a good price: customers are satisfied and quality is g
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Apple, an American company? (Score:5, Insightful)
They produce all their products overseas, they sell most of their products overseas, and they hide all their money overseas.
What part of this company is American anyway?
Re:Apple, an American company? (Score:4, Funny)
What part of this company is American anyway?
"Designed in Cupertino"
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LOL.
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So, on what basis do certain politicians demand that they pay more taxes in the US?
Follow the money (Score:2)
What part of this company is American anyway?
Their money is and that's the bit that matters. Apple does it's business substantially in dollars so exchange rate risk is a big deal for them like most multi-nationals.
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Richest company in the world (Score:5, Informative)
Re:Richest company in the world (Score:4, Insightful)
I would add especially when they hoard those profits overseas and don't pay taxes on them.
unless you invest in the stock market (Score:2)
It's not even about sympathy .... (Score:2)
The lesson here is that when American businesses decide to increase their presence in other parts of the world (typically to try to save money because of such advantages as cheaper labor or lower taxes), the downside is a growing reliance on the state of the global economy, vs. the U.S. economy.
Does he want some cheese with that whine? (Score:3)
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Ok, that is weird.... I *just* had a conversation with a co-worker where he used that exact same expression "[they] can go pound sand".
I hadn't heard that one before and now twice in 10 minutes.
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WOW. Surprised you had not heard it before. While not used as often nowadays. Its been around for as long as i can remember. 44
Expensive Apple..... (Score:2)
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My question is: In this day-and-age, why is it reasonable for Apple products to have a 50% premium?
It's not like they are using high end hardware any longer... they are utilizing the same commodity hardware that everyone else is using.
In addition, many companies have some very stylish product lines that are arguably more distinguished than Apple products (which, more and more, these days look somewhat dated).
Also, the services that they provide like iCloud and the AppStore are falling further and further be
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fair enough
Indeed, because when Jobs was still in charge, there was some actual value in paying that premium. Now it's just name trade. How well has that worked out for Sony?
Since they offshore the profit anyway... (Score:2)
why does it matter? If they are taking the dollars, converting them into Euros to pass through Ireland for their tax scam, then sending it down to the Cayman Islands, a strong dollar just means it converts into more Euros, right?
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From the company that invented the derivitave (Score:2)
this is rich.
What he said was, in other words, was that Apple didn't do well insulating themselves from the currency fluctuations they once were able to do so well at.
And in the process they devised a clever financial instrument that found great utility for other uses. Some not so glorious.
Too bad. That's the risk in global sales. Welcome to the real world.
Revenue? (Score:2)
And we know Apple accounts for all revenue it receives and accurately reports it on its taxes. It doesn't hide any revenues overseas.
Money (Score:2)
Sensational headline misses the point (Score:3)
This affects all American businesses doing business overseas -- and that's a lot of businesses, not just Apple. American goods are selling at a considerable price premium versus competing goods in those markets. Long term, that's not a fantastic place to be as it acts like a export tariff on US goods and makes them less competitive. Also when you are selling overseas what sales you make take a cut due to exchange rates. It's demoralizing to see your sales force bust their ass to log a big YOY sales growth in their country but then have exchange rates eat that up and make it a 0% growth (or a loss) on the bottom line.
And I know we all like to throw barbs at Tim Cook sleeping on his mountain of cash, but this applies to all US business, not just Apple.
pathetic (Score:2)
Seriously: "strong" != "good" in the context of a currency, depending on how you define good.
"strong" US dollar (Score:2)
Re: Seriously? Just move the $$ offshore (Score:5, Funny)
more like a prelude to doing an inversion with Apple Ireland. Should've been the McIntosh. I hear that Apple, an Irish company, will keep a nice R&D facility in the Republic of California.
they dont call it The SpaceShip for nothing (Score:2)
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Pity? Really?
It's not even like Apple *lost* $5 billion.... they *could* have made $5 billion more than they did if X, Y and Z circumstances were different...
That is along the same lines as counting it as a loss when you don't make as much money as you did last year.... you didn't *lose* anything...
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I think this is a calculated ploy by Apple to gander pity after all the bad press at the Billions of $$ that they have hiding from US tax collectors.
Maybe they just don't want to contribute so much to the massive amount of tax money the US government spend on the military? Hell, if I were a US citizen I'd see it as my moral duty to avoid paying taxes to feed the war machine.
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Vote buying? Im sure this is illegal but...
Pledge $20 to candidate X if s/he gets elected president you win an iPhone 7 limit 1000000 customers
DTT is powerful. (Score:2)
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You should not be basing your companies performance on fictional numbers
Welcome to America. We base everything on fictional numbers. Deal with it.
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People like you said the same thing about the Apple CEO from Pepsi that cut R&D and raised prices which maximized revenue for about 5 years, that is until the company began to flounder because the reduced R&D caused them to no longer be competitive once the in channel developments were used up (about 5 years later).
Bad CEO's generally aren't revealed for a number of years. Carly Fiorina was praised for the first 5 years, that is until the reduced R&D and focus on commodity printer market flatlin
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You think Apple used U.S.A.-based manufacturers before 2008? /laugh
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Not very many people at all USA manufacture, and have not for 20 years. Apple is the richest of the lot currently, but they're not alone in their suffering. Having a strong dollar is great if we actually manufactured things here, or had a plan to do so in the short term.
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Until they force and update which kills performance
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If only the stock market were concerned with the profitability of a company, rather than the belief that one should grow to be so large that it dominates the world.
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The stronger US dollar also means that Apple's capital now has more purchasing power overseas.
Which means that Apple's production costs should be moving down, since most Apple devices are not made in America.
It's all too easy to look at flat numbers and come to erroneous conclusions.
The bulk of Apple's capital is not in the US denominated in US dollars, it is in places like Ireland. Thus Apple's asset/capital structure is "dollar-lite". It hold about $40B in cash and short term notes, but about $164B in overseas "investments" that are mostly denominated in foreign currency. The reason it can operate cash-lite is that it issues bonds backed by its foreign holdings to finance it's operations instead of repatriating the money
As the value of the basket of foreign currency declines relat
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He's probably deepthroating a nigger *right now*.
That image gets you hard. Admit it.