Monday, July 16, 2012

How Apple benefits from and promotes modern economic trends?

The spectacular concentration of wealth at the top of the income ladder and the sharply widening income inequality have been among the most intensely debated socio-economic issues of our times. While there have been many explanations offered for this trend, I am convinced that the dramatic growth of financial sector over the past two decades and the nature of distribution of gains in technology sectors have been among the biggest contributors. 

The best example of the latter comes from the latest in the New York Times investigation on the iEconomy, or the economy surrounding Apple products. Apple is widely acknowledged as the most remunerative wealth creation enterprise ever. However, while it has generated staggering returns to its shareholders, engineers, and executives, the same cannot be said about the returns to its remaining workforce. The executives and engineers, who are the high-profile and much-lauded public face of the company, form a small proportion of the company, whose majority workforce are the hourly wage earning sales staff in its retail showrooms. The Times writes,
About 30,000 of the 43,000 Apple employees in this country work in Apple Stores, as members of the service economy, and many of them earn about $25,000 a year. They work inside the world’s fastest growing industry, for the most valuable company, run by one of the country’s most richly compensated chief executives, Tim Cook. Last year, he received stock grants, which vest over a 10-year period, that at today’s share price would be worth more than $570 million. And though Apple is unparalleled as a retailer, when it comes to its lowliest workers, the company is a reflection of the technology industry as a whole... 

Divide revenue by total number of employees and you find that last year, each Apple store employee - that includes non-sales staff like technicians and people stocking shelves - brought in $473,000... The Internet and advances in computing have created untold millionaires, but most of the jobs created by technology giants are service sector positions - sales employees and customer service representatives, repairmen and delivery drivers - that offer little of Silicon Valley’s riches or glamour... Job growth has for decades been led by such service-related work. 
Its assessment of Apple's mystique and success with paying the majority of its employees the bare industry standard wages,
Apple’s success, it turns out, rests on a set of intangibles; foremost among them is a built-in fan base that ensures a steady supply of eager applicants and an employee culture that tries to turn every job into an exalted mission. This is why Apple can do something unique in the annals of retailing: pay a modest hourly wage, and no commission, to employees who typically have college degrees and who at the highest performing levels can move as much as $3 million in goods a year.
The sales and non-sales, non executive and non-engineering staff are typically fresh college graduates, attracted by the coolness associated with selling Apple products. They can be put to work in shop floors with little training and are willing to work for low wages. However, they have limited promotion avenues and very few of such recruits can make a long-term career in the firm. It is therefore no surprise that the turnover ratio is high in all such firms and average tenure is 3-6 years. These youngsters drop out after a few years and search for openings elsewhere.

This draws attention to how Apple benefits from squeezing value at every point in its value chain. As the Times has written earlier and I have blogged, it is now idealy documented that Apple benefits enormously from the low wages paid by firms like Foxconn to its local workforce. Further, Apple is also a very efficient tax optimizer, as its battery of trained tax consultants have managed to keep its tax payments well below that of its competitors.

In simple terms, Apple is the company of our times par excellence, packing all the very best and the worst of current business practices. It is the lodestar for firms seeking to squeeze out all possible benefits from prevailing market trends. In its quest to maximize profits, it has managed to legally externalize all its costs wherever possible, at a global scale. It has been the biggest beneficiary of mega-trends like globalization, financial market deregulation and its global integration, lowering of trade barriers, decline in union power, and so on. Finally, by being a step ahead of regulators and law makers, it has exploited all the legally available opportunities to profit from its business operations.

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