AAPL - Apple Inc.

[rb]

The supply chain isn't all in China. Final assembly and some parts are made in China, but a lot of the value of the products is from outside China (most of it, in fact). Lots of hardware from Japan and South-Korea, almost all software and design from the US, services are mostly hosted outside China (except for the China market), etc.

Big difference between supply chain and value chain.

[rb]

For board members who hold multinational companies like Apple, what is your thinking on the trade skirmish between the US and China? Is it part of your investment thesis or is it something you are ignoring?

 

I wonder if we are not in the very early innings of this skirmish and it may be with us indefinitely (as the cold war was). Should the skirmish escalate i am not sure how it does not impact US multinationals.

 

Companies are likely coming to understand that having 100% of their production in China is a highly risky strategy. It makes sense to me that more companies will chose to diversify their supply chain and it makes sense to me more production will be returning to the US (at the margin).

My opinion is that this isn't a trade skirmish and we're only in the early innings of whatever it will be. Normally it should be easy. By now we all kind of figured out Donald Trump's negotiating style. Raise a big fuss, make a lot of noise, throw insults, throw some tweets, stir, let fester. Then the the other guy gives him a little something, Trump gets to put his name or rename a treaty and claim a big, tremendous, unbelievable victory.

 

This is actually pretty good for the people across from the table. Those people usually have pretty thick skins. So they get insulted, etc, etc but get the job done and nobody cares what the name of the treaty is or what Donald Trump tweets. The problem is that this time is China. China could probably give a lot of things. But one thing that China cannot give up is a big, tremendous victory tweet for the US.

 

You see... in China it's all about "face". Face is HUGE in China! A Chinese cannot be seen to be "loosing face". So if you want to get concessions from the Chinese you have to give them a way to "save face". That means that you cannot claim a big, tremendous victory. Are you starting to see the problem here? To make matters worse, president Xi, has recently done away with term limits and declared himself president for life, presumably  because he's so awesome. So at this point he definitely cannot loose face. This thing has a lot more to go.

 

Now what does this mean for western companies? Will their business suffer in China? I think so. You can see it in historical examples. China and Japan a few years ago have a skirmish over some God forsaken islands and Japanese carmakers sales fall off a cliff. US deploys THAAD in South Korea, South Korean sales fall. So it's fairly safe to say there will be consequences.

 

What about Apple? I think that it made sense for Apple to make products in China. There is a huge supply chain concentration in that part of the world. Also Foxconn provided them with huge supply elasticity that accommodated their growth. It would have been much harder to do that in the US. I don't think it was that much about the cost of labour and profitability. But now Apple is a much different company, more predictable growth and much, much larger. So if Apple says I want to make the iPhone in Alaska their suppliers will bend over backwards to make that possible.

 

Will Apple sales be hurt in China? That's harder to say. Apple is a more powerful brand than than Nissan. So it may be harder to hurt Apple. The Chinese government is pretty pragmatic as well so they may not be targeting Apple and instead choose to target things like GM and KFC.

[Spekulatius]

^ RB hit the mail on the Head, especially with respect to the saving face part. The Trump negotiation style does not lead the leaders in China to save their face, so they have no option but to fight tooth and nail, even if it’s costs them. Xi sold himself internally as a strongman and has a lot to lose if he gives in with a tail between his legs. I also think that within the above restraints, Xi is going to be rational, most likely more rational than Trump.

 

I think the Chinese play is to wait out for a change in leadership in the US. The US holds the better cards in this conflict, but at least politically speaking, the Chinese probably have more time. I think both China and the US would need to get allies to strengthen their positions. With Trump’s style, it’s not really that easy to work with him, even if you agree with some of his goals (like IP protection, opening some of China’s closed markets). The Chinese have been opening up a little toward the Europeans, but it’s hard to read a trend here.

 

In any case, it does not seem that the potential outfall from a protracted trade Cold War is build in the share prices in the US. It’s has been partly build in Europe and China already, but most likely not enough yet.

[SHDL]

I sold my long-term position in AAPL shortly after Trump got elected for exactly this reason.  With hindsight I can say that this was perhaps premature, but at the time the downside risk seemed too large to justify holding on to my outsized (and leveraged) position.  Now that tariffs are kicking in (and are scheduled to go up) and the stock is trading at a much higher valuation, I think the risk is, if anything, greater. 

 

I think rb and Spekulatius have it right with regard to the political landscape.  Plus, on the economic side, it’s not entirely clear how much leverage the US really has…  I mean yes, $500 bn is a lot of exports to be taxed on, but that is not a huge number compared to, say, their GDP, which is probably somewhere around $12-14 tn and growing at a 6%+ rate (at least if you trust the official figures). 

[gfp]

New "Ten R" iPhone starts pre-orders tonight.  Lots of first look reviews out there on the web today.  $749 base price should be a big hit, with plenty of time to meet holiday demand.  Seems like they will sell a ton of these -

 

https://www.macrumors.com/2018/10/18/first-iphone-xr-review-videos-youtube/

 

They are also announcing new bezel-less face id iPad pros and new mac laptops on October 30th -

https://www.cnbc.com/2018/10/18/apple-expected-to-announce-new-ipads-and-macs-on-oct-30.html

[Liberty]

https://www.cnbc.com/2018/10/19/apples-tim-cook-calls-for-retraction-on-chinese-spy-chip-story.html

 

Apple CEO Tim Cook is calling for Bloomberg to retract its story about Chinese spy chips embedded in the company's server equipment, telling Buzzfeed News in an interview, "This did not happen. There's no truth to this."

 

"I was involved in our response to this story from the beginning," Cook said according to Buzzfeed. "I personally talked to the Bloomberg reporters along with Bruce Sewell who was then our general counsel. We were very clear with them that this did not happen, and answered all their questions. ... Each time they brought this up to us, the story changed and each time we investigated we found nothing."

 

Cook also said Bloomberg should "do that right thing and retract" the story.

 

Edit: Original source: https://www.buzzfeednews.com/article/johnpaczkowski/apple-tim-cook-bloomberg-retraction

[johnny]

For board members who hold multinational companies like Apple, what is your thinking on the trade skirmish between the US and China? Is it part of your investment thesis or is it something you are ignoring?

 

If your concern is China/Trump specifically, Apple is relatively safe. Apple would be a terrible target to direct pressure because:

 

1. It is understood that Apple is not, organizationally, on the Trump train, and inflicting pain on them because of Trump would not cause them to rethink their already existing Anti-Trump (tacit) posture. They are already as anti-Trump as they can plausibly be.

 

2. The pain inflicted on Apple would be very unlikely to be passed through or distributed to ANY US citizens, much less Trump-supporters. Apple isn't going to drop engineers in some belt-tightening response to having impaired access to the Chinese market, and even if it did, none of those people were voting T anyway. Soybeans over cellphones.

 

3. The pain however WILL be likely felt acutely by certain local (Chinese) constituents/partners.

 

This is, overall, the exact inversion of what is tactically correct (pursuing acute, politically-targeted pain for the other side, and diffusing the costs over your entire population). It makes a lot more sense to do things like target red-state agribusiness (Soy!) since slightly elevating tofu costs over 1.5 billion Chinese is politically easier than bombing out 10% of Shenzhen.

 

I've always considered Apple's China position a risk, but not because it will be a pawn in a grand game of strategy--more because the Chinese government would very much rather have local champions owning that market and will always be trying to maneuver and arm-twist to make it happen. That dynamic existed before Trump, and it will exist after him. Trump-risk itself is, I think, not significant.

[johnny]

Having now thought about this some more (post, then think) I'm even more convinced that theatrically targeting Apple would be a tremendous blunder for the Chinese.

 

As I mentioned, doing so would inflict absolutely no pain on the individual voters of Trump, but they would understand it as a symbolic act of economic aggression. This is maybe the worst possible combination: symbolism unites, pain splits. Trump's coalition gets all of the symbolism and none of the pain.

 

The extent to which this feeds into the underlying Trump narrative on trade would be extraordinary: it would demonstrate that China is in fact our enemy, and that the trillion-dollar companies that moved their manufacturing overseas not only made a decision that was economically ruinous for the Trump Voter, but ended up being stupid and shortsighted for the firms themselves. Big multinationals squealing about having their factories or logistics fucked with by the Chinese will not be something that embarrasses Trump: it will be an opportunity for him to push his brand of populism to another level: I fucking told you so you idiots. Next time listen to me, in the meantime, get fucked.

 

If I were on Trump's team, I'd be playing possum on this just in the HOPES that we could get the Chinese to target Apple. Doubt the White House is smart enough to try, and doubly doubt the Chinese are dumb enough to fall for it.

 

[Spekulatius]

New "Ten R" iPhone starts pre-orders tonight.  Lots of first look reviews out there on the web today.  $749 base price should be a big hit, with plenty of time to meet holiday demand.  Seems like they will sell a ton of these -

 

https://www.macrumors.com/2018/10/18/first-iphone-xr-review-videos-youtube/

 

They are also announcing new bezel-less face id iPad pros and new mac laptops on October 30th -

https://www.cnbc.com/2018/10/18/apple-expected-to-announce-new-ipads-and-macs-on-oct-30.html

 

My wife ordered an XR, upgrade from an iPhone 6. I also believe it will be a big seller.

[gfp]

I have the Xs Max, which is my favorite phone so far.  But I have big hands and prefer the larger phone.  I think Apple has a really good product lineup at the moment.  I am eagerly awaiting the laptop / iPad pro announcement around Halloween, as I am in need of a replacement for a MacBook air.

 

I wonder what happened behind the scenes that resulted in XR cases not being ready to sell?  They had mentioned they would introduce a clear case to showcase the colored bodies - but as far as I can tell they didn't launch any cases for the XR.  I assume they are coming, but its odd.

 

https://9to5mac.com/2018/10/12/iphone-xr-apple-clear-case/

[Spekulatius]

Having now thought about this some more (post, then think) I'm even more convinced that theatrically targeting Apple would be a tremendous blunder for the Chinese.

 

As I mentioned, doing so would inflict absolutely no pain on the individual voters of Trump, but they would understand it as a symbolic act of economic aggression. This is maybe the worst possible combination: symbolism unites, pain splits. Trump's coalition gets all of the symbolism and none of the pain.

 

The extent to which this feeds into the underlying Trump narrative on trade would be extraordinary: it would demonstrate that China is in fact our enemy, and that the trillion-dollar companies that moved their manufacturing overseas not only made a decision that was economically ruinous for the Trump Voter, but ended up being stupid and shortsighted for the firms themselves. Big multinationals squealing about having their factories or logistics fucked with by the Chinese will not be something that embarrasses Trump: it will be an opportunity for him to push his brand of populism to another level: I fucking told you so you idiots. Next time listen to me, in the meantime, get fucked.

 

If I were on Trump's team, I'd be playing possum on this just in the HOPES that we could get the Chinese to target Apple. Doubt the White House is smart enough to try, and doubly doubt the Chinese are dumb enough to fall for it.

 

I don’t think the Chinese will target Apple either, but I do think they will advantage their national champions in their home market. Note that Apple seems to have lost significant market share in China since at least 2015 x their revenue has fallen from ~ $55B in 2015 to ~ 44B in 2017 and I am guessing that this is probably going to continue, since the Chinese currency has depreciated this year, making Apples products more expensive or at least converting the same revenues into less USD.

[johnny]

Absolutely. The ideal situation for them is a slow bleed, where Apple loses a bit more share each year, allowing for the supply that Apple uses to be gracefully soaked up by Xiaomi, Oppo, Huawei, etc. Apple will always be swimming against a very strong tide of both economic and security interests that make China want to transform the market into an entirely domestic arrangement.

[TorontoRaptorsFan]

Some new details about Apple's TV streaming platform

 

https://www.theinformation.com/articles/apple-to-launch-tv-subscription-service-globally

 

 

[rkbabang]

"Grayshift promised governments its GrayKey tech could crack the passcodes of the latest iOS models, right up to the iPhone X. From then on, Apple continued to invest in security in earnest, continually putting up barriers for Grayshift to jump over. Grayshift continued to grow, however, securing contracts with Immigration and Customs Enforcement, and the Secret Service.

 

Now, though, Apple has put up what may be an insurmountable wall. Multiple sources familiar with the GrayKey tech tell Forbes the device can no longer break the passcodes of any iPhone running iOS 12 or above"

 

 

Apple Just Killed The 'GrayKey' iPhone Passcode Hack

https://www.forbes.com/sites/thomasbrewster/2018/10/24/apple-just-killed-the-graykey-iphone-passcode-hack/#51eb13295318

 

[gfp]

Apple is trading below $1 Trillion market cap again after hours.  Apple returned almost $90 Billion to shareholders in the past 12 months through dividends and (primarily) share repurchases. 

 

Berkshire is basically at 5.5% of Apple at current share count

 

 

This is an important document - goal is to move towards 'net cash zero' while still earning ~$60 Billion annually...

https://s22.q4cdn.com/396847794/files/doc_financials/quarterly/2018/Q4/Apple-Return-of-Capital-and-Net-Cash-Position-Q4'18.pdf

 

I would not be surprised if Buffett was purchasing AAPL shares on the open

[Viking]

China is so important to Apple (sales and production). It makes sense to me that as the relationship between the US and China deteriorates we will see an impact on the financial results of muitinational companies like Apple. It will take time to play out. And it will depend how Bad the relationship gets. A big risk that is very hard for investors to quantify.

[mbreject]

https://www.msn.com/en-us/money/other/apple-won%E2%80%99t-disclose-how-many-devices-it-sold-starting-next-year/ar-BBPfmUq

[plato1976]

I think China is important, but not as important as ppl think in terms of demand.

Now mainland china is  "only" 15% total sales of Apple, after america, europe. It's also growing slower than quite a few regions at 16% (in fact slower than america and much less than Japan's 30%). I am not sure if it's just ppl's impression or not that China is a high growth region - it's not. China is a less appealing place to Apple b/c many ppl in China don't use apple's services (they even have a hack of apple store so they can bypass it). In the sense of ecosystem, it's not as strong there.

 

To Apple, the problem is more a supply issue rather than a demand issue. If I were TK, I would really diversify apple's supply chain (including the assembling part) aggressively from China, b/c that will also slow down competitor's copy strategy to some point

 

 

 

 

 

China is so important to Apple (sales and production). It makes sense to me that as the relationship between the US and China deteriorates we will see an impact on the financial results of muitinational companies like Apple. It will take time to play out. And it will depend how Bad the relationship gets. A big risk that is very hard for investors to quantify.

[doughishere]

Might be a repost.

 

[Gilp]

Might be a repost.

 

 

Great insight by Steve. It reflects my feelings about their recent years, feels for me that they are trying to squeeze more profits, which is good short-term for the shareholders, but they are loosing their magic. And in this competitive field, one day Apple customers will wake up and realize that there is a huge world out there and it's time to explore it.

[gfp]

Speculation that the XR is not the runaway hit some were projecting -

 

https://www.macrumors.com/2018/11/05/additional-iphone-xr-production-canceled/

 

Will play further into the 'Apple has something to hide' narrative.

[Spekulatius]

Speculation that the XR is not the runaway hit some were projecting -

 

https://www.macrumors.com/2018/11/05/additional-iphone-xr-production-canceled/

 

Will play further into the 'Apple has something to hide' narrative.

 

The XR is easy to get, I know that much. My wife got it on its launch day (she preordered it) and there were no lines whatsoever at the store where she picked it up. This is strange to me since I feel that the XR is the best relative value in their lineup. Did the lose the battle for the middle range and are now just controlling the high end with $1k sales prices or more?

[DooDiligence]

Speculation that the XR is not the runaway hit some were projecting -

 

https://www.macrumors.com/2018/11/05/additional-iphone-xr-production-canceled/

 

Will play further into the 'Apple has something to hide' narrative.

 

If "peak iPhone" & "one trick pony" takes the price back down like it did around 2013, before the split, I might put the rest of my investable cash to work again.

 

Fingers crossed.

[gfp]

Apple finally released their 10K, most up to date share count available is 10/25: 4,745,398,000 shares

 

Berkshire owns about 255 million outside of their pension plans, which comes to 5.37%.  Ownership is higher including shares not actually owned for Berkshire shareholders' benefit.

 

https://www.sec.gov/Archives/edgar/data/320193/000032019318000145/a10-k20189292018.htm

 

At 200.50, Apple's market cap is $952 Billion

[Liberty]

https://stratechery.com/2018/apples-social-network/

 

Also on the new iPad Pro:

 

https://daringfireball.net/2018/11/the_2018_ipad_pros