How come Apple Inc. is so profitable?

Many of us think how come multinational companies like Apple Inc. etc earn huge amount of money. No doubt Apple has very successful products such as iPhone, iPad , iPod and Macintosh computer etc.

But is there anything else that needs to be unearthed?

Let us see how some of these unknown facts thorough a simple example as always.

Let's assume a parent company "P", which has headquarters in Ireland and a subsidiary company "S", which operates in USA.

Tax rate in USA is 30% and that in Ireland is 10%.

The company is in the business of making and selling phones.

Let's assume the market price of the phone in USA is 1000 $ and the cost of manufacturing is 500$.

So if company S sells a phone, it gets a profit of 500$ and it will pay 30% of 500$ tax i.e.150$  to US government.

Everything is fine till now.

But now company P plays one fine trick to earn more money.

Company P tells company S , " You buy phone from us for 900$ and sell in USA for 1000$"

By this transaction profit of company S becomes 100$ and tax that S pays to US government becomes 30% of 100$ i.e. 30$.

Company P sitting in Ireland earns 400$ profit after subtracting 500$ manufacturing cost.

Company P now pays 10% of 400$  i.e. 40$ as tax to Irish government.

In total company has paid 70$ tax. Earlier it used to pay 150$ in taxes.

This is how company saved 80$ per phone.If company sells billions of phones per year it will save billions of dollars.

Moral or legal:

These kind of transfer pricing mechanisms are perfectly legal. But whether they are moral is the question that needs to be addressed.

Many of these big companies lobby in the government and bend the lawmakers in their favor by paying huge sums of money to lobbyist and many big shot legal firms.

So these companies get to decide the market power.

As small companies do not have enough money to shell out, they have to pay huge sums of taxes and eventually they will either become bankrupt or be bought by big companies.

Healthy competition is the only thing that benefits all the stakeholders. But by killing competition these companies are ultimately killing new ideas and consumer benefits.

Net neutrality and economics of free internet.....

What is net neutrality? 

In net neutrality, Telecom service provider gives equal importance to all web data that is generated on the internet.

It is like rationalizing the bandwidth so that each and every website will load on the web browser with equal bandwidth.

It is like giving equal opportunity to each website.


Why net neutrality is so important?

Let us take a simple example.

Let us assume there are two factories 'A' and 'B' in the town which produce orange juice.

Factory A has huge amount of money at its disposal but factory B is not that rich.

Now, assume that these factories are far outside the town.

Juice can be transported from factory to town by a truck service provider 'C'.

Truck service provider is the only transport provider in the region. So factory 'A' and factory 'B' have to depend on 'C'.

Everything is going on well for now.

But suddenly owner of factory 'A' says to 'C', " I will give you the money and in the favor you should use all your trucks to transport my product in the town."

Due to this business strategy, factory B will go bankrupt after some time as it can not sell its product in the market.

Ultimately, because of money power, factory 'A' won the battle even if product of factory 'B' was superior to that of factory 'A'.

In the similar way, in the digital world, factories are like websites such as Facebook , Google etc.

Transport service provider is something like telecom operators.

So if a big and rich website company  gives free service to people by paying huge amount to telecom operators, then people will use only these websites.

So in a first place itself competition gets killed even if the competition has better product offering.

If company like Amazon had provided huge money to telecom service provider then Flipkart would not have been established.

So if there had not been a competition consumers like us would not have enjoyed low priced mobile phones, computers and so on.

So the internet service provider needs to be unbiased and neutral.

According to Adam Smith, father of modern economics, "COMPETITION AMONG PEOPLE MAKES BETTER PRODUCTS."



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Is 20 $ per barrel price of oil good for economic growth of India and the world?

Why oil price is so low currently?

Price of any commodity depends on supply and demand.

If we see the current  global economic scenario then we can get the feel for why oil prices have gone down so steeply.

Majority of oil is consumed at following locations in the world

1. United states of America and Canada ( GDP 19 trillion dollars)

2. Europe (GDP 19 trillion dollars)

3. China (GDP 11 trillion dollars)

4. Japan (GDP 4 trillion dollars)

5. UK (GDP 3 trillion dollars) 

6. India (GDP 2 trillion dollars)

Oil is very important commodity for any country's economic progress.

So we can directly correlate economic growth to the price of oil.

China ,Europe, Japan and majority of countries around the globe are experiencing recession.

This means they need less oil for their economic activities.

World's 50 to 60 % oil is consumed by China.

We know from all the news channels, Chinese economy has slipped to 6% growth rate from double digit.

This lack of demand has pushed the price of oil down to huge extent.

Moreover, USA produces oil from shale gas at the production cost of 50$ per barrel

Saudi Arebia and other OPEC (Organization of Petroleum Exporting Countries) countries produce oil at around 20 to 30 $ per barrel.

In order to drive American oil producers out of business, OPEC started to supply more oil so that oil price will go down and  it would be unprofitable for non OPEC countries to produce oil.

These are ce​rtain macroeconomic and strategic factors  that are driving down the price of oil.

How does this matter to India and world?

India's major import is oil. It imports around 300 billion dollars worth oil every year.

If oil price goes down, we will have to pay less money in foreign exchange.

This reduces our current account deficit.

Due to small current account deficit, Indian rupee will appreciate. This is explained in my previous post as follows
http://isheconomist.blogspot.in/2015/12/how-does-current-account-deficit.html

Due to rupee appreciation, Indian export sector will get badly affected. India's major exports are software, jewelry etc.

As Prime minister of India is promoting 'MAKE IN INDIA' project , appreciation of currency may not be helpful for the project.

Indian companies also export engineering goods to OPEC countries. This will also get affected.

Many Indians (especially Kerala people) work in Saudi, Oman , Kuwait etc. and send remittances to Indian coffers. It will be difficult for these people to find jobs.

So in a short term, in my opinion, India can enjoy low price of oil and come out of recession very quickly. But in a long run low price of oil is not good for economic growth of whole world and India.Due to globalization all the economies are  integrated in each other.

It is no more a solo dance but a line dance.  So if we want everybody to be better off then , oil price needs to be at optimum level.