What an Apple! And what a bite! Yesterday the technology giant reported net profits of $18 billion (£11.8bn) in the quarter to the end of December. It tops the previous profits record set by ExxonMobil and makes Apple the most successful company in the world.
The profits have been powered by record sales of iPhones – 74.5 million in the three months to 27 December. Apple has now become the number one smartphone company in China, with sales hitting $16bn last year – a 70 per cent increase from a year earlier, and almost equalling the $17bn sales it recorded in Europe last year. Across the world sales of the new iPhone 6 should help sustain the momentum. And the momentum is staggering – more than 500 million iPhones have now been sold worldwide.
It is a phenomenal story. It is one that has been driven by years of heavy research and development and an impassioned and inspired management. Along with millions of others I have moved from being an Apple sceptic – its future looked decidedly shaky in 2007 – to an Apple junkie. Our house has an iPhone, an iPod and iPads large and small: great technology, great clarity and wonderful design. I cannot imagine life now without them. And I’m looking forward to the Apple wristwatch due out in April.
What would we not give to have a company like Apple in Scotland – and with those massive revenues cascading into our once-impressive banks.
SCOTSMAN TABLET AND MOBILE APPS
This is one of the triumphs of capitalism that we almost take for granted – indeed, how great our irritation is when the internet server breaks down or a new app doesn’t function instantaneously, first time. Innovation and invention not only keep pushing the boundaries of improvement and life experience, but our expectations shoot up in line with every new advance. Yesterday’s new gizmo becomes today’s old hat in need of an upgrade.
Despite this – perhaps because of it – the sniping and bile has poured forth (much of it I suspect, popping up on the very Apple products the critics affect to despise). Obscene profits and margins! Sales driven by slick marketing! Sheep-like customers driven to stampede! And is Apple not a massive tax avoider?
It’s certainly true that Apple, like many technology businesses, makes use of the low-tax jurisdictions available. Some 60 per cent of its profits are run through businesses domiciled in Ireland where tax rates enable companies to reduce their tax liabilities. Apple was able to bypass some $9bn of US taxes in one year, according to a Senate report. As US corporation tax remains relatively high at 35 per cent (it’s 21 per cent in the UK and 12.5 per cent in Ireland) Apple opts to retain almost 90 per cent of its balance sheet outwith America.
It’s perfectly legal but highly contentious. And barely a month has gone by without condemnation of global tax avoidance and calls for a clampdown on the harbouring of profits in low-tax jurisdictions.
But hang on. Wasn’t the whole argument for lower corporation tax in Scotland’s independence referendum precisely to offer similar benefits to global companies and attract their money here? Was not the lower Irish corporation tax rate cited as an example of what Scotland could do? And does not the SNP continue to push for “more powers” legislation to be extended to business taxation? Control of business taxes was surely the most critical of the levers John Swinney was anxious to get his hands on.
This hasn’t changed. But given the pressure in America and Europe to clamp down on tax sheltering of this sort, it is unlikely the Irish model could now be repeated. Indeed, under global pressure, it has pledged to close down one of its tax advantageous schemes.
And in any event, the case for a low rate of business tax rests, not on providing tax shelter and boosting deposits in Scotland’s banks but in attracting business investment, plant, technology and jobs. The critical mission, surely, is to ensure the host country can extract the maximum benefit from a natural or intellectual resource – “beneficiation” in economists’ language.
Scotland does have considerable success here, if nothing like as spectacular as Apple. We have cutting-edge software companies, great designers and technicians and website operators. Our IT sector spans product management and marketing, e-commerce, and data centres and hosting, ably represented by ScotlandIS, with Scottish Enterprise providing support through marketing and investment support and the Alba Innovation Centre. This month alone has seen a £1.5 million investment in Edinburgh-based Cloudsoft by Maven Capital Partners on behalf of the Scottish Loan Fund, and financial backing for Edinburgh University spin-out PureLiFi.
These are minuscule in comparison to America’s technology sector and the industry here has struggled to gain and sustain real critical mass. But there is no magic wand we can wave – not even an ultra-low corporate tax rate – and we are forced back again to work on a wide range of fronts: ensuring a skilled workforce, modern and efficient transport infrastructure, top class connectivity and sporting, leisure and cultural attractions that together make Scotland a desirable location for investment. It’s not that we don’t already work on these things.
But the bar keeps rising.
Will Apple always be on top? That’s highly unlikely. In due course Apple will be superseded by others, thrown forward by the very forces that made for its rise: innovation, adaptation, the restless human quest for the novel and, above all, an open economy that allows competition to flourish.
When iPhone’s gross profit margin has risen another two percentage points to a whisker under 40 per cent, it is bound to attract rivals who will seek to tear at this juicy underbelly.
Equally, we would not wish Apple to be top dog forever, any more than we would always want to shop at the same supermarket. Our quest for the new and different opens the door to others. And the consequences are often unforeseeable. Had anyone asserted, as recently as the 1980s, that millions of homes would have computers with the power of an IBM or that, according to the Mobile Operators Association, 93 per cent of adults in the UK would have a mobile phone, we would have laughed in derision.
Apple has changed the world in which we live and work. And the message from its success is that innovation, risk taking and change, combined with our constant lust for the new, drive the business cycle. This is what is so wrong about the meaningless drivel today of business “sustainability”.
Products rise and fall; companies wax and wane. Much of business, particularly of a kind heavily dependent on one particular product or function, is by its nature unsustainable. The more we hug to this false god, and forego new enterprise and risk, the more uncompetitive and ossified our economy becomes.
Today, Apple has delivered one of the most popular devices the world has known. But it has also delivered something else: hope that the future can be different, and better.