Navigation Search

Select your location and role to view strategy and fund content

  • Global homepage
  • Australia
  • Belgique
  • Botswana
  • Denmark
  • Deutschland
  • España
  • Finland (Suomi)
  • France
  • Hong Kong (香港)
  • Ireland
  • Italia
  • Luxembourg
  • Namibia
  • Nederland
  • Norway
  • Österreich
  • Portugal
  • Singapore
  • South Africa
  • Sweden (Sverige)
  • Switzerland
  • United Kingdom
  • United States
  • International
Professional Investor
  • Professional Investor

Tailored for investment professionals this site provides information on our products, strategies and services. Please remember capital is at risk and past performance is not a guide to the future.

By entering you agree to our Terms & Conditions
China is no longer a copycat

Apple: saint or sinner?

24 June 2019
Author: Michael PowerStrategist

Apple engages in cost arbitrage to a great degree, providing an object lesson in America Inc’s complicity in America’s relative decline. But do they also distort the balance of trade?

The iPhone object lesson

Apple makes a useful case study of what has been happening, as the same formula Apple applies is used by most of America Inc where a global supply chain is involved. Indeed, branded goods companies do something similar, as the emerging scandal on how Mondelez has avoided paying any tax on its Cadbury’s profits for a decade illustrates.

Take the case of Apple and its world-beating iPhone. It is mostly sourced from a China-based contract manufacturer, Foxconn. Like many of America Inc’s Chinabased suppliers, Foxconn is a foreign-owned subsidiary operating in China, Foxconn being a subsidiary of Taiwan’s Honhai.

Apple buys a single iPhone X from Foxconn for about US$370. It retails in the US for US$999. For sales made in the US, some 38% of Apple’s revenue, the lion’s share of the US$629 uplift, accrues to Apple as profit. More importantly for the trade debate, this US$629 does not appear in US trade statistics.

For the 62% of Apple’s sales made outside the US – and specifically for those profits generated outside the US – these uplift numbers do appear in the broader trade statistics but not in the trade account. Mostly, they appear as profit (or ‘royalties’) earned in the income section of the current account.

For sales made outside the US, the iPhone X would typically be bought by an offshore entity, often based in Luxembourg, the Netherlands and especially Ireland for Europe-destined product (22% of global revenues) and for product intended for elsewhere (Japan 10%, rest of world 12%). For Chinese sales (18%), the routing is more direct but the profit uplift broadly the same. End prices vary widely with the lowest being US$994 in Japan. Europe is composed of higher priced markets: Hungary US$1455, Italy US$1400, Russia US$1390, Norway US$1375, Germany US$1353. Other notable markets include China US$1267 and India US$1268.

Figure 1

Source: Quartz, 2018

Profit-shifting shell game

Typically, the phone is sold into a market, firstly, to recover the ‘Foxconn cost’ – US$370 per unit – and, secondly, to cover other Apple-specific costs, most notably what is classified as intellectual property payments in the form of royalties. While these are classified as a cost to a foreign entity, say Apple Ireland Ltd, they are booked as a profit to Apple USA Inc. In other words, after the Foxconn cost is recouped, the parent company Apple takes most of the balance of the price for its own account as profit. But little profit is generated in the market in which the product is sold or indeed made.

The European Commission under Margrethe Vestager, the European competition commissioner, has grown wise to Apple’s shell game with the result that the figures and ratios that follow below will not be the same moving forward. The tax ‘shell game’ is played so aggressively by US Big Tech that the EU is considering introducing a revenue-based tax of between 2% and 6%.

What the European Commission has discovered highlights the scale of the profit shielding Apple has been undertaking. Their investigation showed that Apple paid between 1% in 2003 and 0.005% in 2014 on its European revenues. Apple is not alone. In 2016, Amazon had European sales of €21.6 billion but paid only €16.5m tax, 0.76% of revenues. In 2017, Amazon’s British subsidiary paid £1.7 million on revenues of £11.4 billion (0.01%) and even ‘profits’ of £72 million (0.6%).

Distorting the US trade picture

The point highlighted here, however, is not – at least in the first instance – to point out the methods US Big Tech deploys to shield its offshore profits from non-US tax jurisdictions, but rather to illustrate how this behaviour distorts the US trade picture, especially for a President focused on the trade account balance. Through the eyes of Donald Trump, the likes of Apple have a negative effect on the US trade figures because of its imports of iPhones and iPads from China to the US. President Trump either does not realise, or does not acknowledge that, at the current account level the trade practices of the Apples of America are, especially in key markets like Europe and Canada, much more positive for the US.

It's impossible to tell whether the offshore earnings of America Inc. plus the onshore profits arising because of the ability of America Inc. to harvest profits inside the US, as a result of profit-shifting to the US end of the supply chain, more than cancel out the trade account deficits arising from the importation of product from the likes of China, Japan and Mexico. The US runs bilateral surpluses not just on the income line of the current account, but most likely on the capital account as well.

What can be said to a high degree of certainty, however, is that because of the structures and distributions of these supply chains, more value add is created inside the US than out of it – even if some of that value-add accrues as a cash holding owned by America Inc. but actually held outside the US.

General risks: The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made.

Michael Power
Michael Power Strategist

Important information

This communication is for institutional investors and financial advisors only. It is not to be distributed to the public or within a country where such distribution would be contrary to applicable law or regulations. If you are a private/retail investor and receive it as part of a general circulation, please contact us at No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Investec as a whole, different views may be expressed based on different investment objectives. This communication is based on internal data, public and third party sources. Although we believe the information to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions. Nothing herein should be construed as an offer to enter into any contract, investment advice, a recommendation of any kind, a solicitation of clients, or an offer to invest in any particular fund, product, investment vehicle or derivative. There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Investment involves risks. Past performance is not indicative of future performance. Any decision to invest in strategies described herein should be made after reviewing the offering document and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the offering or other disclosure document for the Strategy. Copies of such documents are available free of charge upon request. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions. In the US, this communication should only be read by institutional investors, professional financial advisers and their eligible clients, but must not be distributed to US persons apart from the aforementioned recipients. THIS INVESTMENT IS NOT FOR SALE TO US PERSONS EXCEPT QUALIFIED PURCHASERS. In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act 2001). In Hong Kong, this document is intended solely for the use of the person to whom it has been delivered and is not to be reproduced or distributed to any other persons; this document shall be delivered to professional financial advisors and institutional and professional investors only. It is issued by Investec Asset Management Hong Kong Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong (SFC). The Company’s website has not been reviewed by the SFC and may contain information with respect to non-SFC authorised funds which are not available to the public of Hong Kong. In Singapore, this document is issued by Investec Asset Management Singapore Pte Limited (company registration number: 201220398M) for accredited investors, professional financial advisors and institutional investors only. In Indonesia, Thailand, The Philippines, Brunei, Malaysia and Vietnam this document is provided in a private and confidential manner to institutional investors only. In South Africa, Investec Asset Management (Pty) Ltd. is an authorised financial services provider. Investec Asset Management Botswana, Unit 5, Plot 64511, Fairgrounds, Gaborone, Botswana, is regulated by the Non-Bank Financial Institutions Regulatory Authority. In Namibia, Investec Asset Management Namibia (Pty) Ltd is regulated by the Namibia Financial Institutions Supervisory Authority. Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Investec’s prior written consent. © 2019 Investec Asset Management. All rights reserved. Issued by Investec Asset Management, issued January 2019. Additional information on our investment strategies can be provided on request.

The content of this page is intended for investment professionals only and should not be relied upon by anyone else

Please confirm you fall under this category

By entering you agree to our Terms & Conditions

Some of the funds displayed on this page may not be registered in your region and will therefore not be available for sale . Please visit to check registration by country.