The international financial market presents multiple challenges to a business enterprise seeking to strategically manage its global operations. The firm’s primary concern is to improve revenues at low costs and bring in higher profits. At the same time, modern and sound business principles dictate that in any business, prudent management decisions be made to minimize or neutralize risks to the firm, its stocks and asset values. Thus, multinational companies like Apple Inc. have to strategically manage their global operations for improving revenues, cutting costs, and retaining or improving profits. But, they also have to efficiently manage risks from exchange rate fluctuations, changes in inflation rates, the different taxation systems across countries, heterogeneous capital markets and political instability that can adversely affect company bottom lines or even threaten the future of the company. Measures for tackling such risks need to factor in the social, political, economical and other conditions in home and foreign countries as also account for variations in stock or asset valuations with time.
An Overview of Apple Inc.
History & Background
Apple Computer, Inc. was set up by Steven P. Jobs and Steve Wozniak way back in Apr 1976. With only $ 1,300, the two helped found the company now known as Apple Inc. and which lead to the phenomenal growth of the personal computer industry. By 1982, Apple became the first company manufacturing PCs to record $ 1 million in sales annually. This was achieved through producing lower-priced personal computers, software, peripherals and special computer models like the Apple II and later on the Macintosh. By the end of the 1970s, Apple had successfully transformed itself from a producer of hobbyist computers to that of designer of computers for the mass consumer market. After designing computer systems and software for mainly educational and technical applications, Apple, in 1980, went public with an issue of 4.6 million shares priced at $ 22 apiece. The shares were fully subscribed and this led to a further launch of 2.6 million shares in 1981, which too were fully sold out. The year 1984 saw the launch of the Macintosh range of computers which sold well and in later years, owing to its relative cheapness and ease of use slowly came to a computer system of choice for innumerable companies. Thus by 1988, over a million Macintoshes had been sold with most (70%) being taken by corporate entities. However, under Scully, the President of Apple since 1983, Apple was transformed into a company designing computer systems for business enterprises.
Law Suits & Other Troubles
The 1980s saw Apple involve in various lawsuits. Apple suffered immensely during these years due to some adverse rulings in these lawsuits involving companies like Xerox, Microsoft and Hewlett-Packard. The 1990s saw Apple bosses concerned more with strategic controls rather than technological issues. But, Apple launched the Power Macintosh range of superior computers in 1994 and these were well received by the market. Despite this, the company’s losses started mounting through the 1990s and these were estimated to be a whopping $ 816 million by 1996. In 1997, the losses even crossed the $ 1 million mark. Simultaneously, the value of the company shares fell from $ 70 each in 1991 to a much lower $ 14 each in 1997.
And while the market share of Apple was 16% in the 1980s, it was as low as only 4% in the 1990s. The upturn started only with the return of Steve Jobs, who had earlier been forced to leave the company in Sep 1985, to the company as interim Chief Executive Officer. Also, the acquisition of NeXT by Apple contributed in no small measure to Apple’s conversion from a lost case to that of a profitable and healthy company with its stock climbing to $ 99 apiece in 1999 (a 140% jump). The story of Apple’s success thus was shown to be inextricably linked with the emergence and re-emergence of Steve Jobs, its founder and CEO
Products, Subsidiaries and Competitors
The products line of Apple includes personal computers, peripherals, software, technological services, networking solutions, etc. Well, known brands include the iMAC and the Macintosh, both desktops and notebooks. Apple also produces portable digital music systems, related accessories, and third party music, audio, video, films and TV shows for distribution in the world consumer market. The most notable brands in this category include the iPod music player & related accessories. The iPod music player, introduced in 2001, and the iTunes Music Store, are important factors that have made Apple a major player in the music industry.
The company sells its products to individual consumers, mid-size and small business concerns, educational institutions, government bodies, etc. For this, it uses its online and retail outlets, utilizing the services of retailers, wholesalers, resellers, etc. For effectively managing its business worldwide, Apple operates through its subsidiaries constituted according to geographical area covered. These subsidiaries include FileMaker Inc., Apple Computer Ltd (Ireland), Apple Computer (UK) Ltd, Apple Japan LLC, etc. Thus, the operating segments comprise the Americas, Japan, Europe, Retail, the Asia Pacific and FileMaker Inc FileMaker exclusively provides database software.
Major competitors of the company include Sun Microsystems, Dell Computer Corporation, Microsoft, Compaq, and IBM. However, Apple, through its innovative technology, software expertise, diverse product line, and strategic marketing has carved a niche for itself in the computer and digital music system industry.
The shares of the company are listed on the NASDAQ GS. Its symbol is AAPL. The ownership is 33.39% Funds, 69.07% with Institutional, and Others 1.26%. The ownership by numbers comes to 3,353 mutual funds, 1,544 institutional, and Others 19 (AOL Money & Finance, 2009).
Managing Foreign Exchange Risks
Among the risks, those due to exchange rate fluctuations, owing to the volatile nature of the foreign exchange markets, make future long and short term stock and firm value predictions quite difficult. The global firm essentially tries to protect itself from foreign exchange exposures which are mainly of three types, viz., translation, transaction and economic. Whereas transaction exposure or accounting exposure is that relating to the firm’s foreign currency-denominated financial statements, translation exposure is the degree by which the future value of the company’s cash flows is affected by the exchange rate variations. In contrast, economic exposure is simply a management concept that denotes the extent of affectation of the firm’s current value of future cash flows due to exchange rate variations. Anderson, T.J. states that ‘currency exposures arise in case of mismatch of foreign currency denominated receivables to payables over time’, and also adds that ‘this makes the conversion of value into the currency of accounting uncertain’ (2005, p. 3). Since exchange rate risks can substantially affect the profitability of the firm, an effective strategy to nullify or minimize these risks assumes tremendous significance for the globally competing firm. Financial experts like Stulz (2003) have advocated adopting a structural approach for hedging operationally against the foreign currency rate variations. This view is similar to that advocated by Eitman, et al (2001). Sohnke, B. & Gordon, B. state that ‘the basic idea in such a method consists in finding the best possible match for the cash flows (inflows fewer outflows) in each currency’ (2005, p. 13). However, often, another way followed to offset the currency rate risks is the hedging of underlying foreign currency exposures to negate the influences of such exposures on the profitability of the firm. Various surveys have found that firms usually hedge their short term exposures by using forward contracts which effectively help reduce uncertainty of foreign exchange rate fluctuations. OTC forward contracts include currency forwards and cross-currency swaps which latter can be either cross-currency basis swaps or cross-currency coupon swaps. Exchange-traded currency hedging tools include futures and options. But the firms adopt operational methods for control of long term exposures which are more uncertain to predict and quantify and are usually covered through credit facilities and contingent capital market instruments. In addition to direct foreign business, even via global competition, firms could face risks from exchange rate exposures. For non-financial and technology-intensive firms like Apple Inc,
Inflation and Interest Rates
Inflation affects the interest rates and profitability of the company investments. Inflation is an overall general rise in prices (Brearley, R. A et al, 2001, p. 61). The real interest rate is the nominal interest rate minus the inflation rate. Madura (2003) among others had successfully tried to explain the parity relationship between exchange rates, inflation and interest rate fluctuations (p. 235). Whereas purchasing power risk caused by inflation can erode the purchasing power of the money in the future in case of payments by way of principal and interest, the interest rate risk or the risk that interest rates may change in the future can affect the value of your investments. Business concerns relying on multinational activities to derive advantage of economies of scale do face a real danger of losses by way of declining interest rates on investments and hyperinflationary trends.
Tax Laws & Their Impact on Company Financials
Another important consideration for an international business concern is the incident of taxation in home and foreign countries that impact the returns on investment of the company. In the US, it is Congress that passes the tax laws which is the Internal Revenue Code or IRC. The Internal Revenue Service or IRS regulates and maintains the laws thus codified. A common factor whether in the US or anywhere in the world is the constant changes in tax rates affected by governments. Among taxes, corporate taxes Excise duties, import & export taxes, etc have a direct bearing on the cash flows of the going concern. Most countries tax incomes by corporates on income sourced globally irrespective of whether the same income is repatriated or not.
Political Stability & International Trade
Political situation in a foreign country can affect the trade conditions of a foreign company in that country. The investing foreign company may have the fear that the country may expropriate the company assets without giving it any compensation. Or it may also insist on retaining the profits generated by the company in that country. The government of a country may support FDI or other foreign ventures or it may be that it imposes stringent regulations to the detriment of the investing foreign company.
Payment Systems/Terms Facilitating International Trade
Common Payment Systems
International trade in goods and services requires a robust and speedy system of payments or payments mechanism which can be safely, securely, and quickly utilized to pay for goods or services purchased from foreign countries as also help in receiving payments for goods supplied or services rendered for foreign consumers/buyers. Banks have traditionally played a key role in setting up and maintaining such a mechanism and various countries have in place a system whereby the laws of the land like tax laws, foreign exchange rules and regulations, contract laws, KYC & AML regulations, etc can be scrupulously followed by parties to international trade transactions. Particularly in the US, trade has come to rely substantially on modern, speedy and online payment modes like the internet & mobile banking. Increasingly, even non-banking players are now in the fray and these companies provide various payment options like PayPal, eGold, etc. The traditional payment systems like cash and cheques have competition in the form of ATMs, Credit and Debit Cards, stored value cards, ACH payments, and online electronic payments like Wire transfers, Western Union, etc.
Common Payment Terms
A commonly used payment term is an upfront payment of cash to the exporter before the shipment of goods to the buyer. This is called Cash in Advance. However, payment may be deferred until the goods are sold to the buyer, in which case the payment is the term used is consignment. There is the unpaid credit order or Open Account. The electronic transfer of funds (TT) model is often followed in many transactions. But the extensively utilized mechanism appears to be the Letter of Credit or L/C whereby a letter of authority is issued in favor of a bearer to draw a certain sum of money from the issuer bank, its branches or agencies. Recommendation 17 as adopted by the Working Party on Facilitation of International Trade Procedures in Geneva lists Documentary Credits, Collections, Payments by Installments, Other Types of Payments, Special Arrangements, and Without Payment, as the six broad types of international trade payment mechanisms (Mar 1982). The US Trade Finance Guide lists four methods, namely, Cash in Advance, Letters of Credit, Documentary Collections, and Open Account (the US Dept of Commerce, 2008, P. 4)
In a global environment increasingly opening up and gradually toeing the line of the WTO and the World Bank and in a world facing economic instability as never before, companies like Apple Inc are hard-pressed to maintain their revenue growth and profitability levels. Economies of scale and expanded markets non-withstanding, the high rate of technological obsolescence in the computer industry, the stagnating IT sector, high rates of attrition, and the intense competition among peer companies like Microsoft and Dell could well spell doom for companies like Apple. The recent severe illness of Steven Jobs is a grim reminder that time may not be far off when a choice of a suitable successor could be a veritable nightmare for the company when devoid of the services of Jobs in the not too far future. Apple’s forte lies in its innovative and diversified portfolio. Yet, it may be hard put to retain its primary market.
Andersen, T. J. (2004), ’Managing Economic Exposures of Natural Disasters’ Special Report, Inter-American Development Bank.
AOL Money & Finance, (2009) Web.
Brearley, R. A., Myers, S. C. & Marcus, A.J. (2001), Fundamentals of Corporate Finance, 3rd Edition, the McGraw Hill Companies, Inc. Boston, p. 61.
Eiteman, D.K., Stonehill, A.I. and Moffett, M.H. (2001), Multinational Business Finance, 9th ed., Addison Wesley Longman, New York, NY
Madura, J., (2003), International Financial Management, 7th edition, South-Western College Publishing, Cincinnati, Ohio, p. 235
Recommendation No.17 adopted by the Working Party on Facilitation of International Trade Procedures, Geneva, March 1982 ECE/TRADE/142 [Edition 96.1]
Sohnke, B. & Gordon, B (2005), The Exchange Rate Exposure Puzzle, MPRA, Paper No 6482, posted 2007, Web.
Stulz, R.M. (2003), Risk Management and Derivatives, Southwestern Publishing Co. Cincinnati, OH Long Range Planning, 36.
The US Dept of Commerce, (2008), ‘Trade Finance Guide’, Chapter 1, pp.3- 4