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When Apple met China

April 28: Profits got really, really big. Plus, the cost of rare earth minerals, Tim Hortons earnings, and when bankers run for office


 

MORNING-PLAYBOOK-STORYAll hail the mighty Apple, producer of non-stop revenue, profits, smart watches and lots of iPhones: lots and lots of iPhones. More than 60 million iPhones, to be specific, in the last three months alone.

And all hail China, source of a massive, and ever-growing, market for those iPhones—and now, the U.S.’s chief rival for Apple enthusiasm. Lest we forget, this quarter has not been about the much-hyped Apple Watch, but about good, old-fashioned smartphones.

Today, we’ll tally up the sales and costs of a giant, as well as look at the tactics of 3G, the company behind the merger of Tim Hortons and Burger King, after it reported quarterly earnings yesterday. We’ll also get excited for the U.K. election or, failing that, will contemplate the age-old question of whether bankers make good politicians. (It’s a skeptical kind of Tuesday.)

Today, the Fed’s meeting begins, and the rate announcement (or lack thereof) will come tomorrow, so prepare for Janet Yellen watching on Wednesday. In Canada, today brings real GDP numbers by province for 2014, as well as a speech by Bank of Canada Governor Stephen Poloz in the House of Commons. Meanwhile, the divisive Yanis Varoufakis has been sidelined by his own government, after a negotiating debacle in Latvia on Friday, and a reminder that Greeks, although they wish to climb out from under their massive debt, do not actually want to leave the eurozone. Earnings today will come from Ford, Twitter, Kraft, Pfizer and GoPro.

The ever-growing empire of Apple. You won’t be surprised to hear that Apple had another massive quarter, pushed by an enormous demand for the iPhone 6 in China. In the first quarter of 2015, it sold 60.2 million phones, surpassed only by the last quarter of 2014, when it sold 74.5 million. It’s helpful to try to put these numbers in context: This quarter, that’s as though almost everyone in Canada went out and bought two phones, and in the previous quarter, almost everyone in Canada bought two phones, except in B.C., where they bought three each. The only way to hit those kinds of numbers is by bringing the iPhone to China, where revenue was up by more than 70 per cent, raking in $16.8 billion, and making the country Apple’s second-biggest market after the U.S. Overall, quarterly profit was up by more than a third, and net income in the quarter was $13.6 billion. For Apple junkies, have a look at Quartz‘s live chart of the results. Despite all the hoopla around the Apple Watch, the smartphone is not yet widely available. While the launch did have a bearing on share price, it hasn’t yet contributed to revenue. Warnings about a lower profit margin on the watch, compared to other Apple products—as well as, let’s be honest, its limited usefulness—suggest that the boost it offers won’t be on the scale of the iPhone. (Then again, it’s Apple, and only a fool would underestimate it.) Last quarter, we tried to put profit and revenue in context (that time around, Apple made a staggering $18 billion) by comparing them to the GDP of several small nations, a common trick for adding context to the hugeness of these numbers. We concluded it was a bad idea. (A country’s GDP and net profits just aren’t the same thing.) More helpful to keep in mind are the company’s “liquid assets” (or cash reserves), which the FT’s Matthew Klein estimates puts it in league with oil-rich Norway, home to the largest sovereign wealth fund in the world.

From inner Mongolia to your iPhone. On another question of scale: When we get excited (or at least awed) by the sheer number of iPhones Apple just sold, it’s worth asking where all of that material—including rare earth minerals—comes from. Rare earth minerals are crucial ingredients in virtually every high-tech or electronic product, from wind turbines to camera lenses (here’s a good little BBC video on which mineral is used for what). And they are mainly a Chinese export; reports estimate that 90 to 97 per cent of the world’s supply comes from China. Claims in years past that China has manipulated prices for the minerals has emphasized how crucial these minerals are to pretty much every area of modern connected life. Much of that Chinese production comes from a single, profoundly polluted industrial city in inner Mongolia called Baotou. BBC Future takes a useful look at the chemical lake in Baotou, which I posted earlier this week, and think is worth posting again. For one, it makes the crucial point that rare earth minerals are not so much “rare” (they’re found around the world), but deeply intensive to extract and process, producing enormous amounts of toxic waste and environmental degredation in the process.

Is the marriage of Timmies and Whoppers paying off? It depends on whom you ask. The company that owns both Tim Hortons and Burger King reported quarterly earnings yesterday, their first quarter since merging the two last year. Restaurant Brands International announced an $8.1-million net loss, with increased revenue from Burger King partly evening out losses the company blamed on currency fluctuations, despite growth in sales at Tim Hortons. The report is also a chance to look at whether early cost-slashing efforts from the companies’ parent, the Brazilian investment group 3G, are working. The company is known for its aggressive approach, which has included early layoffs, and something called “zero-based budgeting,” which means rebuilding the budget each year from scratch. The practice has won growth for other companies 3G owns, but the Globe and Mail‘s story on 3G tactics has a clear implication: The day-to-day impact is intense stinginess (they use a more corporate word for it, something to do with “synergy”), and employees loathe it. Another 3G tactic is making use of an unequal relationship with suppliers: demanding payment within a month, while extending their own payment window with suppliers to about four.

Do bankers make good politicians? That’s a relevant question a week before the U.K.’s general elections, when bankers are both on the ticket for major parties and on the list of priorities (or problems) facing the British economy. About 10 per cent of MPs come from finance, according to a recent study, and the latest cohort (which are mainly running in safe seats) suggest that ratio will remain. This could include Nigel Farage, the head of the U.K. Independence Party, who is a former metals trader. On the one hand, it’s not surprising. After all, bankers have the money, connections and education to run for elected office, and polls show Britons trust bankers about twice as much as they do politicians (which isn’t saying much). But, eight years after the financial crisis began, and even as London’s status as a global financial centre is generally valued, issues of banking regulation remain contentious: A desire to heighten the bank levy, for example, has broad political support (the parties differ on how much the levy should go up), which recently prompted HSBC to threaten to move its headquarters back to Hong Kong. Other issues on the table include the legality of  “non-dom” status, which, not coincidentally, allowed the head of HSBC to live and work in London while having his income taxed in Hong Kong. According to a City lobby group, financial services employ seven per cent of the U.K.’s workforce and make up 12 per cent of economic output.

Need to know:
TSX: 15,344.08 (-64.25), Monday
Loonie: 82.64 (+0.47), Monday
Oil (WTI): $56.87, Tuesday (6 a.m.)


 

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