Article / 30 August 2016 at 13:06 GMT

Apple may protest EU fine, but China's the bigger picture

Managing editor, / Saxo Bank
  • EU Commission hits Apple with €13bn penalty over back taxes
  • Apple will protest but fine will not cause it a big problem
  • Shares slated for a 1.05% fall on the open
  • China remains the main focus of Apple's attentions
  • Apple has slumped to #5 position in share of China's smartphone market
  • CEO Tim Cook struggling to consolidate his position as Jobs' successor


What happens to the business in China probably matters more to Apple. Photo: iStock

By Martin O'Rourke

The European Union's €13 billion fine for Apple today may look like a kick in the teeth but will probably amount to little more than a blip for the technology giant before it embarks on what it does best — beating the bottom line and then some.

The fine, brought against the iPhone maker because the Commission ruled it avoided taxes by directing the bulk of its non-US sales and profits through synthetic corporate entities that were not obliged to pay tax in any jurisdiction, will hog the headlines, but for an entity worth in excess of $600 billion, it is a somewhat irritating annoyance. In footballing terms, it's a yellow card at most and some way short of a red card, and the subsequent lengthy ban that such a penalty entails.

"If you take the mean estimate of what analysts are saying about the size of the tax fine, it is not meaningful to talk about this", Saxo Bank's head of equities strategy Peter Garnry said during the daily global morning call some hours before the decision was made public. "it might have broader implications for the EU, but that is nothing related to Apple".

To look at it another way, the overall value of the company slumped some $50bn after it released disappointing quarterly results in April 2016 detailing its first drop in iPhone sales for 13 years. It went on to recover $12bn of that slide later that day, almost the equivalent of the fine meted today by the EU Commission's 'iron fist'.

How that affects the share price later today is anyone's guess with a 1.05% slide slated premarket, but in the aftermath of the verdict this lunchtime, Garnry told TradingFloor that while "the figure is more significant than initial estimates had suggested, the market is overreacting because it will take years to settle".

Apple lost approximately $50bn in value after it released quarterly results in April

Source. SaxoTraderGO

Apple CEO Tim Cook has already made it clear that the corporation will appeal if it considers the fine unfair, but one suspects that no matter how much noise Apple creates over the penalty, this is probably not that high in his in-tray as he fights his battles on a number of different fronts in his efforts to fill the shoes of predecessor Steve Jobs.

Apple's eye of course is predominantly trained on a different market. In China, Apple's smartphone sales continue to lose market share behind local rivals recently sliding to number five in total sales. This was not how it was meant to be when Apple opened flagship stores across the country spearheaded by glossy retail outlets in Sanlitun in Beijing and Nanjing road in Shanghai.

But local brands such as Huawei, Vivo, Oppo and Xiaomi have outflanked Apple for a combined market share of 53% in May to Apple's 10.8%, down from the year-ago share of 12%.

Alarmingly for Apple, the iPhone 6 had snaffled up a 25% plus share of the urban China market in the three months to January 2015 after its successful launch in late 2014.

It is indicative of a company that, while it has edged higher in the sale of high-end phones in China's tier-1 cities, finds itself outmanoeuvred in so many ways by its local rivals. It has got embroiled in various wrangles and regulatory disputes that have nibbled away at its position, but cost has been the ruling factor.

The Chinese may love a smartphone but they also love a bargain and with Apple's products considerably more expensive than perfectly functional local brands, the hoped for sweep of the 1.4 billion people market has not yet proved to be the engine room for Apple's relentless growth that had been envisaged.

Cook himself is feeling the heat too as he tries to emulate the extraordinary success of Jobs. At the time of the Q2 results, Garnry said Cook had "embarked on a classic deflection of the problems" pointing towards a strong Hong Kong dollar as a cause of Apple's weakened relative position in China.

"I believe this is a bad excuse deflecting the true cause which is Chinese mobile manufacturers are able to produce quality phones at half the price", said Garnry at the time.

It is almost two years exactly since Garnry's seminal piece 'The night Apple became average'. It seems that, just as then, Apple is in need of a gamechanger. And this, no doubt, is what the San Francisco giant is dedicating the vast majority of its resources to. In that context, the EU fine can be safely filed in 'the other business' folder.


Which model did she stump for? Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank

30 August
Martin O'Rourke Martin O'Rourke
From a close of 106.82, Apple dipped to an intraday low of 105.50 so far but has since pulled back above 106. It was at 106.19 at 1349 GMT.
30 August
Amiqero Amiqero
Dear Mr. O'Rourke
Do you think that new iPhone launch next week should boost Apple stocks? Or it will be medium-long term rising ?
31 August
Martin O'Rourke Martin O'Rourke
Hi Amiqero, I'm sure our equities chief Peter Garnry will be looking at this closely so I'd suggest following Peter here to keep up-to-date on all Apple-related matters.
31 August
Amiqero Amiqero
Thank you very much for your reply.


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