FT Weekend Thoughts Apple's material risk, China's plan, the next virus and more
Apple warns of ‘material’ financial risk posed by legal challenges to App Store. I think this is the real reason for the weakness in Apple and it should mean that the Apple supply chain sees a nice bounce on Monday. It is something that has been written on before but this is the first time that Apple has formally acknowledged that there is a major issue.
It is acknowledging the political threats to its business, most notable the potential ‘material’ hit to its App store revenues as the model it operates is challenged. At present it takes a 30% commission most purchases. Effectively this is how it monetises the whole of its platform. It said “If the rate of the commission that [Apple] retains on [App Store] sales is reduced, or if it is otherwise narrowed in scope or eliminated, the company’s financial condition and operating results could be materially adversely affected,” it said.
There is no definition in money terms of ‘material’; SFC uses 5% as a rule of thumb. With reported revenues of $275bn and net income of $57b even 5% would be significant.
More importantly Apple would then have to find other ways to make up that income in order to maintain the level of services that it currently does.
The current threats are from the lawsuit from Fortnite and the antitrust probe from the European Commission and there is potentially a similar investigation from the US DoJ.
There was also recently the establishment of the Coalition for App Fariness again looking to lobby against what they considered excessive fees.
There is unlikely to be a swift resolution of the matter but analysts are obviously going to have to reflect the greater risk to future cashflows. It will also be interesting to see how Apple might seek to change its monetisation model to other parts of the business. The main problem is that in most cases that will involve raising prices to end users rather than to other services providers.
So good news for iPhone supply chain names on Monday. Slight +VE for the App Developers but at this stage it is not yet certain they will get a reduction on the fees they are charged. For the end users the risk is that we will get higher charges for the services we use.
See also The iPhone is still Apple’s star turn for Wall Street. Looks at the prospects for the new iPhone and the threat to Apples existing business.
China drafts five-year plan with US in mind. Strong domestic market sought to counter Washington bid to hamstring tech sector. Notes it doesn’t matter who wins the US Presidential Election decoupling between the US and China looks set to continue. It cites an official who acknowledge that China was lagging in being in control of some key technologies and that whilst the aim is to catch up it is not going to happen in the short term. So key will be keeping savings rates reasonable so they can keep investing in R&D.
A key focus was on “scientific and technological self-reliance” and a “strong domestic market”. I think the leadership was surprised by how much leverage the US had in technology, especially semiconductors and the impact that could have on Chinese companies and the economy. It has I would think put President Xi under considerable pressure; since he was the driver behind made in China 2025 with many questioning how he had not expected such a response from the US.
Achieving technological self-sufficiency will be tough, take time and involve significant risk. As the article Chinese groups go from fish to chips in new ‘Great Leap Forward’ 13 Oct noted 13,000 companies registered themselves up as being semiconductor companies in the first nine months of 2020 many with no experience in the sector. In previous drives money has been wasted on projects that did not come to fruition mainly because the money was squandered; the most common even being diverted into property.
The five year plan also notes the need for other sectors like biotech, New Energy Vehicles and mentions ‘dual circulation’ and 'indigenous innovation’.
Previous plans included growth targets and it is not clear if the next one will include the as they haver lead to waste in the past; instead the emphasis is likely to be on 'high quality growth’ and environmentally friendly. I think that will require a significant mind set change for many companies and people that see profit as the main driver.
Interesting to note that one official involved warned “Many government-backed funds have invested heavily in high-tech projects that in reality are nothing more than a mixture of commercial and industrial real estate and outdated factories. “We need to realise that new [technologies] aren’t like roads and bridges that can be completed with a lot of funding.”The official added: “Their main investment feature is uncertain returns and a lot of government-funded projects may end up going nowhere . . . We need to let market forces decide how much and where to invest.”
That will be key but it does not sit well with the command economy and certainly not one whether decision making in increasingly concentrated in President Xi who has a dislike of critics. Also the increasing influence of the party on the board of companies could be restrictive.
Additionally for semiconductors it is not just getting the machinery which is expensive in itself, it is also a matter of developing the designs and process without using US originated licences. That will take time and at the same time the rest of the sector is moving forward with more and more advanced processes and designs. It is going to be a tough call. For investors picking the good companies that really do have the vision and ability to implement it will be key; as ever good due diligence will be necessary.
Mitsubishi halts SpaceJet project to refocus capital A wise move in the current circumstances and it is looking to shift capital to its renewables business. It hasn’t said it will exit the commercial aircraft business but will monitor the situation. It is a notable read because many of the problems with the project came about because it lacked industry experience and changes in leadership.
As China gears up to make strides into the semiconductor business it will need to ensure that it doesn’t make the same sort of mistakes.
Not mentioned in the article but Mitsubishi Heavy Industries was appointed Friday as a main contractor to develop Japan's own next generation stealth fighter for launch in the 2030s.
Fresh virus curbs set to overshadow bounceback in eurozone. Key is that the data is showing that the recovery may have stalled because of the resurgence of covid. Whilst the date has been improving EU nations are still significantly below their pre-covid levels.
ING are particularly bearish thinking that a double dip downturn is unavoidable.
Interesting Germany has been doing well because of Exports to China, but if the global economy slows, then China is likely to see a slowing in demand for its goods and hence less demand for imports from Germany. The vicious circle continues.
Naspers’ $5bn buyback signals unease with tech valuations. Best know for its 31% holding in Tencent; 'said yesterday that the share buyback was “a good use of capital, given full market valuations evident in consumer internet M&A” and a large discount in the group’s $157bn market value versus the worth of its assets.’ Interesting that investors ascribe little value to its other assets and by inference to the managements ability to leverage them or make further acquisitions. But the buyback will no doubt please holders.
Fed eases rules on loan access for small businesses. Loans can now be as small as $100,000 (from $250,000 prior), in the hope that more people will use the facility that so far has only seem 0.6% of its capacity used. The problem is that these are still loans that will have to be repaid and small business owners tend to be cautious because it is their money and their business they know they need to see demand for their products or services in order to be able to repay any loans taken out. Demand for those goods our services is something the Fed does not have control over.
One sector that had been pushing for changes to the terms was the Real Estate sector, but they are looking for more lienent terms and its unclear if this move satisfies them.
Article notes that use of the 11 lending facilities the Fed introduced in March; few have seen significant use. Powell himself noted that 'there has not been huge unmet demand from smaller businesses, as many are wary of taking on additional debt.’
Banks emerge as bright spot in bleak landscape. Third-quarter earnings have left many lenders upbeat despite woes facing the pandemic-hit global economy. A good read. As always two sides; one wanting to start paying dividends as the sector has seen a bounce others saying it is too early. Too early because a new wave of covid is hitting, too early because whilst we haven’t seen defaults it doesn’t mean they will not come as some Government support programmes end.
The cynical might say they only want to restart dividends so they can justify their bonuses.
It is probably fair to say that the outlook it good because covid has hit the lower income groups much harder that the middle class, white collar workers who have loans, credit cards and mortgages. I think the big problems will come from the likes of the CMBS. I also think the some of the higher geared property companies in the US and Europe could face more problems, and whilst we hope that the second or third wave of covid will have less impact we don’t know. I suspect that there is a large group of companies that could be teetering, hoping they can pull through.
In my mind it would be prudent to conserve cash as we enter the winter period which could see further spikes in new cases and also the potential for new variants to covid-19.
That said there are a lot of investors and pensioners that are suffering because they planned for dividends. As David Herro, vice-chairman of Harris Associates, a $90bn asset manager that owns top-five stakes in Lloyds, Credit Suisse and BNP Paribas says
“They have plenty of capital, the virus will fade, new lockdowns aren’t as severe and the paying of dividends is a form of stimulus,” Mr Herro added. “Capital hoarding means less money is multiplied through the economy and is destructive to growth and recovery.”A good read see also
Mortgage industry is safe as houses on a faultline after taking free Fed money. It’s been written about before but a number of these companies have IPO’d on the basis of stressing the upside of the current environment; housebuilding boom, and cheap mortgages. Whilst discounting the evictions, foreclosures, job losses from industry consolidation etc which they say will be address by the next congress. An interesting read.
FT BIG READ. US ELECTION Trump’s corporate trouble Angered by his management of the pandemic and his election comments, some business leaders have distanced themselves from the president. The rift could be a long-term problem for the Republicans.
The article notes that many leaders became disillusioned at his early business group meetings where nothing got achieved.
Nice quote “I would bring Donald Trump to our CEO summit years ago and the top tier CEOs would say ‘Don’t bring him in here. We don’t consider him a top CEO’,” he recalls. When he told the president this after his 2016 election victory, Mr Trump replied: “Well, they’re all coming by to see me now.”
An interesting read but I think many business leaders do doubt his business acumen and his honesty. For a lot of the public, who are the ones that count, it seems to be less about that. I guess it is not surprising that the majority people are increasingly less interested in politics
Investors weigh up key Trump versus Biden policy battles. Wall Street analysts focus on taxes, infrastructure spending, tech regulation and energy. Looks at the pros and cons for those 4 areas. An interesting read, it basically points out the changes Biden would make to the current position. If Trumps wins we get a continuation of the exiting. Trump did promise huge infrastructure spending which hasn’t happened. Healthcare changes are still promised and trade wars would likely be extended. Without more tax cuts it would be difficult to see how Trump would continue to generate more upside for the markets.
Read also Treasury sell-off gathers momentum amid bets over how high yields can go. Along with Investors look to the reflation trade after US election.
Obituary A consummate BBC frontman with a talent for improv. Frank Bough Broadcaster 1933-2020. I wonder if the scandals that brought his career to an end would even make it into the pages the News of the World if it were still going today. He was a great presenter.
To contain Covid-19, we must learn from each other Looks and contrasts the attitude and practises regarding covid in the US and UK. I agree with the premise that we need too learn from each other and think that both Europe and the US could learn a lot from how Asian countries have reacted and dealt with the issue.
Ant and Covid have made the humble QR code a hit. Looks at how Masahiro Hara deigned the QR code and Denso Wave realising that the QR code had greater potential and did not enforce its patent rights. A move that has changed the world.
Twin deficits and risk of foreign outflows threaten dollar Looks at the possible moves in the USD as pressures grow from rising trade and budget deficits combined with expectations that ultra low interest rates are here to stay.
For something different
How to predict the next pandemic — and stop it There are about 700,000 viruses with the potential to infect humans — and climate change is exacerbating the spread. Leslie Hook meets the scientists working to keep the next epidemic at bay