Apple Pestle Analysis 2018
Kush, Jonathan (2018) "Pestel Analysis of Apple Inc. 2018" 123 Writing [Online] at https://www.123writing.com/sample/apple-pestle-analysis-2018
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In August 2018, Apple became the first company to reach a market capitalization of US$1trillion, beating old rivals such as Google, Microsoft and Amazon. The Cupertino based tech giant is known for manufacturing a wide range of iconic consumer electronics such as the iPhone, iPad, and computer software like Mac OS, iOS and online services like Apple Music. Founded in 1976 by Steve Jobs, Steve Wozniak and Ron Wayne (Dormehl 2018), Apple now operates 492 stores across 19 countries worldwide (Dunn 2017).
In 2017, Apple made annual revenue totaling $229.23billion up from $215.64billion in 2016 (Richter 2018) with a profit of $48.35billion up from $45.69billion in 2016 (Annual Report and Form 10K 2017). Apple’s three major markets include USA, UK, and China with a market share of 45%, 37%, and 17.4% market share respectively ahead of major competitor, Samsung with a market share of 29.5% in the USA, 35% in the UK and 2.2% in China.
Apple market share in key markets vs. rivals 2017
Sources: Mintel.com, Kantarworldpanel.com, Statista.com, Zdnet.com
2.0 Pestel Analysis of Apple Inc. 2018
In the following sections, the author undertakes a pestle analysis of Apple, delving into how various external macro factors including Brexit, China-US trade tariffs, Trumps tax cuts, demographic shifts and technological advancements such as artificial intelligence, are impacting Apple. Through Apple’s Pestel analysis, the author identifies the key drivers of change that constitute opportunities and threats in the external environment and how they affect the smartphone, tablet and PC markets Apple operates in.
2.1 Political factors
On 22nd December 2017, President Trump signed the Tax Cuts and Jobs Act into law, which included the reduction of the corporate tax rate from 35% to 21% and reduction of income tax rates. Like many American companies, Apple has in the past chosen to keep the majority of its external earnings and profits, outside the USA to avoid paying the 35% corporate tax rate.
Before Trumps tax cut, Apple would have been liable to pay $78.6billion in taxes for money held offshore (Hannam 2017). But with Trump's new tax reform, Apple could gain over $47billion in benefits if its profits are repatriated.
However, the tax reform indicates that companies are required to pay a one-time tax on oversees accumulated profits of 15.5% on cash and liquid and 8% on assets (MacMillan 2018). So far, Trump’s tax reform has helped boost Apple’s growth in earnings and shareholder capital returns as the company has returned $25billion per quarter this year compared to $11billion per quarter last year with a 19% increase in stocks (Kim 2018). The favourable tax environment has been one of the reasons that contributed to Apple stock rising to a level that catapulted it into the first trillion $ company.
2.1.1 Impact of China-US trade war on Apple
In addition, the China-US trade war greatly threatens Apple’s performance in China as the country accounted for over 25% of Apple's profits in 2017 and is predicted to become Apples biggest market (Edwards 2017). It is worth noting that Apple's revenues in China could be negatively impacted by any retaliatory moves by Beijing. In 2017, Apple gained over $44.7 billion in revenues by shipping 41million iPhones to China making it the 5th largest player in China’s smartphone market. If Xi Jinping and Trump’s trade war escalates to include a comprehensive US tariff on all Chinese imports into the US, iPhone imports into China could also be heavily taxed by Beijing in retaliation, which will raise their already exorbitant prices even higher and affect Chinese consumer demand for Apple’s core product. Even more, since Apple relies heavily on its Asian suppliers; Xi Jinping could limit its operations causing delays for Apple products (Kharpal 2018).
China did impose US$60billion worth of tariffs on American imports in retaliation for Trumps more than $200billion tariffs imposed on Chinese imports (Mitchell et al 2018). While Apple's core products including the iPhone, iPad and Mac computers were exempted from the $200bn worth of US tariffs imposed in September 2018, Apples wearables and audio accessories strategic business unit (SBU) which includes sales of more than 3.5million Apple Watches in 2017, were not exempted from the $200bn tariff tax imposed in August 2018.
A worst case scenario would be the core products also taxed as part of a comprehensive list of potential tariffs Trump wants to impose on all imports from China (Bradshaw 2018c; 2018d). Apple management has already warned the US government that existing tariffs will increase the costs of its American operations and force Apple to either raise prices or take a hit a hit to profit margins in order to compensate for the rise in duties. This in the end disadvantages Apple compared to foreign rivals (Bradshaw 2018d).
2.2 Economic factors
Economic factors in a Pestle analysis refer to positive or negative influences of an economic nature, which interact with the business environment of firms and influence strategy. Such macro influences include economic growth, unemployment rates, wage growth, inflation/interest rate policy or consumer confidence etc. Economic influences are often an outcome of political or legal policies given that government policy tends to dictate economic outcomes such as interest rates.
2.2.1 A brighter outlook for the UK economy
The UK economy held up fairly well in 2018 despite persistent concerns and uncertainty over Brexit. In April 2018, the Office for National Statistics (ONS) declared that the UK was beginning to recover from a year-long wage squeeze that had seen pay growth stagnate for more than a decade since the financial crisis (Strauss 2018). Prior to this, much of 2017 and early parts of 2018 were characterized by wage growth below inflation, which meant UK consumers have been worse off with less disposable income on hand to spend (Cocco 2018).
Despite this, the UK has been enjoying record numbers of people in employment with unemployment standing at a record low of 4% by August 2018, the lowest since 1975 (BBC 2018). Much of 2018 also saw the pound recover from its earlier depreciation following the Brexit referendum meaning that Apples UK consumers are no longer subjected to higher prices that Apple imposed immediately following the referendum vote in October 2016 when it, for instance, marked the launch of all new Macs and the company’s desktop computers with a 20% price rise across the line (Hern 2016). A combination of these factors has played a role in keeping Apple the biggest smartphone brand in the UK with Apple’s iPhone commanding a market share of 48% ahead of Samsung’s 35% (Statista 2018d).
2.3 Social factors
2.3.1 Demand for phablets
According to a Mintel study, full-screen displays, and larger screens are the major trends driving prices for smartphones. With the increasing demand for phablets and extended battery life being a priority to consumers, multitasking attributes and low prices can help drive smartphone sales since customers are attracted to low cost but high-quality products (Reynolds 2018). Apple’s smartphone rivals like Samsung and Huawei have already developed extra-large screen smartphones to capture the growing market.
However, to appeal to the increasing number of consumers who prefer phablets because of their multitasking capabilities and the need to provide a more affordable version of iPhone X which currently retails at $1000, Apple released a new iPhone version, the iPhone XS Max which, at 6.5 inches, has the largest iPhone screen Apple has ever made (Apple.com 2018; Bloomberg 2018).
2.4 Technological factors
Artificial intelligence is one of the trends revolutionizing the technology industry with nearly half of the US population finding digital assistants very helpful as they can be used to complete tasks via voice control (Bingle 2018).
Smartphones companies are therefore incorporating advanced AI functionality through digital assistants by combining voice control with AI and integrating commands with third-party apps which makes smartphones faster and more effective.
At the WWDC 2018 event, Apple announced its new iOS 12 which is powered by Siri, one of the big 3 digital assistants including Amazon’s Alexa and Google assistant. Apples Siri makes the operating system faster and highly personalized as the AI iPhone will understand where you are and where you need to be and bring suggestions like text “someone that you will be late”, in case you’re not on schedule (Perez 2018). Besides the AI-powered phone, Apple’s homepod wireless speaker is a new gadget powered with Siri and is compatible with Apple’s homekit. With its voice activation functionality, it produces high-quality sound and can control a smart-home. Apple HomePod has a 5% market share amongst smart-speaker owners like Amazon’s Echo having 76% and Google Home with 17% (Mintel 2018).
2.5 Legal factors
2.5.1 EU pushes for digital turnover tax plan targeting tech giants
Many times, businesses face threats from the external environment that come in form of legal requirements which stipulate new ways of working or new rules and regulations that companies need to abide by if they are to continue operating legally. For instance, in March 2018, the European Commission proposed a temporary levy aimed at taxing some of the world’s biggest tech firms from the USA such as Google, Facebook, Apple, Amazon, Airbnb, Uber for operating in Europe with claims that they pay little tax. The tax designed as a short-term measure as EU finds a way to tax profits based on where tech companies do business, is forecast to collect over $339billion in tax revenues for member countries over the next 10 years (Wallace 2018; Khan 2018).
In the proposed digital turnover tax, any technology company with annual global revenues exceeding 750million euros or with EU revenues exceeding 50 million euros faces a 3% tax levy on its revenues. If passed, this new legal requirement will likely affect the profitability of tech firms including Apple as they will face an extra £4.4billion tax bill yearly to operate in Europe (Wallace 2018).
2.5.2 Apple fined €14bn for violating EU law
While the digital turnover tax hasn’t been signed into law as it awaits backing from the European Union and the 28 EU countries (Blenkinsop 2018), Apple has already been forced to pay Ireland €14bn in disputed back taxes in May 2018 after the EU annulled the smartphone company’s sweetheart tax deal with Ireland citing it violated EU law (Toplensky 2018). This fine reflects an increasingly tough stance by the EU on the low tax bills of digital giants as it tries to work out a framework to tax tech companies operating in Europe. If passed, firms such as Apple will increasingly find themselves paying more taxes, a legal factor that will eat into their profit margins.
2.6 Environmental factors
Sustainability not only helps a company in waste management but can also help improve profit margins by eliminating waste disposal costs and create a company’s long-term shareholder value. According to Mckinsey, investors, and stakeholders seek to understand a company’s sustainability performance to determine its risks and opportunities like future investment plans because good sustainability adds long-term value to a company making it more attractive (Bailey and Koller 2017).
Therefore, to promote sustainability, Apple now runs completely on renewable energy with all its shops, data centers, and offices across 43 countries running on 100% green energy including 9 of its suppliers. In China, Apple has constructed solar and wind projects to restrain carbon emissions produced during the manufacturing process (Griffin 2018). Good sustainability performance makes Apple very valuable.
This has been a decade of Apple as demonstrated by the pre-eminence of the iPhone, an iconic device that’s revolutionized the tech industry, ushering in the age of apps or smart home. Thanks to the iPhone, which makes up two-thirds of Apple revenue, the Cupertino based tech giant became the first trillion dollar company in 2018. This overreliance on the iPhone leaves Apple vulnerable to falls in iPhone sales. Apple has already lost its second spot in the global smartphone market to Huawei, which overtook Apple last year to become the second biggest smartphone firm in the world based on volume shipment, after Samsung. It is the first time Apple is not in the top two global smartphone firms in the world since 2011.
Apple has also lost market share in China, falling from the top spot in 2012 to currently fourth in the Chinese market as it battles low-cost Chinese rivals.
Secondly, trade tensions between the US and China have already led to tariffs from both sides. While Apple's core products including the iPhone, iPad and Mac computers were exempted from the $200bn worth of US tariffs imposed in September 2018, Apples wearables and audio accessories, which include sales of more than 3.5million Apple Watches in 2017, were not exempted. Chinese consumers are also increasingly becoming more patriotic as a consequence, meaning they are increasingly supporting Chinese firms like Huawei in battles against foreign firms including Apple.
Thirdly, Apple is facing increased regulation in key markets including China, US and lastly the EU where a proposed digital turnover tax by the European Commission is pending approval. Apple has already been fined €14bn by the European Commission when in May 2018, it was asked to pay disputed back taxes to Ireland. If passed, the EU digital turnover tax will likely affect the profitability of many tech firms including Apple.
Apple's strategy to counter low-cost rivals and a highly competitive industry driven by cost and volume production has been to make the iPhone gradually more expensive and ultra-premium over time as a way to make up for decreased volume sales. The iPhone X at $1000 is the most expensive so far. While this may squeeze more ‘revenue mileage’ in the short-term, it is unlikely to stop the loss of Apple's market share in more cost-conscious markets like China and India, where much of future growth lies.
So far, the positives for Apple include Trump’s tax reform which helped boost Apple’s growth in earnings and shareholder capital returns. A brighter outlook for the UK economy has also cemented iPhone dominance in the UK where it commanded more than 48% of the smartphone market in 2018. Apple is likely to find itself a niche player in markets such as India and China especially if it continues on the high cost, higher value trajectory, sacrificing volume sales for higher returns.
Its battle with Android competitors in mature markets is also likely to revolve around technological developments especially in the deployment of advanced AI functionality to drive new device sales. It has built up strong resources and capabilities such as brand value or cash reserves to withstand any competitive challenge in the foreseeable future. It is still innovating as seen with the success of the Apple Watch, part of the company’s wearables and audio accessories SBU, the fastest growing division in Apple. Apple’s R&D is already working on launching Augmented Reality glasses that could further expand Apple’s winning constellation of wearable devices in the future, as part of its move into smaller and more personal devices. More importantly, Apples move in 2018 to buy Dialog, the maker of Apples power management chips, shows the importance Apple places on power management as it seeks to further differentiate itself from Android smartphone rivals who rely on the likes of Qualcomm for their core processors.
In other words, Apple is climbing up higher and higher up the value chain in order to remain still. Only time will tell if this strategy will pay off in the long-term.
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