Electronics Manufacturing Industries and Profitability of Apple Inc - Report Example

Introduction

Structure and conduct of any industry or firm affect its performance. Computer and electronics manufacturing companies have been faced by structure and conduct issues that have negatively affected their profitability. This study will look at Apple’s case in the Computer and Electronic Product Manufacturing Industry with NAICS six-digit codes (334220 and 334111) (NAICS, 2017). This study through descriptive and exploratory method will use Porters five forces and theoretical framework of Structure Conduct-Performance paradigm in explaining whether Apple’s structure and conduct influence the performance of the industry over time. The Structure-Conduct-Performance paradigm states that the structure of the industry affects its pricing and, therefore, has an impact on the profitability of the industry over time.

Exploratory Analysis

Table 1: Profits

Years

Profits

1990

560,000,000

1991

412,000,000

1992

543,000,000

1993

-14,600,000

1994

315,704,000

1995

462,630,400

1996

-722,988,000

1997

-1,003,527,000

1998

389,555,900

1999

392,621,100

2000

609,724,650

2001

835,005,000

2002

85,600,000

2003

92,454,200

2004

101,320,000

2005

336,022,000

2006

1,344,021,100

2007

2,000,145,000

2008

3,502,777,000

2009

6,115,902,900

2010

8,241,067,700

2011

14,019,021,000

2012

25,922,753,100

2013

41,734,900,450

2014

37,048,476,200

2015

39,519,684,500

2016

53,399,501,380

Source: Apple Inc (AAPL) (2017)

Figure 1: Profits

Sources: Author (2017)

The trend shows that there has been an increase in Apple’s profit from the year 2006 to 2013 which was stagnating from 1990 to 2005. There was another decrease in2013 t0 2014 due to massive investment in R&D.

Descriptive and Causal Relationships

Performance

Firm size is an important performance variable. Large firms have financial and real resources and hence scale advantage which improves investment in information technology. The larger firms such as Apple have a division of labor in production which ensures that cost of production is reduced. Apple compared to its competitors have power over their suppliers, customers, and competitors. Large firms have the power to force their suppliers to adjust input prices to fit their needs. The price-cost margin of electric manufacturing companies in the United States has positive relations to the firm size. Apple has used its size in becoming more efficient compared to smaller firms because they have good management, marketing, technical and financial factors

Structure

The structure which could be defined by concentration ratio is important because it shows market power by indicating whether the industry is highly concentrated or low concentrated. Some features in industry structure including buyer and seller concentration, product differentiation

Concentration Ratio of Electronics Industry Players (CR4)

In the disaggregated level, however, the electronics industry concentration declines much more in the communication electronics which was followed by component, industrial electronics, and computers (Miglani, 2016). The only constant industry is the consumer electronics which only experienced a bit of decline in 1990 after which there was an increase in the same rate. Apple has been a leader in Apple PC maker using Windows from Microsoft and Intel. It has high concentration ratio than Microsoft, Google Inc., and Samsung.

Technology

Transfer of knowledge and technology in this industry has been diffused through liberalization of the economy. Liberalization of the economy is useful in allowing the import of capital as well as technology from countries that have well-developed technologies, therefore, closing the gap. Apple has used massive and effective technology in production, sales, and marketing of its products in the global market which has given it a competitive advantage over its competitors.

Market

Apple is a global brand with a strong presence in the United States market. It has also penetrated the global market. Apple has its biggest market in North and South America which generates about one-third of its total sales. Europe accounts for about 22% of Apple's total sales with the United Kingdom being the strongest European market. China is the fastest growing market with Japan market being the fourth largest iPhone market in the world.

Demand and Market Conditions

Economics dictates that with the rise of price, demand declines. The inverse relationship is that with the decrease in price for any product, there is an increase in demand. Supply also affected by price because with high prices firms will increase their supply. The market has mechanisms of adjusting the prices to satisfy both the consumer and suppliers. There has been a rise in demand for Apple’s product such as iPhone which was consumed by U.S consumers of the age bracket between 17-35 years (Apple, 2017).

Apple has participated in price cuts which had the effect of increasing sales. The iPhone prices were cut from U.S $ 599 to U.S $ 399. This drove the demand for the iPhone up. The demand was also adjusted up by the introduction of new iPod brand. This price cuts, however, affected in short run positively the demand of the iPhones but in the long run, will decrease the demand for the iPhones because the low price will reduce their market value to the consumers. Consumers are happy to purchase Giffen goods where even under high prices, demand still rises.

Potential for Entry

Capital requirement in the electronics industry is immense. The cost of machinery, buildings, and plants, as well as raw materials, are very costly and capital intensive and therefore acts as a barrier for the new entrant who may want to enter and compete with big names such as Apple, Microsoft, and other electronic giants. Electronics firms that have gone public are large and therefore enjoys economies of scale. Also, the high cost of R&D keeps of new entrants. However, Apple has immense capital that it uses in R&D as well as other large investments

Market Conduct

Market conduct can be observed through pricing behavior, integration and research, and development.

Pricing behavior in Apple Inc.

The company increases its market demand through differentiation thus making its product unique as well as attractive. The design is ahead of the design compared to its competitors thus enabling the company to have the power of setting prices above those of Samsung Electronics, Google Inc., and Microsoft. This has been possible with the help of product differentiation, brand loyalty, innovative advertisement as well as hype in launching new products (Wooldridge, 2015). Apple products have premium prices which attract consumers who feel that quality is related to premium prices.

Integration

Integration is another market conduct that Apple uses. It does not have its own manufacturing facilities but uses vertical integration in its product line. They engage in outsourcing the production tasks to other companies. The firm also has integrated horizontally where it has increased its market share through the occupation of the similar company which deals with iOS App Store, iCloud, iBooks as well as iTunes Store. Apple also uses different software from those of its competitors such as Samsung, Google Inc., and Microsoft. It ensures that this unique software offer makes the product to stand out. The firm also practices forward vertical integration through acquiring other companies in China to do initial manufacturing processes. It also engages in backward vertical integration it involves other companies in performing later production processes. Apple Inc. has also involved in conglomerate integration it merges with other firms coming from different industry and participating in the distinct production.

Research and Development

Industrial research and development have been experienced much in computer and electronics components industry. Large firms such as Apple have advanced research and development because of the economies of scale. According to the United States Securities and Exchange Commission (2016), in the United States, firm which employs more than 5000 employees has about 90% share in industrial research and development. However, small and medium size have efficient research and development compared to larger ones. Research and development influences profit and profit results from the effort of research and development.

Apple spends a lot of money in R&D which has been increasing over the years. According to Apple (2017), Apple Inc. spent U.S $ 10.39 billion on R&D. however, compared to Microsoft and other technology industry, it still lags behind in R&D spending. The R&D in Apple car, computer graphic, chips and overseas R&D centers makes the firm a huge spender on R&D. there is a connection between improving the products and price valuation in the market.

Summary and Conclusion

This report identified various variables that affect electronics manufacturing industries and how the market structure, market conduct, and profitability of Apple Inc. is affected by structure, conduct, and performance of the industry. The exploratory part looked at the trend line of profit of Apple Inc. while description looked at the causal effect of structure and conduct on performance.