How Tim Cook Tries to Save Apple from Crash – The Accountant’s Approach

Hey.

The crisis in Apple is growing, and the current pandemic only increases the number of problems for the company. It is a mistake to believe that it was the pandemic that launched negative processes inside Apple, this happened long before, and the reason for this was one person – Tim Cook. The current crisis is very different from anything corporate America has faced over the past hundred years, and before that it did not de facto exist. There are no ready-made recipes for salvation, there is no understanding of how the situation will develop and what needs to be done today. But already now the plan of the game of the top management of Apple is outlined, and it begins to be implemented. Details of this plan will be announced when the first quarter results are announced, the announcement will take place on April 30. Today we can talk in detail about what they will tell us and what they will keep silent about. But first, let’s focus on the global economic situation to understand the conditions in which Apple will operate, as well as other manufacturers in this market.

Content

  1. Unemployment, recession and other delights of the new time
  2. Apple strategy for the Tim Cook era
  3. 2020 is a watershed year for Apple

Unemployment, recession and other delights of the new time

The pandemic launched the process of a global recession, de facto it had already happened before, but most countries in the world tried to hide it behind the inflated figures of the reports. The rise in stock markets in 2019 was rapid and speculative in nature. Those who were smarter were bullish in order to profit from this bubble, the rest followed the trend in the market – it seemed that the economies of most countries were growing and the future was cloudless. At the same time, all indicators of the real sectors of the economy were burning red, there was no need to talk about long-term growth, it was stagnation at best. But in a decent society, it is not customary to talk about this, and therefore most financial analysts, banks and their employees took this position: the problems are of a private nature and cannot in any way affect the general state of the world economy. This has always been the position of an ostrich hiding from problems rather than trying to look them in the eye. In some ways, the state of the global economy resembles what Apple is doing, the approach is very similar and almost no different.

It takes a long time to write about the current crisis, when countries that make up half of the world economy are closed. But for the sake of simplicity, I will only draw your attention to things that are important to understand in terms of Apple’s future. I hope that these points will not cause misunderstandings and their understanding will be the same for you and me. For simplicity, I will list them by numbers:

  1. The unemployment rate in 2020 will be the highest in recent history. Forecasts are a thankless thing, especially in a situation where there is no clear understanding of what exactly is happening. In the United States in 2019, the unemployment rate was minimal – 3.7% (data from the International Monetary Fund, IMF). In Europe it is 10.4%, and the eurozone is very heterogeneous, in developed countries the unemployment rate is lower, the further to the east, the higher it becomes. This number is average and does not describe the complexity of specific countries and economies. According to the IMF’s forecast, which can be called overly optimistic, in 2020 the United States will catch up with Europe in terms of unemployment, and in 2021 it will even surpass. At the moment, already 20 million Americans have applied for unemployment benefits, in the second quarter their number may reach 47 million! The statistics lag far behind reality, as officials do not have time to register the statements that come to them. In Europe, the situation is somewhat different, as business is trying to save jobs, people get their salaries (somewhere in reality, somewhere on paper). We are talking about the fact that tens of millions of people will lose their jobs around the world in 2020, this is a reality that has already arrived. Not everyone can understand the scale of the problem, but it is such that we are talking about a complete change in the economies of many countries.
  2. Zero economic behavior, restructuring of each state. At the moment, each state is trying to mitigate the economic consequences of the pandemic as much as possible, which has not even ended. Markets are saturating with money, printing presses pouring out new money that is not backed by anything, it is important to add liquidity. This process is uneven in different countries, somewhere we are talking about hundreds of billions of dollars, somewhere the amounts are much more modest. At the moment, of course, it is good when there is a lot of money that solves immediate problems. In the long term, the saturation of the economy with money leads to the fact that they begin to depreciate, the cost of goods and services grows, and the inflation mechanism is triggered. For example, a bottle of water in the United States costs one dollar. After the stage of saturation of the economy has passed, there will be a need to give loans, redistribute cash flows, the price of such a bottle will be at least $ 1.3. And it will be economically justified. In every country in the world, inflation will eat up incomes of the population, the cost of living will increase in all aspects – both for manufacturers, retailers, and for ordinary people. This will lead to an increase in wages, but it will not be a multiple of the increase in the cost of living.
  3. Consumer behavior will adapt to new conditions. People will have less money, they will not be able to use money thoughtlessly, economic discipline will increase. This is a matter of survival for many families, as a result, priorities will shift – avoiding travel, changing consumption habits and much more.

I identified three main blocks that will affect the market, including Apple, and now let’s take a look at how the company will deal with this crisis.

Apple strategy for the Tim Cook era

The root of Apple’s current crisis lies in the strategy Tim Cook chose as CEO of the company. Taking the place of Steve Jobs when he could no longer manage the company, Tim Cook had to prove that he was able to replace him. This was not just a stress test, but a war on two fronts. Within the company, there is a struggle with those who, on a daily basis, compare your decisions with what Jobs did, and who can challenge your leadership, express doubts, and do it out loud. Outside the company – an attempt to prove that nothing has changed and Apple remains on top. Difficult task? Not that word. Add a lot of publications in the media, where companies predict the collapse, since Apple has always been associated exclusively with Steve Jobs and it was impossible to imagine another manager at the head.

The strategy chosen by Tim Cook is very clear and fits well with his character. No sudden changes, close work with investors and improvement of financial performance. From quarter to quarter, Tim Cook spoke on a call at the end of the quarter that a new product category would appear, but it still did not appear and did not appear. Smart watches as a product are largely due to Johnny Ive, this is his toy, which was created by Apple without Steve Jobs. No major breakthroughs in the form of new product categories or devices at Apple have happened under Tim Cook. This is a reflection of his character, he does not like to take risks. Any new product is always a risk of how it may or may not be accepted by the market.

In the electronics market, it’s impossible not to take risks and protect yourself from failures, the more you try, the more often failures happen. But it is from such failures, with the right approach, that products are born that can become massive. In the Apple era of Tim Cook, this understanding has disappeared, it simply has disappeared.

How Tim Cook Tries to Save Apple from Crash - The Accountant's Approach

What was Jobs’s genius? The answer lies in the fact that he found an already existing technology, understood how it can be simplified to the limit and made more convenient for the mass consumer. He also had the gift of persuasion and understood how important PR is in order to correctly position a product. Jobs was not perfect, quite the contrary. But in his approach to the market, he succeeded. Tim Cook is his complete opposite, since he does not know how to convince, he does not like it. Moreover, if Jobs always insisted on his point of view and he did not care about the opinions of other people, then Tim Cook lives in a different coordinate system. Let me give you a simple example that says a lot. At Apple, under Jobs, all presentations were created under his direct supervision, he selected every person who could appear on the stage, and personally watched how he looked, spoke and how convincing. In this aspect, he was worried about only one question – how good the presentation would be in order to impress the audience and make them buy the product that he shows.

Under Tim Cook, presentations are boring and identical, built on the same tracing paper. At some point, one of the American journalists joked that Apple talks about the diversity of employees, the role of women in the company, but they are not present at the presentations, they do not appear on the stage. No comments followed, but after that, women working at Apple began to appear on the scene in all the announcements, the problem was quietly and peacefully resolved.

Tim Cook doesn’t like to take risks. The strategy he chose is very simple – he began to build on the strengths of Apple, to exploit the legacy of Steve Jobs. This means that no drastic changes in the policies of the companies could have happened. And then a strategy arises that the most important thing is money, the company must show record results, investors must be satisfied. The product that will provide revenue growth is the iPhone, other products are secondary and do not play a big role. In fact, Tim Cook buried Apple’s R&D department and made engineering secondary to marketing and sales. This is a common mistake when managers do not understand that technologies cannot be bought somewhere else, they need to be developed and refined. Tim Cook’s approach is completely different – why spend money on expensive developments if we can buy them and integrate them into our products. Sounds logical?

At first glance, yes. But let’s remember all the failures that have plagued Apple in the field of development over the years. The secret project Titan was launched in 2014, the project that Tim Cook was supposed to reveal to the world as a breakthrough for the company into a new field, in this case the field of self-driving cars. Initially, about 1000 people worked on the project, including from the auto industry. In 2016, several hundred developers were fired. In January 2019, several hundred more people fell under the knife of layoffs. Apple continues to research software for controlling cars, but apparently the company no longer has plans to create its own car. This is one of the projects that Apple has failed to do well.

There are many such projects, of course, they are not so large-scale. For example, you can look at Siri, this voice assistant froze in its development. As a result, the HomePod smart speaker turned out to be a failure, did not achieve any significant market share in its segment. It is possible to list failures for a long time, for example, this is wireless charging for several devices, which was announced, and then quietly and noiselessly all references from the Apple website disappeared. It is impossible to imagine such a thing in the days of Steve Jobs. The products that were announced eventually made it to the shelves.

Tim Cook has de facto destroyed his R&D laboratories and made their capabilities negligible. This is a scattered set of engineers who together do not represent a team; each solves his own, very narrow tasks. Why did it happen so? The answer lies in the approach of Tim Cook, it is mathematical, this is how people without imagination behave – accountants.

How to save money on development? The answer is obvious – to transfer part of the development to third-party companies, to make them responsible for the creation of certain components. This approach is widely practiced in the era of Tim Cook – why should engineers struggle to integrate modems, if Qualcomm can do this work, and their engineers will also configure the radio part? And here the flaw of this approach is clearly visible in the fact that when Tim Cook decided to go to war with Qualcomm, to reduce the cost of components from this company in order to increase its efficiency, the company immediately lost the help of engineers from the other side. As a result, the quality of the radio part of modern iPhones has fallen sharply, they are built on modems from Intel. The legal battle was lost, Apple paid all costs (billions of dollars), signed new agreements with Qualcomm that are clearly less profitable than previous ones. And all because the mechanical calculation of profit and loss did not work. The resulting iPhones turned out to be worse than those before, and this brought a lot of secondary problems.

If you think that only the development of hardware inside Apple suffers, then this is clearly not the case. Programmers are in the same toxic environment where initiative is killed, and task setting at least does not work as it should. We can see this by the speed at which new intermediate versions of iOS appear and by the way security holes are quickly patched in them and beyond.

Tim Cook, however, is on a roll, and his strategy has played a role. It was with him that the capitalization of Apple exceeded a trillion dollars, he learned to squeeze the maximum possible out of buyers (prices for all products went up, it all started with the iPhone X). That is, the increase in the average price of Apple products was due to the fact that since 2016 the company has abandoned the fight for sales in pieces and market share. It became important for Apple to achieve records in profit and turnover. And the peak came at the end of 2019, when the company showed record revenue. Another thing is that these results were accompanied by a slow slide in iPhone sales, which began all the same in 2016. It was just that the size of the fall was not so noticeable.

Research and development have been partially transferred to external partners, this has already resulted in a total lag between the current iPhones and Android smartphones, and it is growing with each generation.

An attempt to bring R&D back and strengthen it within Apple would be possible if the company tried to spend money on it. But it is too expensive for Apple, as sales records require squeezing money in every direction.

2020 is a watershed year for Apple

What does 2020 mean for Apple? This is a watershed year in which Tim Cook’s strategy of boosting the company’s stock, improving financial performance without meaningfully developing its core product will fail. The stock market has hardly reacted to the new economic reality; the fall of this inflated bubble is still ahead. And Apple, as a key player in this market, will suffer more than other companies (at the moment, the company, on the contrary, looks better than others, shares are falling less than any competitor).

How Tim Cook Tries to Save Apple from Crash - The Accountant's Approach

In 2020, it is impossible to sell ultra-expensive smartphones, which on average cost twice as much as their direct competitors. Even an audience loyal to Apple begins to look for analogues, since they are not ready to pay so much. The destruction of Apple brand loyalty began in previous years, now it is just picking up steam. And this is Tim Cook’s biggest mistake, since the brand is the only thing that allowed him to take twice as much money from a particular customer.

In fact, Apple needs an iPhone that will have all the capabilities of competitors and at the same time differ in cost from a direct competitor by 10-15%, this will be a markup for the brand. The company does not have such products and will not appear, it is unable to create them (hello R&D, we have successfully killed). The expectation that the 5G iPhone will shift sales and boost demand seems naive to say the least. Most operators will revise their plans to launch 5G networks, they are becoming too expensive in the current realities of the market. We are not talking about 5G becoming a sales driver; this is no longer enough. Moreover, in 2020, the market will be flooded with 5G Android smartphones at a cost of $ 300-400. The iPhone will not be able to provide such a level of cost.

Apple is great at manipulating information, and here and there leaks appear that paint the company’s prospects in a rosy light. From the latter, take a look at this publication.

Sources suggest that Apple wants to ramp up iPhone production by 4% over the next 12 months. It follows from this that the company believes in the success of the new generation. More interesting are the details, they say that 50% of all manufactured devices will be on the 2020 iPhone SE. That is, the company will not have another inexpensive product in noticeable volumes.

And this is very bad news, as there are four iPhones waiting for us in the upper price segment! The expansion of the model range is an attempt to increase sales by expanding the range, this trick was already done under Tim Cook (this is how the “pluses” appeared, the new iPad diagonals). Inflating the lineup in a difficult economic situation is a bad idea for a player like Apple, losing focus, blurring the perception of the brand.

But the most important thing is that in 2020 the number of those who are physically able to buy an iPhone and have money for it will sharply decrease. We recall the unemployment rate, the new economic reality.

What will people who can’t afford an iPhone say? Some of them will remain silent. Many will simply say that the iPhone is bad for such and such reasons, including the price. And for X dollars / rubles / yuan, they will be able to buy a product from company Y. The negative background for Apple will intensify, and it will constantly haunt the company and influence sales. In Jobs’ time, the company built the image of a successful manufacturer, and the level of sales is extremely important in this image, today it is breaking down. After the fall in the stock market, Apple and how much the company’s shares fell will also be widely discussed. This will all affect the brand and its perception.

Tim Cook has almost no opportunity to change anything. The focus on services and content sales looks odd as this category grows, but growth itself has slowed. Moreover, the growth is quite artificial, for example, a subscription to Apple TV + is given to all iPhone buyers for one year, and conditional money for this subscription is taken out of the cost of the device and credited to the service account. A kind of balancing act with numbers to inflate the performance of the service and demonstrate its success.

The geographic factor for the growth of services has already been exhausted, the other day Apple announced that it was entering dozens of countries with iCloud, Apple Music and other content. These are mainly African countries or microscopic markets with a lack of effective demand. Rather, it is good PR, rather than a notable business. In some countries, the cost of starting such a business will be higher than the profits generated there.

How Tim Cook Tries to Save Apple from Crash - The Accountant's Approach

For the market in 2020, Apple products are becoming very expensive. And this is a fact that has already happened, demand in the second half of the year will shift to the middle price segment. And it is impossible for Apple to be outside of this process. They want a product like the iPhone SE, but with different specs.

What will happen to Apple because of this? The answer is obvious – sales in piece terms will drop. All of the company’s plans for the production and procurement of components will not be fulfilled. In 2019, they did not happen anymore, and the company was forced to pay a penalty to suppliers. So, for the fact that the screens were not redeemed from Samsung Display, Apple paid a forfeit in the amount of $ 684 million.

Trifle? I don’t think so. For Apple, the number of such payments will increase, as it is impossible to maintain production volume in 2020. But at the same time, partners will not forget to collect forfeits, since times are difficult and you need to save every penny. The threat that Apple will no longer turn to a supplier is no longer valid – companies need funds here and now.

Let’s add to the picture of what is happening the losses from the closure of the Apple Store in all countries of the world (in China today they are already open, but were closed earlier). These are tens of millions of dollars to be paid for their downtime. First quarter results will not include the impact of these factors, they will be low, but not catastrophic. More interesting is what the company will show in the second quarter, when all economic activity in many countries, including the United States, has come to a standstill. And these data will show the volume of the fall, Apple will not be able to recover from it quickly, there are no prerequisites for this.

The current economic situation is unwittingly pushing consumers to try something new, and suddenly it turns out that Android is not at all that complicated, works well, and does not have serious flaws. This will add to Apple’s problems as well.

Tim Cook’s strategy could work in the long term only in one case – if the company maintained the quality of the iPhone and other products at the level of competitors, or there was no strong lag, and there were no global crises. But Apple was unable to do the first, and the crisis just exposed these problems. And the rate of Apple’s decline is accelerating, the company in 2020 will feel much worse than its direct competitors. This is not Apple’s time.

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