What′s behind Apple′s constant profit surge? | Business| Economy and finance news from a German perspective | DW | 02.02.2018
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What's behind Apple's constant profit surge?

Apple has just reported another record quarter, seeing its profit surge despite slumping iPhone sales. We take a brief look at how the company manages to keep the show on the road.

Apple has boasted a 12-percent surge in bottom-line profit for its September-to-December quarter, making it a record-breaking three months for the US tech giant in terms of net income.

The company was able to report the positive result despite a drop in iPhone sales of roughly 1 million, year on year. You have already probably guessed how — the only way to do this is to increase the prices of your flagship products, and that is precisely what Apple has done.

A year ago, the average price for an iPhone was $695 (€556), but now it's $796, which is quite a hefty jump in the space of a year. It's not the first time a "sell less, make more" approach has worked well for the tech company.

Apple has never lost sight of its profit margin. Its new iPhone X is the company's most expensive smartphone to date, starting at $999 in the US, but you can also spend close to $1,500, if you go for the model with the biggest storage capacity.

Cost of components

Research firm IHS and others have estimated that the iPhone X costs roughly $400 to make. The price includes expenses for the display, a Bionic chipset, NAND memory, a Qualcomm modem and of course the FaceID sensor. The assessment, if true, would mean a profit margin of about 60 percent.

To be fair, one must consider wages, marketing and advertising costs on top of all that, but a net margin of 40 percent seems realistic.

Through the years, Apple has not lost its seemingly singular ability to make customers pay a premium price for products and yet still retain brand loyalty and affection — you could easily call this the firm's greatest achievement.

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Scott Galloway, professor of marketing at the New York University Stern School of Business agrees that Apple has managed "to combine the lowest cost of goods through mass production with the highest profit margins available only to luxury brands."

He adds that "this demonstrates the value of finding a way to appeal to irrational urges and instincts, like status and mate-worthiness, in your marketing and product design."

Keeping costs down

A look at the company's supply chain suggests cost efficiency is high on the agenda for Apple's strategists. Apple has previously come under fire in this area after a report by Amnesty International pointed to child labor in the manufacturing of smartphone batteries.

The assembly of iPhones is mainly done in China, with the majority of parts sourced from China and Taiwan. For Apple, these countries have the benefits of lower labor costs and more flexibility in the production process, all adding to the tech giant's ability to maintain huge profit margins in the face of challenges.

Moving more of the production cycle to the US — something US President Donald Trump is demanding — would certainly eat into Apple's profits. Having said that, it's fair to emphasize that Apple is also a huge employer in the United States. After all, the design, development, marketing and software coding for Apple's most famous products are all done at home.

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