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Clearing Billions in Profit Is About To Get Much Harder

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The math of netting $1 billion is daunting.

The mainstream financial media nearly wet its collective pants with excitement in reporting that the planet's corporations paid $1 trillion in dividends in 2013. What they didn't report is that clearing billions in profit is about to get much harder.

As a refresher, let's look at what it takes to net $1 billion in net profit.

You sell 10 products or services that each yield $100 million in net profit. There aren't too many such products or services. Aircraft carriers come to mind, but there are fewer than 40 active-duty carriers in the world. A semiconductor fabrication plant that costs $1+ billion might yield $100 million in net profit for its vendors, but there aren't many $1+ billion fabs around.

You sell 100 products or services that each yield $10 million in net profit. Examples include large airliners, power plants, etc.

You sell 1,000 products or services that each yield $1 million in net profit.

You sell 10,000 products or services that each yield $100,000 in net profit.

You sell 100,000 products or services that each yield $10,000 in net profit.

You sell 1,000,000 products or services that each yield $1,000 in net profit.

You sell 10,000,000 products or services that each yield $100 in net profit.

You sell 100,000,000 products or services that each yield $10 in net profit.

You sell 1,000,000,000 products or services that each yield $1 in net profit.

Let's consider a well-known example of a highly profitable company: Apple. Back in the good old days, when Macintosh computers were scarce and highly desirable, Apple famously netted $1,000 per computer in profit. (Please adjust for inflation to dial in the time-frame.)

So Apple had to sell 1 million Macs to net $1 billion.

Margins have dropped considerably as competition increased and the cost of components dropped. Can any company net $1,000 nowadays on a personal computer? It seems unlikely, as technology works to lower costs and increase supply, reducing margins.

Let's say Apple nets $100 per iPhone and iPad. If so, Apple has to sell 10,000,000 of these devices to net $1 billion.

But since low-cost Android phones and tablets can be had in China for $50 each wholesale, manufacturers without the cache of the Apple brand and features have to sell 100,000,000 such low-cost phones and tablets at $10 net profit each to net $1 billion.

At the consumer-products level, companies selling shampoo, diapers, etc. have to sell 1 billion items that each net $1 to reap $1 billion in net profit.

As the costs of production and the demand both decline, profits plummet along with prices and sales. Apple looks ahead and sees a market for smart phones and tablets that is increasingly saturated in advanced economies (i.e. everyone who wanted one has already bought one, and the market for replacements is not a high-growth scenario) and increasingly competitive in emerging markets (i.e. consumers might desire an Apple product but are unable to afford one, so they buy a $50 device instead).

Thus it is not entirely surprising that Apple is looking far afield for new opportunities to reap high margins and profits: Apple exploring cars, medical devices to reignite growth (S.F. Chronicle, subscription required)
 

Such a buying spree has ignited fierce speculation in tech circles and on Wall Street about Apple's future ambitions, especially as smartphone and tablet sales start to slow. Most of that speculation has centered on wearable technology or perhaps a souped-up upgrade of Apple TV.But Apple is thinking bigger. Much bigger.

A source tells The Chronicle that Perica met with Tesla CEO Elon Musk in Cupertino last spring around the same time analysts suggested Apple acquire the electric car giant.

The newspaper has also learned that Apple is heavily exploring medical devices, specifically sensor technology that can help predict heart attacks. Led by Tomlinson Holman, a renowned audio engineer who invented THX and 10.2 surround sound, Apple is exploring ways to predict heart attacks by studying the sound blood makes at it flows through arteries.

Taken together, Apple's potential forays into automobiles and medical devices, two industries worlds away from consumer electronics, underscore the company's deep desire to move away from iPhones and iPads and take big risks.

Allow me to state the obvious: Apple is grasping at straws in its search for new ways to net $1 billion. Electric autos are a small but growing market, but Mr. Musk appears to be doing quite well on his own at Tesla and has little incentive to cut anyone else into the deal.

High-cost medical devices depend on the tottering sickcare system for payment, and if the Affordable Care Act (ACA) has indeed provided the final destabilizing push over the cliff, counting on the gummit to pay full price for millions of costly devices/tests may not be a sure bet any more.

The math of netting $1 billion is daunting. You have to sell a million products or services that net $1,000 each to clear $1 billion. Say the battery pack on an electric car costs $12,000 now. It's certainly possible to net $1,000 on each pack at that price. But you have to sell 1 million packs a year to net $1 billion. Since electric autos are selling in the thousands, not millions, it will be a long time before anyone can sell 1 million battery packs a year.

As the price of batteries declines, it will become more difficult to net $1,000 per pack. By the time the price has declined to the point that someone can sell 1 million packs a year, the net profit per pack might be $100 rather than $1,000.

Here's the macro picture: China and the emerging markets are slowing as various credit bubbles pop, meaning the profits from moving commodities to Asia will plummet. The developed world is also depending on credit bubbles and the one-time consumption of seed corn (capital/equity) for its anemic expansion. Eating Our Seed Corn: How Much of our "Growth" Is From One-Time Cashouts? (February 25, 2014)

The point is this: technology lowers margins, and credit bubbles inevitably pop. Any company or nation that depends on maintaining high margins in credit-bubble-based "growth" is about to find that it's much harder to net $1 billion, much less $1 trillion.

 

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Wed, 02/26/2014 - 20:23 | 4482630 Looney
Looney's picture

Jumpin' from the rooftops is about to get much harder for'em as well! JPM, GS, et al, are about to start charging their employees for the special access card to the LEDGE. (me hopes so!) Voices in my head are saying that they offer options, i.e. jumping WITH a bungee cord or WITHOUT it...   ;-)

Loo(certifiable and freshly re-certified)ney

Wed, 02/26/2014 - 20:13 | 4482631 BLOTTO
BLOTTO's picture

Like we give a fuck that 'its harder for a corporation to make a billion dollars net profit'

The real point is: Has the world gotten better as a result of all these profits? Thats the real rub of it all...are we better people as a whole and making the future brighter for our children?

 

Wed, 02/26/2014 - 20:32 | 4482686 tickhound
tickhound's picture

So if "solving" these problems is a real goal, one needs to understand:

Products can't be allowed to maintain a lifespan longer than what can be endured in order to continue the cyclical consumption growth model. And its now more critical than ever that stuff break down.

This is called planned obsolescence, and it's become the centerpiece course of action in the extend and pretend game of "search for growth."

So when words like "sustainability" or "preservation" or "balance" are used by our corporate governmental whores, it's BULLSHIT.

These things are enemies of economic growth... And any actual "sustainability" works INVERSE to it.

And just like every cost that goes into the "cost efficiency" of a product, our own obsolescence is being planned. This is what kicks most people in the nuts right there.

Wed, 02/26/2014 - 20:27 | 4482688 James_Cole
James_Cole's picture

Thats the real rub of it all...are we better people as a whole and making the future brighter for our children?

Yes.

Wed, 02/26/2014 - 20:10 | 4482640 RafterManFMJ
RafterManFMJ's picture

I working on a new electric currency that will have 10 coins, each costing one ... Billion ... Dollars.

I'll retain one coin, for a value of one billion dollars.

Pretty clever, and if you act now you can get in on the ground floor.

Wed, 02/26/2014 - 20:22 | 4482665 Looney
Looney's picture

Hey, here's a new digi-currency - BitCan. It can be sold/exchanged in 6-packs, 12-packs, or triple-kegs.

I'm also working on the BitCunt, but i've been running into problems every 28 days with it...  ;-)

BitLooney

Wed, 02/26/2014 - 20:35 | 4482711 long-shorty
long-shorty's picture

Looney, is there any way I could talk you into changing your username or avatar? A young friend of mine, last name Looney, recently died an unfortunate death at a young age, and I keep thinking about him everytime I see your posts. I know its my problem and not yours, but I thought I'd ask in case you were willing to do a favor for a stranger.

Thu, 02/27/2014 - 06:40 | 4483776 DYS
DYS's picture

Are you fucking stupid?

 

P.S.  Sorry for your loss.

Wed, 02/26/2014 - 20:14 | 4482649 cynicalskeptic
cynicalskeptic's picture

It's EASY to clear  BILLIONS in profits when you get free money from the gov - no brainer.....

borrow a few trillion at 0% and invest at anything more than 0% - BINGO!!!!!  PROFITS!!!!

Wed, 02/26/2014 - 20:20 | 4482668 medium giraffe
medium giraffe's picture

I miss the days when 1 billion = 1 million million.  Cheapskates!

Wed, 02/26/2014 - 20:21 | 4482674 buzzsaw99
buzzsaw99's picture

Please, you sell 200M shares of FB from your personal account and bam, one beellion dollars.

Wed, 02/26/2014 - 20:30 | 4482695 new game
new game's picture

treasuries comes to mind, skim a 1/4 percent times billions lines the coffers with millions.

do it pomo x twice/week. nice gig. leave work on helicopter or jet and land at the vinyard.

not bad for a crony, harvard club member sanctioned by a privately held currency creator...

Wed, 02/26/2014 - 21:07 | 4482826 Kirk2NCC1701
Kirk2NCC1701's picture

When you're a CB or a bank that's a Preferred Friend of the Fed, you can conjure "money" (Currency, dammit!) "At Will", i.e. out of thin air or your rear end.

Current Production (Profit) rate is ~ $85 B/mo, or ~ $3B/day, or $1B/shift.  It must feel good to "do God's work", I'd imagine.  Then you can rain down these 'divine' benefits to anyone you deem 'sponge-worthy'.  Eg., The EU Friends, the PIIGS and soon to be UPIIGS (Ukraine included).  Heck, if the Turks behave, there might be TUPIIGS -- not to be confused with Tucows.

Wed, 02/26/2014 - 21:14 | 4482886 Rising Sun
Rising Sun's picture

Here's the answer - let's start fucking our wives again and have 10 kids.

 

That will make more consumers - that's good for inflation and consumption, isn't it???

 

BTW - TSLA is a con-game, much like shitcoin - electric cars died in the 1940s - they were not viable - could not produce enough cheap output, but natgas and diesel sure do and these two technologies have come a long way.

Remember hydrogen run cars?  WTF ever happened to those?  Right, DOA.

Thu, 02/27/2014 - 05:33 | 4483749 satoshi123
satoshi123's picture

never going to happen, the majority of american men, have gone to their dogs and aren't ever going back to the wife, ...

the men that aren't sleeping with the pooch, are with bath-house barry running fairy rings, and those who can't handle a relationship man or beast are on ZH circle jerking

Wed, 02/26/2014 - 21:35 | 4482967 Urban Redneck
Urban Redneck's picture

Where can one get an aircraft carrier for a mere one billion? - I could open a shop tomorrow and move 20 or more in a week at that price...

There are plenty of big ticket items out there (for those brave enough to venture into CapEx graveyard) - oil refineries 5-10B, ports 1-5B, even highways are $1-2M per lane mile (and that's w/o bridges or overpasses)...

While Obozocare may be bankrupting the US, there are also plenty of nations that don't have anywhere near the healthcare infrastructure that the US does, but what an American or European considers a hospital - is at least a nine-figure expenditure.

The sheeple market for Crapple products may limited, but crapples are neither durable nor capital goods (if they only they had a captive investment which could better direct cash to someplace other than shareholders...) -- but since a banker isn't getting out of bed for less than a $20M deal - the banksters will most likely focus their ponzi-preservation on the low volume high dollar transactions, and since the world is larger than the US and China, they still have some options left (if all else fails there could be booming business window replacement and other CapEx in Ukraine soon).

The herd of banksters needs to be thinned, but most of them are parasitic non-producers anyway. The problem is the survivors will be a perverse combination of the few can rationally attract and deploy capital, and the most perverted of the parasites.

Wed, 02/26/2014 - 23:00 | 4483251 TheRideNeverEnds
TheRideNeverEnds's picture

Apple is grasping at straws in its search for new ways to net $1 billion

 

Have they considered purchasing a few thousand shares of Tesla stock?  

Wed, 02/26/2014 - 23:52 | 4483388 cannuck
cannuck's picture

The problem is that nobody is differentiating between wealth that is created and wealth that is being re-distributed.  It has ALWAYS been tough to pay more than 10% annual dividends from producing goods since most markets for products have ALWAYS been competitive.  BUT:  when you are talking about Casino Capitalism, it is dead EASY to make billion, or a trillion, or just about anything else you want when you literally own the government and the central bank.  With that kind of return available, not to mention unfettered access to the pockets of John Q. Public's deposits in banks, insurance and pension funds, you can whiz up some what would otherwise be hyper-inflationary schemes and scams to re-distribute endless amounts of money as profit from purely speculative games at that table - and then you get to pass the bill for the increase in the money supply to the taxpayer.  Nice gig.

And we are collectively stupid enough not only to tolerate it, but celebrate it.

Thu, 02/27/2014 - 05:22 | 4483743 satoshi123
satoshi123's picture

First Trillionaire is HERE today ...

Charles Smith always trying to be rational, in an irrational world.

Look at all the BILLIONAIRES, I mean every geek with a computer a social networking idea is a billionaire,

Charles Smith worry's about how Hercules can find $1billion in sales, and NERD's just write some code and get a check.

This is FIAT to infinite, Charles Smith is just an AIPAC HO to create sanity in an insane world.

I say follow the TRilliionaire's fuck this billion shit.

First TRILLION-AIRE is Stewart Resnick, Israel / USA dual citizen, ... how many people here even know about Stewart Resnick the first Trillionaire.

Once Stewart Hit's the trillion he will be able to BUY country's and then AIPAC will have unheard powers, ...

 

How did Stewart Resnick become a TRILLIONAIRE?

Thu, 02/27/2014 - 07:30 | 4483802 zippy_uk
zippy_uk's picture

So does this mean that prices for *Stuff* get cheaper in the shops/webstores due to competition and that the West will have to decend in to making its own stuff because a credit based artificial margin which supports global offshoring is going to collapse ?

Geesh - we will have to spend money opening up factories and and kick people off welfare and give them old fashioned, socially defunct roles like "workers" in "Jobs" based on "productivity".

=============

Something tells me that although this is a disaster for ther 1% - the 99% should be screaming "bring it on"...

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