The Reason Apple's Margins Are Declining

Airpods are more expensive to manufacture than Macs and iPhones, affecting corporate margins. 

And the trade war with China has increased costs and decreased sales of Apple products in China, which includes the sale of lower priced phones for that market. JL

The Hustle reports:

 Apple’s gross margins have fallen from 40.1% in 2015 to 38.2% in 2020. Airpods, because of their rounded case and miniaturized parts, are harder to manufacture and lead to greater % of defective devices, which increases cost of goods sold (and decreases margins). Mix shift, which describes how gross margin is affected by blending together high- and low-margin hardware. If wearables have lower margins than Macs and iPhones, that explains part of the margin decline. (And) the recent US-China trade wars are a double whammy for Apple on the consumer side.

Here’s something you won’t find in a Black Friday discount bin: Apple products.

To maintain its high-end appeal, the $2T tech giant is extremely careful around its pricing. Rather than deep price cuts, Apple’s Black Friday promotion this year offers gift cards as enticements.

Clearly, the Cupertino colossus knows what it’s doing: it pulled in an astonishing $60B in Q3 2020 (for reference, Facebook’s full-year 2019 revenue was $70B).

Apple’s margins have been sliding for years, though

As highlighted by Jay Goldberg and his consulting firm D2D Advisory, Apple’s gross margins have fallen from 40.1% in 2015 to 38.2% in 2020.

What’s happening?

D2D offers up these potential reasons:

• More services revenue: Apple bundles a number of offerings under “services.” While content is likely a margin drag, Cloud Services, AppleCare, and Advertising are high margin.
• Increasing component costs: Over the last 5 years, Apple has upgraded its screens and radio-frequency components. D&D rejects this rationale because Apple was upgrading components even when margins were previously expanding.
• Wearables: Airpods -- because of their rounded case and miniaturized parts -- are likely harder to manufacture and lead to greater % of defective devices, which increases cost of goods sold (and decreases margins).

Wearables could be part of a larger issue…

… known as mix shift, which describes how your gross margin is affected by blending together high- and low-margin hardware.

If wearables have lower margins than Macs and iPhones, that explains part of the margin decline.

2 other drivers of mix shift: China and the SE phone

The recent US-China trade wars are a bit of a double whammy for Apple on the consumer side:

1. Apple is losing share to Chinese phone manufacturers.
2. China’s Apple’s sales are skewed toward the highest margin high-end iPhones (losing out on this business pulls margins down).

Also in 2016, Apple released its entry-level iPhone SE (“foray into sub-$400 devices”). Apple said the SE boosted its margins but the move signaled that it was ready to expand its total addressable market, outside of high end.

Not long after, Apple stopped disclosing iPhone unit numbers.

So, there it is: mix shift seems to be eating into Apple’s profits.

Now, go get those gift cards.