Tag Archives: recession

Why bank lending can never be the same again

The government has said on a number of occasions that it wants the banks to resume lending money to home-buyers and small businesses at the same levels as before the start of the credit crunch. There’s only one problem: doing so would be a sure-fire way to bankrupt the banks. And either the government doesn’t know it (in which case it’s stupid), or it does know it (in which case it’s lying to the public).

If you want to understand why bank lending can never be the same, look no further than Robert Peston’s post on HBOS’s last financial results as an independent entity. HBOS was amongst the most willing of lenders to both companies and home-buyers, and it has ended up with 47% of its business loans going bad. And, when you’re lending a total of £116 billion to business, that’s a lot of potential for loss – a risk which will now have to be paid for by the taxpayer.

Continue reading

Is Apple recession proof? The answer is “no”, but…

Jason O'Grady has a good post summing up the theory (first espoused by American Technology Research analyst Shaw Wu) that Apple is "recession proof". In fact, I think there's good reason to think that the opposite it true, but also that the bright points for Apple outweigh the bad ones.

Where the iPhone sits

The first thing to think about is to break down Apple's product lines, because the economy will affect each in different ways. Perhaps surprisingly, I think iPhone is probably the least vulnerable of the product lines. The upfront cost of the iPhone is heavily subsidised by phone companies, and that will make it a tempting upgrade when someone's phone contract runs out. In tough times, a luxury product with a low upfront cost is likely to be quite attractive.

How will the iPod perform?

For iPod, there are good and bad points. People who already own one will probably put off buying a new version, and as the market for music players reaches saturation point the upgrade market will be the most important one. However, the speed of development of technology means that someone replacing what was a top of the range iPod from two years ago can get a much lower cost replacement – and low-cost luxuries do well in downturns. So, while iPod sales will head down, they won't get hammered too hard.

Mac: from market share hero to market share loser?

The big question mark is over the Mac. Over the past couple of years, Mac sales have been nothing less than stellar, with an overall market share increase compared to the rest of the computer industry. The reasons for this have been partly due to an exceptionally well though-out product line, the failure of Windows Vista to impress virtually anyone, and improved mind-share for Apple in general thanks to the iPod and, more recently, iPhone.

But Apple's pricing remains on the high side. That's not to say that they aren't close to the prices of equivalent Windows-running hardware (sometimes they are, sometimes they aren't). If you want to spend £1000 on a laptop, Apple offers good options – and even better ones if you want to spend £1700.

In tough times, though, the number of people prepared to pay that much shrinks, and the number of people prepared only to stretch to, say, £500 increases. Even people who have money are more inclined to be careful with it. And for those people, Apple presently is not an option. Some customers might defer buying anything until they can afford a Mac, but if you have a four year old PC which barely runs Windows, or a child heading off to university, you're going to be buying something very soon.

So the question isn't "will Apple sales be hit by the recession?" – they clearly will – but whether Apple will be hit harder than the rest of the PC industry. The bare-bones analysis of pricing suggests it will, but you also have to take into account the momentum that its increasing market and mind-shares have given it. I'd expect Apple's Mac share growth to continue over the next couple of quarters, but decline after that if the recession continues. At some point, if the recession continues long enough, they will start to decline if Apple doesn't change its product line mix – but that decline could be a year away, and depends on a whole host of macroeconomic factors.

The management factor

The other factor which needs to be taken into account is the incredibly well-managed nature of today's Apple. The company, probably more than any other in Silicon Valley, has exceptional aggressive control over costs – it doesn't waste money. This, plus its supply-line management, will help it ride out the worst of the recession. When the recession is all over, the shareholders should give Tim Cook a big bonus, because as COO he's turned Apple from a management joke into one of the best-run businesses in the world.

The product mix: time for a "value" segment?

Given that the biggest potential weakness seems to be the lack of lower-cost products, should Apple introduce a new "value" section into its product matrix? Some would argue that this would be counterproductive: that part of the allure of the Mac is that it's firmly in the high price/high value segment. There's something to be said for this, and whether sticking with the strategy makes sense depends almost entirely on how long you think the recession will last. Apple could easily ride out six months to a year of slowing sales in the high-price segment, thanks to its vast cash reserves and excellent cost management.

The danger would be that if Apple starts to under-perform the rest of the market, it could lose a lot of the impetus it has gained over the past year or two. There's also the possibility that, if the recession last long enough, consumer confidence will erode to the point where its Mac sales will fall off the metaphorical cliff.

These risks are, undoubtedly, the ones which Jobs and his team have been weighing up for a while. Given the company's cash and income situation, I don't expect any rush to introduce "recession-buster" low cost products. But I'd be very surprised if Apple wasn't working on them, as a hedge against the downturn lasting.

Could Apple create low-cost products? Of course: in fact, it already has done. Both the Mac mini and the iPod demonstrate that, if it wants to, it can produce exceptional, high-value low-cost products. The mini is a bit of an unsung hero in Apple's current product line, and its easy to imagine that it could produce a laptop which fulfill the same purpose in the portable range.

So overall, it's fair to say that Apple isn't recession proof. No company is. But it's not in a disastrous position, and it's incredibly well-managed. This buys it the time to either ride out a shorter recession or readjust its product strategy if the downturn is likely to be a long-term thing. It's revenues and market share aren't going to fall off a cliff any time soon.