Charles Duhigg is on a roll.
In January, the New York Times
reporter wrote a lead article
on how Apple’s
(AAPL) global sourcing strategy benefitted Chinese workers at the expense of American jobs. On Sunday his lead story
focused on Apple’s complex tax planning, and how its use of various strategies and legal entities, not just around the globe, but also here in the United States, dramatically reduces the company’s tax burden.
At the core of both of Mr. Duhigg’s front page articles is transnational corporate mobility, a privileged few individuals and small businesses have to move both revenue and expense streams in an instant to whatever location around the globe maximizes the bottom line.
Lower taxes in Ireland? Move there.
Lower labor costs in China? Move there.
An uptick in demand in Brazil? Move there.
And there are legions of consultants, logistics experts, bankers, etc. all ready to help. As they say on TV, for transnational corporations “Operators are standing by,” ready to aid however they can to deploy global, just-in-time profit-maximizing strategies.
In periods of rising social mood, no one cares. What is good for the transnational corporation is good for the consumer, governments, and small business. Growth and lower costs fuel a virtuous economic cycle.
In periods of falling mood, however, everyone cares, as any advantage you may have appears to have come at my expense. We perceive things as a zero-sum game. (See: In Our Zero Sum Economy, Are You Winning or Losing?
A year ago, I offered that deteriorating social mood would force transnational corporations to answer a very simple -- albeit for them, a very awkward -- question: “What passport do you carry?” (See: Pledging Allegiance: Multinationals in an Increasingly Nationalist World
After reading Mr. Duhigg’s column, I feel like my question may not have been complete. Perhaps I should have also asked: “And what state driver’s license do you carry as well?”
Today, in our current dour mood environment, the answers to these questions matter to voters, and not just here in the US, but also in Europe. Nationalism/localism is on the rise and citizens want to know where corporations stand, and more importantly, where they really sit. Today there is a world of difference between a headquarters or manufacturing facility and a legal domicile, between local jobs in my community and profits that seem to benefit faceless shareholders somewhere else. (See: 2010: The Robin Hood Economy
That Mr. Duhigg has chosen to highlight the significant benefits of transnational mobility for what is arguably one of the world’s most popular corporations, Apple, is saying something. But other S&P 500
leaders would be wise to sit up and take note. This is not an Apple tax or labor issue. This is a migration of the 1%/99% divide from the consumer to the corporate sector -- the perception that big transnational corporations get benefits that those on Main Street do not.
From my perspective most transnational corporations are woefully ill-equipped and ill-prepared for this rapidly changing sentiment. For most, it is hard to be truly local in 200 different countries. Worse, and like many of their too-big-to-fail banking brethren, the leaders of most of these companies don’t understand why their actions are being scrutinized and why they are being vilified. They completely miss the clear connection to changes in social mood.
One segment that does get the public sentiment shift, however, is the public sector. Where governments once competed aggressively to bring in and retain transnational corporations, I sense they are now looking for ways to capture more of those firms’ record corporate profits. Last week, for example, French presidential candidate Francois Hollande suggested that if elected he would not permit “profitable corporations” from laying off current employees. I suspect this is just the beginning of what will be a long list of less-than-subtle “burden sharing” efforts by governments with the private sector.
When I raise this point with equity investors, most suggest that what we are seeing both here and in Europe is nothing more than campaign-year rhetoric, and they respond immediately with something that begins with “Governments would never….” Suffice it to say that history strongly suggests that "never" is relative: Governments do -- and likely will do whatever they think they have to.
Mr. Duhigg has now brought out into the open significant manufacturing and tax-related issues for Apple – two of the largest expense items of the world’s most popular company. I strongly doubt he (and soon, others) will stop there. As I say to my clients frequently, never underestimate the inverse correlation between social mood and scrutiny.
We saw this in 2008 during the banking crisis as everyone from investors to regulators wanted to know more about financial services firms. The folks at Chesapeake
(CHK) are clearly experiencing this “inverse correlations” now in real-time. And based on what I saw in the Times
Sunday, transnational CEOs would be wise to consider that they are likely to be next given what I see ahead.
Position in SH and JPM
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