Transfer Pricing and the Relationship Between Apple Inc. and Foxconn Technology Group
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Transfer Pricing and the Relationship Between Apple Inc. and Foxconn Technology Group
Qn 1. The Types of Businesses that Apple Inc. and Foxconn Technology Group Engage in
Transfer pricing determines the price paid for the transactions of commodities between companies and their subsidiaries. The concept invariably entails a parent company and a subsidiary or other related organization where both organizations are based in different jurisdictions. The interaction between the two organizations may take forms such as service transactions or controlled distributions. In the present study, the primary company is Apple Inc. (Company A), while the contractor is Foxconn Technology Group (Company B). Apple Inc. is one of the USA’s largest public companies, and it is headquartered in California. Foxconn Technology is the largest electronics producer globally, and it is located in Taiwan. The two companies’ selection is because Foxconn Technology Group handles the production of Apple electronics, but it is in a different tax jurisdiction. Furthermore, Apple wholly outsources the production of electronics such as smartphones to Foxconn, which creates a supplier relationship, thus demonstrating the required relationship for this study.
Apple is an American-based multinational technology company with headquarters in Cupertino, California. The company was founded in April 1976 and currently provides a range of services and goods globally (Tankovska, 2020a). The company’s hardware products include smartphones, laptops, personal computers, smartwatches, television sets, and smart speakers. The smartphone sector, which is based on the iPhone, accounts for 44.56% of Apple’s overall revenue (Tankovska, 2020a). Additionally, Apple sold approximately 37 million smartphones globally, which accounted for 13.5% of smartphones’ total market share in the second quarter of 2020 (Tankovska, 2020b). This market share makes Apple the third-largest smartphone vendor globally, with only Samsung and Huawei beating it for the top spots.
Additionally, Apple tablets and smartwatches also lead in their respective sectors. Apple occupied 29.2% of the global tablet market share as of the third quarter of 2020 (Tankovska, 2020b). This market share is the largest of any other tablet vendor globally. This dominant market share is although Android replaced the Apple iOS as the leading operating system of choice as of 2012 (Tankovska, 2020b). Apple also dominates the smartwatch sector due to the brand value associated with the company. This brand value enabled Apple to enter the market and claim the majority market share over other competitors such as Pebble. This dominant global smartwatch market share stood at 47.9% in the first quarter of 2020 (Tankovska, 2020c). Summarily, Apple dominates the market shares in the hardware products that it provides.
Apple also provides software products. These products range from web browsers, music identifiers, operating systems, media players, and professional applications. These software products also include online services, such as messaging apps, music stores, and payment facilities. The software products are strategically designed to be compatible with the iOS that is in all Apple products. As a result, users of Apple products are drawn to these software products out of convenience. For instance, iTunes- the Apple music streaming platform- is among the leading music streaming platforms in the US-based on the proliferation of Apple devices (Watson, 2020).
Foxconn Technology Group is a Taiwanese multinational electronics contract producer. Foxconn is the trading name, but the full name of the firm is Hon Hai Precision Industry Ltd. Notably, Foxconn is the leading global electronics manufacturer based on the production of electronics for leading brands. This includes Apple primarily and other firms such as Dell, Nokia, Nintendo, Xbox, and PlayStation (Chan et al., 2013). the top position of the company is illustrated first by the revenue from operations in 2019 which stood at $ 178 billion and second by the fact that Foxconn produced 40% of all consumer electronics in 2012 (Alsop, 2020). The business model of the firm is based on an independent contractual basis where Foxconn undertakes to produce and assemble the consumer electronics. At the same time, the companies outsourcing its services focus on designing, marketing, and selling the final product. This structure explains the business relationship between Apple and Foxconn (Chan et al., 2013). Importantly, the success of Foxconn is closely linked to the Apple product consumer demand, which is why a special relationship is presumed between the two entities despite Foxconn producing consumer electronics for other tech firms.
Qn 2. The Market Structures in which Apple Inc. and Foxconn Technology Group Exist
Apple Inc. exists in an industry with mixed market structures. Apple provides a vast range of products that each exist in different economic ecosystems. Therefore, the competitors of Apple come from different sectors, and competitive relationships vary significantly. For instance, Apple operates in an oligopolistic market structure as a smartphone vendor. An oligopoly is defined as a market structure where there are a small number of actors, and none of the actors can directly manipulate the other’s market influence (Onozaki & Yanagita, 2003). The market share of smartphone vendors ranges between three main actors, Huawei, Samsung, and Apple. These three actors are in a constant state of competition based on the turbulent market shares. As of the second quarter of 2020, Apple was the third with a market share of 13.5% (O’ Dea, 2020).
Inversely, Apple exists in an asymmetrical duopoly in the smartwatch market. This market structure is a variation of oligopoly where there are two dominant players in a market, and one has a competitive advantage over the other (Onozaki & Yanagita, 2003). The same is exhibited in the global sales of smartwatches, where Apple led with a market share of 47.9% as of the first quarter of 2020. Samsung was in second place with a market share of 13.4% of the market share in the same quarter (Tankovska, 2020c). This disparity shows a competitive advantage of Apple in smartwatches in comparison to Samsung. However, the two entities dominate the market leaving only 38.7% of the other players’ market share. Therefore, Apple exists in different market structures, depending on the sector that is focused on.
Foxconn operates within a duopoly in the production of electronics in Taiwan. A monopoly is defined as a market structure where a single dominant player is providing a niche service or product, and it is characterized by barriers to entry to the market (Onozaki & Yanagita, 2003). Inversely, a duopoly entails the presence of two dominant players in the market. Foxconn is the largest producer of consumer electronics in the world, evidencing its dominant market share. In 2019, the company had the second largest annual revenue of all electronics producers globally; it was topped by Samsung, which is based in South Korea (Buchholz & Richter, 2020). Additionally, Foxconn employs approximately 1.4 million labourers in China, which positions it as the largest private employer in Taiwan (Chan, 2013). Collectively considered, Foxconn has dominated the consumer electronics production market in Taiwan. However, Foxconn does not have exclusive control over the market share because Apple has split the production between Foxconn and another Taiwanese firm, Pegatron (Chan et al., 2013). This move is strategically placed to provide Apple with a higher bargaining power over Foxconn. Summarily, Foxconn operates in a duopoly where it shares the market share on the production of consumer electronics with Pegatron, another Taiwanese company.
References
Alsop, T. (2020, July 23). Foxconn revenue in USD. Retrieved November 13, 2020, from https://www.statista.com/statistics/277582/revenue-of-foxconn-electronics-since-2005/
Buchholz, K., & Richter, F. (2020, November 02). Infographic: Electronics “Made in Asia”. Retrieved November 13, 2020, from https://www.statista.com/chart/23356/largest-manufacturers-of-electrical-and-electronic-equipment-by-revenue/
Chan, J., Pun, N., & Selden, M. (2013). The politics of global production: Apple, F Foxconn and China’s new working class. New technology, work and employment, 28(2), 100-115.
O’Dea, S. (2020, November 04). Smartphone market share 2020. Retrieved November 06, 2020, from https://www.statista.com/statistics/271496/global-market-share-held-by-smartphone-vendors-since-4th-quarter-2009/
Onozaki, T., & Yanagita, T. (2003). Monopoly, oligopoly, and the invisible hand. Chaos, Solitons & Fractals, 18(3), 537-547.
Tankovska, H. (2020a, October 30). Apple revenue breakdown by product. Retrieved November 06, 2020, from https://www.statista.com/statistics/382260/segments-share-revenue-of-apple/
Tankovska, H. (2020b, November 03). Tablet market share by vendor 2019. Retrieved November 06, 2020, from https://www.statista.com/statistics/276635/market-share-held-by-tablet-vendors/
Tankovska, H. (2020c, September 01). Global smartwatch market share by vendor 2014-2020. Retrieved November 06, 2020, from https://www.statista.com/statistics/524830/global-smartwatch-vendors-market-share/
Watson, A. (2020, May 27). Music streaming market share. Retrieved November 06, 2020, from https://www.statista.com/statistics/653926/music-streaming-service-subscriber-share/