Waiting for the inevitable? No company is too big to fail, not even Apple

Posted: 03.16.12

How long do you think it will take for Huaweai to overtake Qualcomm, TI, Nvidia, or ST-Ericsson? How long before ZTE to surpass Alcatel-Lucent, Alvarion, or Cisco? Or how long will take for Samsung to overtake Apple? Is it inevitable, or is such speculation just doomsday talk? Remember when we thought DoCoMo would take over the world? Or Samsung surpass Intel? Can growth rate be a reliable predictor of the future? Not very often, but it is tempting to accept the intercept points as inevitable; and in the case of notebooks and desktops the prediction (based on the curves) was correct. But there’s always that black swan lurking around the corner, isn’t there?

However, in the case of the Chinese government sponsored companies the rules of predictive forecasting get bent. Governments and sovereign funds (like ATIC of Abu Dhabi, which is GlobalFoundries investor) have long horizons and aren’t scared off with a bad quarter or two or three or more if the goal is what they believe in and want. Publically held companies that have to answer to intolerant investors or dividend collectors have to hit the mark every quarter, and if a long range outlay is needed (like a multi-billion dollar fab) then the company better make sure it’s got the cash flow and cash reserves to support such an investment.

Some companies with patient investors, like Kodak, Philips, and Nokia have found you need more than just a polite BOD—you need a good plan based on real market information and not just tweaks of the last game plan. If anything good came out of the economic meltdown the unregulated banking speculators brought the world, it was the realization that too big to fail is a lie. It’s the emperor’s new clothes. How big do you have to be not to be able to fail? Would Greece be big enough, or Spain?

Information and knowing when and how to react to it are of course the key. But usually (if not always) the vested short-term interests of the people empowered to do something about it block the decision making for the common good.

Usually when a company is in trouble it looks to the courts to remedy the situation, or protect it from the inevitable that its management refuses to acknowledge or do anything about. IP protection is the first step. Sometimes it works, most of the time it’s a delaying action that just keeps the lawyers well supplied with expensive suits, cars, and houses. Imagine what might be accomplished if the company invested all that legal money into R&D. But then to do that you’d have to have a plan and a vision—what should you be R and D’ing? Certainly not anything that’s going to jeopardize the status quo and so management turns to lawyers.

And that leads us back to the question, how long do you think it will take for Samsung to overtake Apple? No doubt about it Apple is at the top of its game, and it has a following other companies can only fantasize about. But what can it do next? Build a TV, go into game console market, manufacture electric cars? When you’re sitting on the biggest pile of corporate cash in the world, and your market cap is bigger than that of most countries, your next trick had better be a bold outrageous idea or your crown will slip off faster than a starlet’s garment malfunction.

Is Apple too big to fail? Not likely.

One way companies maintain their growth is when they’ve just about wrung out all the juice that’s left in their key market is to go on an acquisition binge. Sometimes that works, most of the time it doesn’t. It kind of kept Broadcom alive, but with the possible exception of Infineon, it hasn’t helped Intel much. The other choice is consolidation as Renesas and its component companies have tried, and as ST-Ericsson is trying. Neither looks too promising.

So what’s Apple going to do to keep its staggering PE where it is? And here’s a wild idea, what if the management at Apple doesn’t care where or what the PE is? Is that a possibility? Seriously, how many of the senior managers seeing their net worth go up daily from their stock holdings or options would do (or not do) anything that would jeopardize that?

Apple has been amazingly good about keeping its plans a secret. That has worked well for the company, kept the mystery to add to its cachet, and blind-sided all the shorters who have tried to divine the company’s plans. If we give the company the benefit of the doubt, another rabbit will be pulled out of the hat this time next year. But what if the management at Infinite Loop are running through the halls as if their hair was on fire screaming—where’s the next trick? Wow, that could be a bigger crash than 2008, and who all would they take down with them?