France seems to be focused on implementing protectionist measures that would help to boost the domestic economy. According to the BBC, the French government is considering introducing a 1% tax on the sale of smartphones and tablets to help fund French film, music and images.
Source: YCharts
France faces a genuine problem of declining output. The nominal GDP has been able to grow by 5.35% over the past 5-years. Meanwhile, the real GDP has seen a 36% decline over the same period. The difference between real GDP and nominal GDP is that real GDP measures the changes in real output (changes in production of goods and services), while the nominal GDP measures the increases in consumption. The above figure clearly illustrates that France’s economy is struggling to improve its production of goods and services.
The government hopes to offset the losses in production by using the 86 million euros the tax would raise in a way that would support cultural industries like music, imagery, and video. Perhaps French movie studios will be producing higher quality content that could compete with the likes of The Walt Disney Company (NYSE:DIS), Time Warner Inc (NYSE:TWX), and Viacom, Inc. (NASDAQ:VIAB).
Quantifying the effect on multinational company’s
I suspect that the French government won’t be the only government to implement some protectionist measures. I anticipate the rest of the Eurozone to at some point activate a similar 1% tax in order to stimulate supply-side economics. After-all, these economies face a very real threat of declining output.
Looking closely at the policy, it is aimed at internet-enabled devices. That means it should have a negative impact on BlackBerry, Google Inc (NASDAQ:GOOG), and Apple Inc. (NASDAQ:AAPL).
I assume that at some point, all of Europe will implement a 1% tax measure against smart phone and tablet devices. This should result in a 1% decline in total European sales revenue. Under that basis I make my calculated losses for Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and BlackBerry. Remember these are just estimates, not exact figures!
The effect on Apple is minimal
Apple Inc. (NASDAQ:AAPL) generated $36.323 billion in revenue from its European division in 2012. A 1% loss on that revenue would result in Apple Inc. (NASDAQ:AAPL) paying out $363 million in additional taxes. The net-effect so Apple Inc. (NASDAQ:AAPL) shareholders would be immaterial, as the company reported $41.733 billion in net income. Shareholders would experience an 87 basis point decline in net income. This isn’t enough to miss earnings even if widespread adoption of a hardware tax were occurred throughout Europe. For Apple Inc. (NASDAQ:AAPL) shareholders, the 1% tax was not enough to merit any of the over-excessive fear mongering by the press.
Blackberry could be hurt
BlackBerry currently generates $4.5 billion from its European operation (this is an estimate because data includes Middle East and Africa). The company’s European operation composes 40% of its revenue. That being the case a 1% tax on $4.5 billion is $45 million. The company reported a $646 million loss in 2012. The 1% tax increase would cause BlackBerry to lose an additional 7% in net income (700 basis points versus Apple’s 87 basis points). Any marginal increase in costs will have more of a substantial impact on BlackBerry shareholders than Apple shareholders.
Google is hard to read
Google Inc (NASDAQ:GOOG) doesn’t give an exact breakdown of its Motorola Mobility costs or its exposure to Europe, so at this point I would be making an inference based on the data I have of Apple and Blackberry. Google Inc (NASDAQ:GOOG)’s Motorola Mobility generates $4.1 billion in revenue on an annual basis, according to Google Inc (NASDAQ:GOOG)’s 2012 annual report. Google Inc (NASDAQ:GOOG) generates a total of $50 billion in revenue when combining all of its divisions. This implies that a 1% tax increase on Motorola’s European division revenues would have a small effect on the company as a whole. However, Motorola and BlackBerry are similar in that both companies’ generate about the same amount in terms of revenue. Based on that assumption one can assume that both companies have a similar cost-structure; prior to Motorola being bought out, Motorola was losing money. That being the case I can assume that if a 1% tax were implemented the net-loss from operations could potentially fall in the 500 to 700 basis point range that BlackBerry sits in.
The effect to Google as a whole would be minimal, but when isolating it to Motorola Mobility, a small percentage change in tax would lead to a marginal decrease in net income that would be larger than when compared to Apple (87 basis point change in net income).
Conclusion
BlackBerry and Motorola could be hurt significantly, as a marginal effect on taxes would hurt the net incomes of these company’s more than it could hurt Apple. However, Motorola as a segment represents around 10% of Google’s total revenue, so it would have an immaterial effect on Google’s net income.
After outlining the worst case scenario of every European country levying a 1% tax, I could conclude that with reasonable analysis, the effects could be enough to cause BlackBerry to miss earnings. But in the case of Google and Apple, the effect would be so small it probably wouldn’t even have to be calculated into an analyst’s earnings growth estimate.
The article How Much Will Protectionism Hurt Technology Companies? originally appeared on Fool.com and is written by Alexander Cho.
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