January 3, 2019

Breakingviews: Apple sales warning is a Chinese joint venture

by Breakingviews.

Apple’s warning about slowing Chinese sales eroded more than $50 billion of its $750 billion market capitalization on Wednesday afternoon. It will also have taken a chunk out of confidence in the global economy. Investors don’t always believe China’s official economic data, but they can’t brush aside news that iPhone sales in the country have rapidly decelerated, even if Apple is possibly at the sharp end of the slowdown.

Chief Executive Tim Cook said in a letter to investors that the U.S. tech firm expects $84 billion of revenue in its latest financial quarter. That’s about 8 percent less than its earlier guidance. Cook said the company was surprised by the magnitude of the economic deceleration in emerging markets, “particularly in Greater China,” and said that the fall in revenue relative to what was expected is all accounted for by lower iPhone revenue. Markets had already ended 2018 on a wobbly note; Apple shares fell 8 percent after Wednesday’s close.

China accounted for nearly 20 percent of all Apple revenue in the last quarter, so Cook is implying a very sharp fall in Chinese demand. This could be merely one company’s experience – the price of the average iPhone sold has risen by about 30 percent over the past year. There are other factors that are still impossible to quantify, like the effect of trade tensions, questions over spying and the detention of an executive from Chinese telecoms-equipment maker Huawei in December, all of which may have made iconic American goods less popular in the Middle Kingdom.

Still, Cook was careful to point out that smartphone sales overall in China have contracted. And it was already pretty clear that things weren’t going great in the Chinese economy, which contributes around one-fifth of the world’s output, according to the International Monetary Fund. Retail sales grew just 8.1 percent in November, year-on-year, their slowest pace in 15 years. Car sales have fallen several months in a row. The iPhone is a classic symbol of the kind of mass affluence China covets for its 1.4 billion population. When demand falters, it’s an ominous sign of what may lie ahead for the global economy.


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