From some recent news reports and analyst pronouncements, we could easily get the impression that the relatively weak Chinese economy poses a major threat to Apple. The argument doing the rounds is that China is where Apple is seeing most of its growth at present, and the Chinese economy is tanking.
It’s absolutely the case that the importance of China to Apple cannot be overstated. Apple does continue to grow its sales in both the Americas and Europe, of course, and there is no suggestion that this is showing any sign of slowing, despite a saturated smartphone market. But worldwide growth of 33% was dwarfed by that seen in China, as one recent graph vividly illustrated.
If Chinese demand for Apple products were indeed to weaken significantly, there is no doubt that this would be a major problem for Apple. But it seems to me that the issue is being substantially over-stated …
I’m very much a layman when it comes to economic matters, so perhaps I’m venturing into risky waters here and am about to get slapped down by those who know more than me about such things. And I do fully appreciate that Chinese share prices have been hit hard. But looking at the underlying numbers that have prompted such concern about the Chinese economy, they don’t seem anything like as bad as the share slide would suggest.
The Guardian today posted three sets of stats about the actual economic performance of the Chinese economy, and from the words alone, it sounds bad. Economic growth was worse than expected. Factory output missed expectations. Retail sales fell short of market expectations.
But then we look at the numbers. Economic growth in the first seven months of the year came in at 11.2%, versus an expectation of 11.5%. Factory output grew 6% instead of the forecast 6.6%. Retail sales grew 10.5%, missing expectations of … 10.6%.
So, all three metrics show that the economy is growing, just slightly slower than market predictions.
Against this, of course, is the fact that China today devalued its currency for the second time in two days – despite describing yesterday’s devaluation as a one-off correction. And while share prices may at times seem to bear only a tenuous relationship to reality, stock market slides definitely end up having real impacts on the economy.
But even the most pessimistic financial reporting I’ve seen appears to be suggesting only a slowing of growth in the Chinese economy, not economic armageddon. And Apple isn’t vulnerable to the economic performance of China as a whole, only that demographic which is in the market for iPhones and other Apple goodies – namely the upper middle class.
In 2012, the upper middle class represented 14% of China’s population. By 2022, it’s still forecasted to grow to 54%. Even if the economy grows at a slower pace than predicted, that would still seem to leave Apple with a large and rapidly growing market.
Sure, the currency devaluations will take their toll. Apple has two options: either raise prices in response, which is bound to have some impact on demand, or absorb the currency hit and end up with lower profits if it repatriates the income. But given the company’s investment in China, on both manufacturing and retail fronts, I’d imagine that a lot of Apple’s income from China never leaves the country’s borders.
But worst-case, we would appear to be talking about somewhat slower growth in either revenue or profitability. Given that Apple grew its business in Greater China by 112% in the past 12 months, some degree of slowing would seem to fall some way short of catastrophic.
So will Apple suffer to some extent if the growth in the Chinese economy takes further hits? Sure. But does the impression of doom one could glean from some recent coverage reflect the likely real-life effect? So far as I can see, it’s not even close.
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What I find hilarious is that the same pundits that predicted Apple would fail in China because they didn’t have an el-cheapo iPhone to sell to the cost conscious Chinese customer are now predicting Apple’s doom because they sell too many iPhones in China to the now cash strapped Chinese customer. Doomed of you do and doomed of you don’t. That’s Apple financial coverage in a nutshell.
Another ‘correct me if I’m wrong’ offering…
I don’t think Apple keeps much in the way of monetary assets in China as yuan, so Apple lost no money on this. Apple’s dollars or euros or pounds can now by more yuan than they could two days ago. To the extent that Apple pays for Chinese parts and labor in yuan, Apple now gets more for less. What that extent is, I don’t know, but I bet the financials on this are complicated, and I bet Apple gains in some way.
Set that gain against the weaker yuan, and the initial hit might not be to bad. Use that gain to lower prices in China and it could end up closer to a wash. It’s even vaguely possible to me that Apple’s Chinese market demographic wasn’t too affected (psychologically) by this devaluation, and that a price lowering by Apple could even affect sales to the upside. Far fetched, perhaps.
The sky, however, is no where near fallen.
Apple is doomed.
These analysts saying that Apple is doomed, and especially that Apple are doomed due to the Chinese market, are not taking into account that first of all, a 4″ aluminium iPhone 6c could be exactly what all those “just the right screen size”-zealots have been holding out for. A large chunk of iPhone users still on the iPhone 4, 4s, 5 or even 5c or 5s are hesitant to upgrade solely to the fact that they don’t want a larger screen on their phone, or at least a larger device footprint. If the iPhone 6c is indeed released, with a premium build, a lot of these might be persuaded to switch. Also, although the Chinese economy is experiencing uncertainty and some level of turmoil, and the US dollar is currently also a bit stronger than it should optimally be for Apple, the Chinese market of iPhone buyers have not exactly been those who are struggling to put food on the table. My guess is that while still will still impact Apple, and they will surely fall short of the 90M goal, we are absolutely going to see some growth. I go into greater detail on this subject over at NinjaTeched, at http://ninjateched.com/2015/08/12/rumour-apple-will-release-new-iphone-6s-iphone-6s-plus-entry-level-iphone-6c-concurrently-in-september/
There has never been a time where Apple hasn’t been doomed. Whenever something changes in the economy, Apple is always said to be the company that will be harmed the most. I think it basically has to do with Apple products being the most expensive of any consumer tech company. Wall Street seems to have this idea that only the cheapest products are guaranteed to sell in lean times. I don’t think that theory necessarily holds up in all cases. I believe every range of product will see decreased sales and given Apple’s larger margins, the company should fair better in leaner times. I just wish I had lots of information on how companies fail and I don’t think it has anything to do with the price of their products. Most of it relies on how well the company is being run and how well the books are kept balanced. Supposedly, the Chinese consumer loves Apple products and have been begging for more retail stores. Wall Street simply ignores those facts.
Wall Street now has this theory of how India is the place to be and Apple won’t be able to sell products there because consumers don’t have enough money to buy Apple products. It’s believed that only Android products will be able to sell in India and Google is making sure by pushing $50 Android One smartphones. I’m definitely curious as to how this is going to turn out. How good could $50 smartphones be and how will companies survive selling them so cheaply? Wall Street has already decided Apple is doomed in India.