Apple’s stark warning may be ominous news about China’s economy - Los Angeles Times
Advertisement

Apple’s stark warning may be ominous news about China’s economy

A woman runs past a red Apple logo in Beijing. What happens when the Chinese growth juggernaut slows or, worse, grinds to a halt?
A woman runs past a red Apple logo in Beijing. What happens when the Chinese growth juggernaut slows or, worse, grinds to a halt?
(Ng Han Guan / Associated Press)
Share via
Washington Post

For most of the last two decades, China — with 400 million middle-class consumers growing richer by the day — was a one-way bet for the world’s corporations and a driver of the global economy.

By early 2018, General Motors was selling a third more cars in China than in the United States. Starbucks unveiled plans to open a new coffee shop in China every 15 hours on average. Adidas saw 26% growth in China while Western Europe, its home market, was staying flat or shrinking.

But what happens when the Chinese growth juggernaut slows or, worse, grinds to a halt?

The world got a glimpse Wednesday when Apple, the second-largest publicly traded tech company, lowered quarterly sales estimates for the first time in more than 15 years. Chief Executive Tim Cook blamed the unforeseen “magnitude of the economic deterioration” in China, the world’s largest smartphone market. Apple shares plummeted 10% on Thursday and pulled down a bevy of consumer stocks with exposure to the Chinese market.

Advertisement

Though a number of factors may have played into Apple’s travails — including political tensions, the U.S.-China trade war and changing demand in the smartphone market — the news from Cupertino, Calif.-based Apple seems to affirm a warning that Chinese economic observers have been sounding for years, particularly in the last few months: The slowdown in China’s economy might be worse than many appreciate — as well as the spillover effects.

Apple’s iPhone problem goes beyond China: It’s falling short on innovation, analysts say »

“China’s economy is definitely slowing quite a bit across a bunch of sectors, and this slowing momentum is likely to continue for another couple of months at least,” said Arthur Kroeber, the founder of Gavekal Dragonomics, a research firm in Beijing. “And consumer confidence is definitely down, which is probably part of what’s behind the Apple numbers.”

Advertisement

After multinational companies relied heavily on China for years for growth, warning signs across different industries are beginning to crop up suggesting there are broad, ominous trends gathering force in the world’s second-largest economy. In that regard, Apple isn’t alone.

Months after Starbucks announced a massive China expansion this year, it said its China sales would increase just 1%, far below those in the United States. Jaguar Land Rover briefly shut a factory in Britain after September sales in China dropped by half. LVMH, the luxury giant that owns Louis Vuitton and has often been used as a barometer for consumer spending in China, said the Chinese were spending “a little bit less.”

The significance of Apple’s results is partly that they shed a bit of light on what’s going on in China and how that might affect other firms and economies. That’s valuable information, as top-line economic data given by China’s government are murky at best and fudged at worst.

Advertisement

Although Chinese officials report that the nation’s gross domestic product has been growing more than 6% a year for a few years, “it looks truly like some sixth-grader got out their ruler and drew a straight line with a slight downward slant,” said Christopher Balding, an expert on the Chinese economy at Fulbright University in Vietnam. “It’s totally unrealistic.”

As worries have mounted in recent months, top financial regulators have held meetings with economists at banks and brokerages to instruct them to take into account the interests of the Communist Party when they publish economic analyses — an apparent euphemism for holding back alarming language, Bloomberg reported in November.

But over the last 12 months, bits and pieces of data coming out have been precisely that: alarming.

Car sales have been shrinking for the first time since 1990, when most of the country was pedaling bicycles. A key manufacturing survey at the end of the year showed Chinese factory activity shrinking. And revenue from consumption tax was down 72% in November from a year earlier, Balding said.

Chinese investors have been among the most pessimistic about their economy’s prospects: China’s stock market lost $2.3 trillion, or about a quarter of its value, in 2018 — its worst performance in a decade.

To be sure, Apple — perhaps the preeminent symbol of corporate America’s success in China — is buffeted by forces far beyond the country’s macroeconomic trends. Tech analysts say local brands such as Huawei and Oppo have been closing the gap with Apple in terms of performance and design even while Apple continues to raise its prices.

Advertisement

Meanwhile, the U.S. arrest warrant for Huawei Chief Financial Officer Meng Wanzhou, who has been detained for the last month in Canada, infuriated many Chinese and touched a nerve in a country where nationalism — and distaste for the United States — has been on the rise as national competition has broken out.

In recent weeks, Chinese media have reported stories of companies awarding stipends to employees who ditch their iPhones to buy Huawei, said Shen Dingli, a well-known international relations commentator in Shanghai.

“The ordinary people may have a kind of nationalist consciousness,” Shen said, adding that middle- and upper-class Chinese are no longer dazzled by iPhones as they were a decade ago.

“Apple’s glory days are past,” he said.

On Thursday, Henry Zhu, a student from Shenzhen, was browsing a Xiaomi electronics store at the upscale Parkview Green mall in Beijing as he considered the relative attractiveness of Apple’s latest products.

His first smartphone was an iPhone 6, he said, but he has since switched to Chinese brands because of similar quality and lower price. Now an iPhone X in China is twice the price of his Chinese-made OnePlus handset, which costs less than $500. The iPhone just isn’t worth it when money is tight, he said.

“If I have more money to spare, maybe I won’t hesitate to buy the latest iPhone,” Zhu said as he brandished his OnePlus 6, which, except for the logo, looked almost exactly like an iPhone.

Advertisement

“For now, I’m happy with what I’ve got.”

Shih writes for the Washington Post.

Advertisement