Apple's projection slump in China

January 6, 2019

I remember a time visiting China when my uncle was super excited to show me his new American car - a Buick sedan, shiny, gold, and sparkling clean from his daily cleanings. American goods are (were?) sort of the pinnacle of luxury in China. Call it a manifestation of the United States’ “soft power” abroad - we manufacture and market some of the most desirable goods in the world.

One of the goods that had substantial market influence in China was the iPhone. We’ve heard it a lot: it’s a status symbol in China to have an American smartphone. Seeking to take advantage of China’s thirst for foreign goods, Apple intelligently decided to focus on the Chinese market in the early 2010s.

On January 2nd, Tim Cook released a memo revising their revenue projections for Q1 2019. Apple’s market capitalization subsequently dropped 10 percent, for a loss of over $100 billion.

Apple’s struggles in China have now been a long time coming. There are several surface-level reasons for the drop: the trade war, China’s slowing economy. But there is a bit more of a nuanced explanation for the slowdown in China. A lot of factors are in play. Competition from domestic brands like Huawei, Trump turning China off of American goods in general, WeChat’s monopoly in China over anything related to mobile applications, and the slow government shift to promoting a self-sustaining economy are a few things that are affecting Apple.

We’ve talked a little bit about how China’s trade surplus has led to RMB buybacks through their foreign exchange reserves. RMB outflows are a threat to the domestic Chinese economy, as the loss of value comes at the expense of higher inflation. One way to offset this trade surplus is by promoting domestic production and consumption. In particular, the government will work to promote companies that already have some market share in China, since those companies often already have government oversight and consumer trust. Huawei’s sales in China have actually grown relative to its peers. My own father has been indoctrinated into the Huawei line, simply because they understand Chinese consumers so much better. In many ways, Huawei is ahead of the competition in making the value proposition to consumers around the world, and especially in China. By matching or exceeding the feature set of the iPhone for a lower price, they’ve been slowly chipping away at Apple’s market share in China. Perhaps the iPhone isn’t as much of a Veblen good as once thought. Sluggish sales of the phone worldwide have prompted a trade-in program that seems antithetical to the Apple way.

Donald Trump’s inflammatory rhetoric has turned lots of Chinese folks off of American goods. The mentality for many is now: if American’s are able to elect someone with such a negative attitude towards China, why should we support their economy? In fact, the Donald dominates the airwaves in China nearly as much as he does in the United States. This means the CCP has more justification to keep some young Chinese from leaning Westward culturally. Compounded with the impact of the ongoing trade war, and government propaganda to buy domestic, Donald is having a huge impact on American companies’ ability to sell in China.

It’s hard to talk about mobile phones in China without talking about WeChat. For many Chinese, all you really need is a phone that can handle WeChat, where you can get your Facebook, Twitter, Youtube, Venmo, and Apple Pay all in one. All your apps can be run directly from within WeChat, which makes Chinese smartphone users’ lives easier (not to mention the CCP’s handle of the people easier too). “If a phone can run WeChat, I don’t care what brand it is” they say. It makes the ultra-high end luxury phones a hard sell for Apple in a market that really doesn’t need it. Further, the technology gap between a Xiaomi or Huawei and an iPhone is slimming. In fact, the Chinese phones actually perform better in many cases.

I started writing this on the 6th in the light of Apple’s investor letter. Since then, several things have changed. One, it seems like China has given in to the pressure of their buckling economy to some of the Donald’s trade demands. This seems to be largely a rhetorical promise - in the end, the Chinese can simply throw up their hands and say “we tried to reduce the trade surplus, but we’re just so good at exporting, you know?” On the other side of the Pacific, the White House has also considered reducing their aggression towards China.

There was also this good article the other day about the controls that China has to control their economy, that warrants a completely separate blog post.

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