Getting To The Core Of Apple’s (And Everyone Else’s) China Issue

Live by the Chinese consumer, die by the Chinese consumer.

Apple, of course, is getting cored, on the heels of a surprise announcement that, in hindsight, should not have been a surprise.

At this writing, shares of the tech giant are down 9 percent in intraday trading, as on Wednesday (Jan. 2), CEO Tim Cook said via letter to shareholders that revenues will be lighter than expected, at $84 billion for the quarter and down from a range of $89 billion to $93 billion.

Cook blamed the ongoing trade war, and said the Chinese economy is weaker than expected. Those two macro sentiments are helping to send the broader markets into freefall – after all, the slowdown would augur ill for any number of countries and any number of verticals.

But beyond the idea of Apple as a bellwether for investor sentiment, and beyond the long ago and far away trillion-dollar market cap, some company-specific issues stand out. Look back beyond the panic of December’s stock market and the initial panics of January (the month already feels like it’s been dragging on forever, doesn’t it?), and the signs have been there for a while.

Consider the fact that Cook shone the spotlight, specifically, on iPhone sales tied to China, along with other hardware. “Most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline” is tied to China, said the CEO in his letter, and he added that “lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year. While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be.”

China has now been starkly illuminated as a battleground for Cook and company. A few short quarters ago in its fiscal year 2015, China was north of 20 percent of sales, and now the tally is at about 18 percent – and the drag this quarter, and presumably going forward, will be pronounced as smartphone sales are sliding several percentage points year over year and upgrade cycles are getting longer. The folks that supply the components and casings and chips? Oh, well, they are getting hammered, too, as of Thursday, in an echo of supply chain fears that rattled investors.

The competitive environment has been a challenge, as the company now stands in a relatively dismal place with fifth-place market share in China for phones, trailing Huawei and Oppo, among others. Turns out, too, that the famed iOS ecosystem is not the lure that it may be in other parts of the world, as The Wall Street Journal noted that many consumers prefer to spend their time in the confines of other ecosystems that span social media, payments and, of course, any other number of applications, notably WeChat.

That may be tough for the company that seems to be looking toward a services strategy – an approach we spotlighted in these digital pages only a few short months ago.

And yes, as it does everywhere, at a certain point price matters, as evidenced by the fact that the newer hardware models, such as the iPhone XS Max, retail for north of $1,000, while other Apple models have a price tag of around $300 or so.

Whenever an 18-20+ percent revenue contributor – in this case, of course, China – falters, that spells rough sledding for any company. But Apple’s woes have a notable ripple that will make waves for any number of global players, spanning luxury retailers, for example, or even fast food purveyors staking a claim there, or where cross-border commerce is a growth engine. Another shot across the bow is here, too, as Baidu just warned that “winter is coming” for China. To paraphrase a famous doyenne of the silver screen: Fasten your seatbelts … it’s going to be a bumpy ride.