Story Of The Week

Apple Faces the Dragon’s Wrath

Apple’s camera lens supplier, Largan Precision Co. said Apple’s revenue fell by 33% in China due to demand for the iPhones dampening in the country. The market price of Apple’s share fell by 10% the next day as it announced the low sales in China on January 2nd. This is their worst drop since 2013

Sales dropped 33.9% percent to 8.85 billion dollars and were in line with Largan’s estimates, a company spokesperson said on Saturday. This company also makes lenses for Huawei technologies limited and Samsung. The too big to fall Apple’s iPhone is perhaps sending out signals in the smartphone industry that the demand for handheld devices has reached a saturation point. Unless the smartphone makers discover a new market or bring about a major breakthrough in technology, the future seems bleak, the competition is tough.

However this event also points out to the fact that the dragon might be losing its fire lately. Not just the Apple’s but China stock market evaporated by 25% in the year 2018.

Shanghai composite stock market index

An interesting statistics is that brands like Louis Vuitton, Prada and Gucci has also been losing market in the country. Have the neighbours become more frugal? Or is there a fall in their disposable income? The economy of the country seems to be undergoing a major overhaul in the last couple of years as all its tricks of the trade are getting obsolete.

What is China’s Central Bank up to?

  • Lately, China has been banking on its debt-fueled infrastructure spending to counter its economic slowdown. However, given its surge in local government’s loan appetite, the country can run into financial difficulties.  China is adopting what is called the “proactive fiscal policy” to rejuvenate the lost economic rigour as its GDP fell the deepest in 2018 in the decade to 6.5. The local government is issuing bonds worth 1.39 trillion Yuan (US$202 billion)
  • The government is also cutting taxes. “At the moment, talk is all about pro-growth measures now,” said Iris Pang Greater China economist at ING Bank.
  • The central bank has also cut its reserve ratio. Last year it lowered the reserve ratio four times. The latest cut will expand the economy by $117 billion.
  • China is currently applying expansionary fiscal and monetary policy. In such conditions growth in GDP is quite likely, but what about the interest rates, inflation and Price levels?
  • A time when revenues are taking a hit due to the industrial projects while the government is issuing bonds to boost the economy, the repayment pressure can be intense.

This also opens the floodgates of speculation over the US companies doing huge business in China. The economic slowdown in the country can infect these multinationals too. Kevin Hassett, chairman of the white house council of economic advisers, warned that more US companies can be expected to lower earnings forecasts as the slow Chinese economy takes a bite of their sales. He further added “the Chinese economy is slowing in a way that i haven’t see in a decade,” further claiming “going to be bad” for the US corporates doing business there.

Why does the slowdown in China matters to us?

Well for starters China accounts for 19% of global economic activity. George Magnus, research associate at Oxford University’s China Center says that China’s economy is so large that it pretty much decides the global price of a huge range of products. Half of the worlds steel, copper, coal and cement ends up in China.

China has too many apartments that home buyers do not want, pulling back the real estate market, that’s a major source of wealth in China.  Chinese household debts are quite high especially under its shadow-banking networks.

Is the Trade war hurting US more than  China?

The Apple CEO partially blamed the trade war for the decline in iphone sales in china. The supply chain of Apple is crucial in China, increase in tariffs is inflating the costs of the phone, hurting the sales. In the wake of recent not so good events, the two countries representatives are set to meet and hold ministerial level discussions on Monday and Friday.

Besides the geopolitical tensions what’s hurting the companies more is the rising competition from Chinese rivals like Huawei and Oppo. These players are not only investing heavy in R&D but are also offering products at much cheaper rates. Huawei witness a 13.4 percent year on year growth in the third quarter of 2018. Xiaomi grew with the rate of nearly 20 percent.

Chinese exports to the US held up through late 2018, despite trump’s hefty tariffs. Some manufacturers that work for the US have shifted their business to other countries. A study by investment bank UBS says that 37 percent of 200 manufacturers have shifted out of China over the last year, due to the rise of trade tariffs. While another 33 percent of these companies are planning to move out in this year.

Will US have “The Talk” with China?

Trumps one strong agenda is to stop China from its “made in China 2025” initiative, that seeks state-lead creation of champions in robotics, artificial intelligence and other fields. The US is insecure of China’s leading position in these fields.

China’s leaders are likely to lessen the up to sensitive trade surplus with united states and purchase American goods. However, it’s unlikely the Chinese will back down on technology leadership.

What can be the likely outcomes?

  • More transparency

The thrust of negotiations can be the removal of information asymmetry. They should facilitate a mechanism that reveals the impact of all measures and policies taken by the countries. Both these countries should involve critical stakeholders in these decisions.

  • Agree on a an unbiased, effective dispute settlement process.

WTO current regulations in cases of disputes are clearly not enough to work it out between the two superpowers. The two countries should seek better mechanism to address disagreements and disputes.

  • US firms not forced to handover their technologies when working in China

This is one of the pain points of US, where its tech giants are forced to share thier technology with the Chinese if working in China. U.S. has always spoke against this unfair trade practice, it will for sure bring this up again.

  • Grant China market-economy status

China wants itself to be treated as the market economy when applying US trade laws. This will enable China to be less affected by the way in which penalties will be calculated, if it dumps in the US market.

In this densely intertwined global economy, no brand is immune to trade fluctuations. This is indeed the toughest time for market players, as the competition is intense, and the consumer is the real king. And above all market regulations and trade wars can take even the market leaders for a ride!

References

http://time.com/5493838/china-us-tariff-talks-jeffrey-gerrish/

https://www.scmp.com/news/china/diplomacy/article/2170477/us-may-take-trade-table-next-trump-xi-meeting

https://appleinsider.com/articles/16/07/26/apples-china-revenue-dives-33-on-iphone-sales-slowdown

Bloomberg

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