Apple's Bad News Is Worse for China

Consumer Electronics

Published: January 3, 2019 6:30 am

Last Updated: January 31, 2020 2:36 am

Apple Inc. (NASDAQ: AAPL) released a letter from CEO Tim Cook to investors. Among the most important comments was that Apple would miss its own sales forecast for the quarter that ended on December. Another was that sales in China were the most serious barrier to better results.

Cook’s comments indicated that the problem was not primarily an Apple problem. The Chinese economy started to slow in the second half of the year, he said. Economists have worried China’s gross domestic product would fall sharply from its standard growth rate. Apple’s information is another affirmation that this line of thought is accurate.

In the “Letter from Tim Cook to Apple investors,” the CEO wrote:

China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed.

Apple has a window into China much greater than retail sales. It sources many of its components from Chinese suppliers. Apple has enough stores that his observation about “retail traffic” points to consumer demand at the brick-and-mortar level.

It is easy to argue that smartphone sales are a poor indicator of an entire national economy because these sales in total are a small part of overall GDP. However, in China, the number of people on wireless networks is estimated to be 850 million. Smartphone users number over 600 million.

Apple’s announcement about its Chinese sales is a canary in a coal mine that snows that the mighty economic engine of China is slowing.

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