Bill Jamieson: Beware when Apple succumbs to law of gravity

The shock sell-off was triggered by a trading update from chief executive Tim Cook which cut revenue forecasts. What was to blame for such a sales slowdown? Over-pricing of products? Lack of innovation in new iPhone versions? Mobile phone market saturation? After all, more than 1.5 billion mobile phones have already been sold.

In the run-up to Christmas, it was impossible to avoid the saturation marketing of Apple’s new iPhone – saturating and seductive, with the product projected as an aesthetic icon and a designer must-have.

But then came the price – marketed at £1,000, it was hard to fathom how so many millennials, already clutching earlier versions of the iPhone, could form queues for an Apple iPhone XS at such a price – a device with little (barring a sharper picture) by way of functional improvement. Meanwhile, competition from less expensive mobile phones such as Samsung, Nokia and Huawei have come to look better value, while pressure on household incomes has put a lid on the obsessive-compulsive pursuit of the latest mobile phone simply because it’s the latest.

And companies and products, no matter how popular and seemingly ever-enduring, do rise and fall – just as the iconic slide-phone Nokia rose and fell and the flip-top Motorola rose and fell. Apple is highly dependent on customers buying new phones – and that relies on technological advances. Here it has struggled to entice consumers post-iPhone 8, where technological advances have begun to plateau and with it consumers’ incentive to purchase a new iPhone.

Innovation is the constant disrupter, providing sharp reminders that “sustainability” is an ephemeral and not always benign pursuit. New entrants and new technologies force the giants from their top slot. And while Apple, with its huge revenues and massive R&D budget, will continue to have a global presence for years ahead, it will at some point fall victim to the process of creative destruction.

Perhaps, then, we should not be over-concerned about the falling Apple. But there is certainly cause for worry if you read the company’s summation. It blamed a weak Chinese economy for disappointing sales of the iPhone.

The Greater China region, which includes Hong Kong and Taiwan, accounts for almost 20 per cent of the firm’s revenue. “While we anticipated some challenges in key emerging markets,” said Cook, “we did not foresee the magnitude of the economic deceleration, particularly in Greater China.”

The statement brought a sell-off, not only in shares of Apple (its market capitalisation, which broke the trillion-dollar mark to hit $1.2 trillion in early October, is now down to $674bn) but across global stock markets. The technology-heavy Nasdaq Composite index tumbled by more than three per cent. Together with a renewed sell-off in Asia and Europe, this sent the FTSE All-World index down 1.7 per cent.

For if a China slowdown was the cause, this would portend wider and more serious implications for the global economy. Investors have grown increasingly worried over a broad global growth slowdown after a string of weak data. China’s private-sector Caixin index of manufacturing activity last week indicated contraction for the first time in 19 months.

From car makers to aircraft, heavy engineering to electrical machinery, pharmaceuticals to food, drink and luxury goods, China has become a vital growth market for the West.

And business confidence in the US is especially brittle, given the concerns over President Donald Trump’s pursuit of tariffs and worries over a trade war. Kevin Hassett, chairman of the White House Council of Economic Advisers, warned that the US-Chinese trade war was likely to lead to more US companies seeing lower revenues and profits. “It’s not going to be just Apple,” he declared last week. “There are a heck of a lot of US companies that have sales in China that are going to be watching their earnings being downgraded until we get a deal with China.”

Such is the concern over a China-led global slowdown that there is now speculation that early this year we will see not further US interest rate rises as widely expected, but a rate cut. Already the Fed Funds futures market indicates that investors think there is no chance the Fed will lift rates in 2019, and a greater than 50 per cent chance of the US central bank easing policy this year. The US yield curve, the slope formed by Treasury yields of various maturities and a popular market gauge of impending economic downturns, is also signalling danger ahead.

The yield curve has flattened and inverted, when short-term yields are higher than longer-term ones, ahead of almost every post-second world war recession. The difference between three-month Treasury bill yields and 10-year Treasuries fell last week to its lowest since September 2007.

Markets now seem to be pricing in a significant risk of a substantial economic slowdown. And the UK is far from immune. Purchasing managers last week reported that growth in the dominant services sector in December was the second lowest since July 2016. This points to a notable slowdown overall in the final quarter of the year, with the British Chambers of Commerce reporting that domestic sales and orders fell to a two-year low for UK services companies in the October-November period.

Accountancy giant EY expects UK GDP growth to have halved to 0.3 per cent in the fourth quarter from 0.6 per cent in the third. This would result in overall GDP growth of 1.4 per cent in 2018, down from 1.8 per cent expansion in 2017 and the weakest performance since 2009.

All told, the problems at the core in 2019 may go a lot deeper than Apple.