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Last week’s shocking news that Apple was losing $7 billion from iPhone projected sales due to China sent the market into a tailspin. Either Apple was going to pot, or China was. Either outcome is a market negative. But how much is China to be blamed for Apple’s sales miss?
Apple CEO Tim Cook said China’s weaker economy and trade tensions were the problem. An Apple boycott in support of the Huawei CFO from Canada who was arrested last month for breaking Iran sanctions rules didn’t help. So it looks like iPhones sales will be around $84 billion globally versus the consensus of $91 billion. Many China watchers said that Apple phones are just too expensive for the locals, who now have homegrown brands to choose from, including Huawei and Xiaomi-branded devices.
Apple’s gross profit margin on the iPhones is around 38.3%.
On Friday, just two days before the Trump administration sends a small delegation to China for trade talks, Larry Kudlow suggested that Chinese phone makers stole Apple’s IP. “I don’t want to surmise too much here, but Apple technology may have been picked off by China, and now China is becoming very competitive with Apple,” Kudlow said.
It is plausible. Apple assembles iPhones in China, so there is a chance that technological know-how was picked up, reverse engineered and copied by newcomers. China has been doing that across industries for years.
“They can knock off my product and sell to the people I work for, absolutely,” says Ravin Gandhi, founder and CEO of GMM Nonstick Coatings, a chemicals company headquartered in Chicago. “China is a bad actor in a lot of ways. This horse is now out of the barn. They stole so much in the past that they have built a base in which they can build their own intellectual property,” he says, without alluding to Apple. He mentioned solar panels, automotive and chemicals for starters. “They already have the building blocks now.”
Assuming the best out of China, and that Huawei and Xiaomi didn’t steal Apple’s technology, both carriers are gaining market share at Apple’s expense. However, the same can be said in India, where IP theft is not front and center. Other emerging markets were also soft for the iPhone.
Instinet analysts led by Jeffrey Kvaal in New York believe Apple was cutting orders to the supply chain late into December. He expects Apple to enter the second quarter with excess inventory. Part of Apple’s non-China related woes includes fewer carrier subsidies and reduced battery replacement pricing.
Apple also disappointed with its app sales in China. China recently lifted gaming restrictions, which should have been a boost for Apple's downloadable games in the App Store. Instead, App Store growth can in far below China rivals.
Proprietary telecom industry reports say that Apple has been lagging in other areas, namely 5G. Chinese brands are quickly developing 5G smartphones, and there has been some speculation that Apple might not launch a 5G model in China until next year. With the absence of 5G phones, Apple is likely to adopt a more aggressive pricing strategy to maintain the sales momentum of iPhone devices this year.
“I think the Apple miss it still up for debate,” says Craig Birk, CIO of Personal Capital in San Francisco. “It could also be because Apple isn’t as desirable as they once were in China. Or that trade frictions exacerbated the problem. Apple is going to have a big impact on trade negotiations this week,” says Birk. “It’s the most tangible example of China hurting retail investors.”
Then again, Audi said it sold 11% more cars to China last year, hitting 660,888 units in 2018.
“We should expect more Apple-like China blame games especially in light of White House Council of Economic Advisor Kevin Hassett’s comment that ‘It’s not going to be just Apple,’ ” says Brendan Ahern, CIO of KraneShares in New York.
