How The Chinese Slowdown Hit Apple?

Apple is a well-known brand since it is the most valuable firm in the entire world! Apple can attribute a large part of its success to being one of the few American firms that have been able to gain a significant foothold in China. However, this foothold could be the very reason that Apple is in the eye a storm now. The growing sales in the Greater China region gave Apple a competitive edge over its peers. However, now these falling sales from Greater China could also be responsible for substantial markdowns in the company’s profitability as well as revenues.

In this article, we will have a closer look at the slowdown in the Chinese industry as well as how it ended up impacting Apple.

The Chinese Economy and Apple

China is a major market for products being sold by Apple. At the present moment, around 15% of the sales generated by Apple are from the Greater China region. Apple has spent a lot of money and has done a lot of work to become the darling of Chinese consumers as well as the government.

Apple products are used by consumers in China to show off their new found wealth. On the other hand, all the apps in Chinese iStore are compliant with China’s internet policies. Even the data related to Chinese iPhones is stored in a server which is based in China.

It is no surprise that Apple is so focused on it’s China strategy given that China is one of the few high growth markets left in the world for Apple’s products. Since other markets are saturated, a slowdown in China has a huge impact on the Chinese economy.

First, we need to ascertain the basis on which we are claiming that the Chinese economy is in a slowdown. This is because even though the world believes that Chinese growth has slowed down, China simply refuses to believe it. However, numbers do not lie.

Consumption tax is paid by Chinese consumers whenever they buy any goods or services. The amount of this tax collected is indicative of the quantum of economic activity that is going on in a given region.

China has witnessed a steep drop in these tax collections in the past few months. In some months, the consumption tax had seen a downfall of close to 70% from the previous year.

Apple CEO Tim Cook has revised Apple’s revenue expectations to $84 billion from $90 billion because of this expected slowdown.

Reasons Behind This Slowdown

• Competition: Apple is facing a lot of competition in the Chinese market. Regional players such as OnePlus, Oppo, Vivo, Xiaomi, etc have started capturing market share from Apple. These players are providing much cheaper substitutes for Apple’s products.

  Apple is known for charging a premium because it has a superior Operating System and proprietary apps. However, the Chinese market is known to be different. WeChat an app made by Tencent is widely used in China for everything from hailing taxis to reading restaurant reviews.

  The popularity is WeChat is so much that consumers are willing to forego apps such as FaceTime. Slowly but surely, the competition is catching up to Apple, and the results are reflecting in Apple’s financials.

• Trade Wars: The Sino-American trade wars are making things tougher for Apple. Right now there are no direct taxes which have been imposed on Apple products from both sides. However, the sentiment against Apple and its products is very high.

  The problem with Apple is that it is viewed as a Chinese company in America and as an American company in China. This is because it is an American brand which manufactures most of its products in China.

  Right now, there are negative sentiments related to Apple products in the people of both countries. This is what has created a dent in sales. In future, if the trade war between China and the United States escalates, Apple may become one of the first casualties.

Why Will It Not Affect Other Tech Companies?

Ever since Apple’s results came out, the entire investor community has been worried. This is largely because they believe that Apple’s problems will also spill over to other tech companies. However, analysts are pretty sure that is not going to be the case. This is because, amongst the FAANG companies, i.e. Facebook, Apple, Amazon, Netflix and Google, Apple is the only company to have significant exposure to the Chinese markets. Since other tech companies do not have sizeable business interests in China, they are unlikely to be affected by this slowdown.

However, there are other American products which may be affected. For instance, Starbucks has more than 3000 cafes in China. Also, General Motors is using brands like Cadillac and Buick in order to capture the automobile market share in China. These companies, just like Apple are vulnerable to ups and downs in the Chinese markets. If a company as efficient as Apple, couldn’t manage this crisis, it is unlikely that the others will.

The bottom line is that Apple’s exposure to the Chinese market is a liability for the company as of now. Apple can only hope that the Chinese economy picks up once again so that its sales are also revived in the process.