Tim Cook does not celebrate ‘Happy New Year’

Cong Minh NGUYEN  London 01.04.19

LSE SE Business and Finance Guild, London School of Economics 

Starting the new year 2019, optimistic investors are put down by a rare fall in sales forecast of Apple since 2002. In his letter to investors, Tim Cook, Apple’s chief executive, states the expecting revenue of the company to be around $84 billion and gross margin of 38% for the blockbuster 3-month trading period following the introduction of new iPhones. This is indeed a decrease from its own forecast of at least $89 billion and gross margin of 38.5% two months ago. This shows Apple to be shrinking such that shares of the tech giant tumbled nearly 10% after the news.  

To justify shortfall, Mr Cook plays his game of blames, saying:
         
                 “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic                    deceleration, particularly in Greater China”

Indeed, he has a reason. China significantly matters to Apple as the biggest smartphone market of the world, accounting for more than 30% of global sales. Therefore, the slowdown in China’s economy, due to the toxic combination of trade wars with the US and weakening domestic demands, inherently drove down consumers’ confidence. This has hit the mobile market such that unit sales fell for the first time by 4.9% in 2017 after an 8-consecutive-year growth.   

The market is thus tightened, but why is it more so for Apple? Tim Cook is hiding defects in the company’s operations to challenge Chinese competitors. In reality, Apple was surpassed by Huawei last year as the world’s second biggest smartphone giant, after Samsung. As Apple positions itself to be a luxury brand targeting at China’s increasing middle class, its phones are sold for Rmb12,700 ($1,856), which is more than prices of any Chinese rivals’ top-end products. However, this strategy is now counterproductive as only 1.1% of respondents to a research of FT confidential would be willing to spend that much on the new iPhone. This means Apple’s innovations are no longer enough for its phones to be worth the price in China. Chinese companies indeed appear to be faster to catch the market trend. For example, Huawei has offered dual-Sim card support since 2007, which is done by Apple only last year. Furthermore, the most-recent product of Huawei is priced only at Rmb4,000 ($580) but offers multiple cameras, reverse wireless charging, excellent chipset and battery. The slowdown in the economy then put consumers under pressure to care more about the price-quality ratios to which Apple is now less appealing.

It is also worth noticing the change in patterns of consumers’ behaviours in China following the US-China trade war. The rise in patriotism, especially after the US extradition request to arrest Meng Wanzhou - the chief financial officer of Huawei, explains a rising preference for local brands. Interestingly, there are discounts for Huawei’s users in restaurants and indeed, one Zhejiang-based technology company explicitly banned its employees to use Apple’s products and promoted Huawei’s brand. Such a hardly expected consequence of the trade-war then provides an insight into the decrease in Chinese’s preferences for Apple.

Not only does Apple underperform in China, the result is also disappointing in mature economies, being admitted by Tim Cook: “In some developed markets, iPhone upgrades also were not as strong as we thought they would be”. He blamed this on price rises in some countries due to the strength of the US dollar that put off consumers and the company’s reduction in battery replacements’ price from $79 to only $29 that discourages current iPhone users to upgrade. To regain some optimism, the CEO pointed out stronger growth in other areas. Revenues of apps and music is up by 25% to $10.8bn, while Apple Watch and Airpods sales all rose by more than 50%. However, the majority of the company’s revenue is still from sales of iPhones that urges a real boost.

Apple was the world’s first public company to be worth more than $3 trillion 6 months ago, but has since lost such a status, and even its recognition as the world’s most valuable company in the middle of growing disappointments of the new iPhone’s sales.



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