Apple warns sales will fall short and cites 'deterioration' in China

The Washington Post

Apple on Wednesday lowered quarterly sales estimates for the first-time in more than 15 years, blaming an unexpectedly deep slowdown in China and President Donald Trump's trade war for the shortfall.

The announcement suggested not just significant business challenges emerging for Apple, which briefly became the most valuable U.S. company in history last year, but deeper concern about how the trade war might be contributing to a global economic slowdown led by China.

Apple chief executive Tim Cook said in a letter to investors that Apple "did not foresee the magnitude of the economic deterioration" in Greater China, an area that includes China, Hong Kong and Taiwan. Along with slowed growth there in the second half of last year, Cook said that the "economic environment in China has been further impacted by rising trade tensions with the United States."

The announcement seems likely to fuel further volatility in the U.S. stock market, where U.S. technology stocks have driven a major correction in recent months. The news Wednesday sent Apple's stock - as well as the broader market - plunging in after-hours trading.

It also comes as the Trump administration and the Chinese are trying - without success - to resolve a simmering trade conflict that has already put nearly half of all Chinese exports to the United States under tariff.

Apple is perhaps the most prominent U.S. company to cite the trade war as a factor dragging down its business.

But a variety of other issues could also be at play that raise questions about the long-term challenges facing the iPhone, Apple's flagship product. Consumers may be holding on to the devices longer in China and other markets, while Chinese consumers may also be gravitating toward cheaper alternatives made by Chinese companies such as Huawei.

Greater China accounted for one fifth of Apple's roughly $265 billion in global sales in the last fiscal year. That makes Greater China the third-largest market for Apple, although Cook at one point in 2013 said he expected it to "become our first."

"Apple is in a lot of trouble," said Shaun Rein, managing director at the China Market Research Group in Shanghai.

Along with being the world's most populous country, China also serves as a key hub in the tech giant's supply chain - a place where iPhones are assembled.

Many signs have been pointing to the slowing of China's economy. The International Monetary Fund predicts China's economy will grow at 6.2 percent next year, down from 6.9 percent in 2017, but some analysts say the decline will be even more dramatic.

Apple's warning suggests one way that the slowdown could reach the United States. China has the second-largest economy in the world and is the third-largest buyer of U.S. exports after Mexico and Canada, meaning that what happens can quickly affect U.S. growth and employment.

"There's massive uncertainty because of the trade war. We're seeing the weakest retail sales in years," Rein said of China's economy.

A number of other prominent companies, including Ford, Walmart, United Technologies and Honeywell, have cited the trade war as hitting their businesses. But while most of these companies have been hurt because they have to pay more to import products, Apple's situation is more complex.

Cook personally lobbied Trump for months to spare his company from tariffs targeting products imported from China and expressed optimism that the trade war's impacts would prove modest.

But it is feeling the effects now because the trade war has slowed China's economy so much that Chinese consumers are buying fewer smartphones.

"Trump really does think tariffs are a good thing, and that's scary for the economy," said Phil Levy, a former economist in the George W. Bush administration. "Companies thought tariffs would just be temporary. Now it's dawning on them that's not the case and they have to react."

Trump has previously threatened to place hefty tariffs on all Chinese products coming into the country - including iPhones - if Beijing doesn't make a deal by early March.

With Apple's stock falling more than 7 percent in after-hours trading, investors Thursday will likely be asking if this is a preview of what other technology, retail, auto and manufacturing companies are facing.

Apple is no longer the most valuable company in the United States. It now trails Microsoft and Amazon. Some analysts say Apple is getting hurt in China as consumers there prefer to buy Huawei phones, a top Chinese brand.

The company lowered its revenue guidance to $84 billion, compared with its previous revenue estimate of between $89 billion and $93 billion. The news halted trading of Apple's stock late Wednesday and comes as Apple is set to unveil final earnings at the end of January.

Apple's revision to its revenue estimates is "probably the most significant one they've ever done," said Ben Bajarin, a tech analyst at Creative Strategies, who said Apple last made such an adjustment in 2002 in the early days of the iPod music player.

Along with its troubles in China, Bajarin said Apple's new miss also reflected a change in how consumers are purchasing the company's devices around the world. Consumers aren't springing to buy Apple's newer, faster, pricier iPhones as soon as they hit the market, he said.

"It's happening in every major market, not just the U.S. They're being hit by consumers holding on to these devices and not feeling the need to upgrade," Bajarin said.

Originally published by The Washington Post.

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