Commentary
Hit Hard By Chinese Economic Downturn And Dwindling IPhone Sales, Apple Shares Plunge As Company Slashes Revenue Forecasts
Swarajya Staff
Jan 03, 2019, 09:40 AM | Updated 09:40 AM IST
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Hit by a sharp economic deceleration in China and fewer upgrades to newer iPhone models, the world’s largest smartphone market, Apple Inc has lowered its quarterly revenue forecast for the first time in more than 15 years, The Wall Street Journal reported. China represents nearly 20 per cent of Apple’s sales.
Apple has now pegged its revenue for the quarter that ended 29 December at $84 billion, way short of estimates by analysts that it is likely to clock a revenue over $91 billion.
The announcement late on Wednesday (2 January) sent Apple shares plunging 7.6 per cent in extended trading after the announcement. The year 2018 has turned out to be Apple’s worst yearly performance since the financial crisis with the company losing more than $300 billion in market value after peaking above $1 trillion in early October.
Apple's Chief Executive Officer Tim Cook in a letter to investors on Wednesday (2 January) attributed the disappointing performance of the company to the economic slowdown in China, exacerbated further by mounting trade tensions with the US.
While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 per cent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.
China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years. We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp.
Lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance and for much more than our entire year-over-year revenue decline. In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year. While Greater China and other emerging markets accounted for the vast majority of the year-over-year iPhone revenue decline, in some developed markets, iPhone upgrades also were not as strong as we thought they would be.
While macroeconomic challenges in some markets were a key contributor to this trend, we believe there are other factors broadly impacting our iPhone performance, including consumers adapting to a world with fewer carrier subsidies, US dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.
Cook in his letter pointed out that revenue outside iPhone business grew by almost 19 percent year-over-year, including all-time record revenue from Services, Wearables and Mac.
Our non-iPhone businesses have less exposure to emerging markets, and the vast majority of Services revenue is related to the size of the installed base, not current period sales. Services generated over $10.8 billion in revenue during the quarter, growing to a new quarterly record in every geographic segment, and we are on track to achieve our goal of doubling the size of this business from 2016 to 2020.
Cook said other factors will also pull down Apple’s revenue, including the timing of its iPhone launches last year and a strong dollar that means that sales when converted to US currency resulted in lower revenues. He also cited supply “constraints” for some products, including its latest Apple Watch and iPad Pro.
Despite concern over China, Cook said that he expected to set all-time revenue records in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea and in some emerging markets, others set records, including Mexico, Poland, Malaysia and Vietnam.
Analysing the dwindling fortunes of Apple in China, the WSJ report highlighted that the company's share of the Chinese smartphone market has been declining steadily, as it faces tough competition from homegrown tech giants such as China’s Huawei Technologies Co. that market increasingly sophisticated phones at a lower price tag.
Apple’s share of the Chinese smartphone market contracted to 7.8% in the first three quarters of 2018 from a peak in 2015 of 12.5%, according to Canalys, a market research firm. Apple was the country’s No. 3 handset maker, measured by unit sales, in 2015, according to International Data Corp. For the first three quarters of 2018, Apple ranked as the fifth-largest seller in China.
Analysts have also been closely watching China’s economy for signs that increasing Chinese nationalism, combined with higher-quality China-made products, is moving consumers to purchase local brands. Signs have begun to emerge: For the first time, last year four of five of the top-watched films in China were Chinese, according to Box Office Mojo. Local brands continue to outgrow multinational corporations in the food and beverage sector, according to Goldman Sachs.
In November, Apple announced that it will no longer be reporting unit sales of iPhones, iPads and Macs beginning 2019. Analysts believe that it was a calculated move on part of the company to avoid disclosing lacklustre growth numbers.
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