How did Apple get blindsided by China? Here’s one theory.

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Jean Louis Gassée asks a good question. Horace Dediu suggests an answer.

From Gassée’s latest Monday Note:

By the end of October 2018, Apple was on its way to a decent quarter. Sixty days later, $7B in revenue is missing. Tim Cook writes to his shareholders but leaves one or two key questions unanswered.

A more serious issue [than battery replacements] is Apple’s blind spot regarding China. I distinctly recall Cook telling analysts during a quarterly earnings call that, having studied the country for 30 years, he knew China. This is true and relevant. Cook’s ascension to the COO and, later, to the CEO job is due to his prowess building and managing Apple’s nonpareil Supply Chain Management (SCM) system. Imagine the thousands of parts inside an iPhone, and then picture building ten iPhones per second, 24 hours a day at the peak of the Holidays season, and shipping them to 130 countries… No question, one has to know China, the people, the culture, companies large and some small to make the SCM magic happen year after year, with only the rarest of hiccups.

With all of these strengths, how could Apple, which is more embedded than most Western companies, not see a Chinese economy slowdown that started well before the 2018 Holiday quarter? More specifically, what did Apple know and not know when they issued a guardedly optimistic Q1 revenue guidance in the $89B to $93B range on November 1st? What did they learn in the following 60 days, how much, how fast?

From Dediu’s The Critical Path 216: Tim’s Letter. He’s trying to explain a sudden 70% drop in consumer spending on luxury goods in China, not convinced that the trade war is to blame:

My suspicion is that it’s far more fundamental, dealing with anxiety people have about their assets. They may worry that they don’t have as much money as they thought they had. If you ask yourself “why would you cut your spending by 70%”? Why would you hunker down, expecting the worst? … People react with extreme anxiety only to some existential threat to their finances.

My hypothesis is that you have to know how Chinese consumers actually deal with their personal finances. I’m not an expert, but I’ve seen a few informative videos on the subject. One has to do with real estate.

Real estate in China is actually a deep deep sink of capital. Meaning that people put money there the way we might put money in a bank or the stock market. In China if you are a consumer and you have a little bit of excess cash… the average person is going to try to put it in a safe asset, and the safest asset for most Chinese has been real estate. Most people are buying second and even third homes as investments. And many are going unoccupied. In fact, there are about 50 million homes in China which are unoccupied. Think about it. 50 million is about half the household count of the entire United States…

People have been possibly over-investing in real estate, and there isn’t enough demand for what’s being built. So the Chinese government has been trying to figure out ways of slowing this down and changing the economics of real estate. One of the oddest things is there is no real estate tax [in China]… So if they were to introduce a real estate tax, people would panic. They’d have to sell their properties probably because they couldn’t afford the cash flow. And if they were to sell their properties there would be a market crash.

My take: It’s just a hypothesis, but he’s not making this stuff up. For background, see Can China fix its runaway housing market? in the South China Morning Post.