Signs of a Chinese growth slowdown are prompting caution and pessimism among firms spanning multiple sectors
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A rare sales forecast cut sent Apple shares tumbling Wednesday, marking an inauspicious start to 2019 for the company. The reason, according to CEO Tim Cook, was weak iPhone demand in China during the past holiday quarter.
In a letter to investors, Cook said the company did not anticipate the magnitude of China’s economic deceleration. According to CNBC News, the Chinese Academy of Social Sciences, a government-led think tank, recently moderated its projection for the country’s economic growth from 6.5% this year to 6.3% — a significant drop in consumer spending considering its population of 1.4 billion.
Trade tensions with the US, which Cook also cited in his letter, are being tagged as a contributing factor to economic deceleration in both countries. While the two largest economies have temporarily suspended plans to raise tariffs as they try to iron out a deal, the damage has been done. Coresight Research, citing data from China’s National Bureau of Statistics, said retail sales in China grew 8.1% in November, its slowest pace in 15 years. Export growth also plunged from 15.5% in October to 5.4% in November.
Apple dialed down its first-quarter revenue projection from US$89 to US$93 billion to $84 billion. But it’s not the first to sound cautious notes of guidance over China; C-level spokespersons from Intel and HP notified their own shareholders in October and November, respectively, of a potential impact.
US automakers have already been hurt by tariffs. Ford CEO Jim Hackett has claimed that tax penalties on steel and aluminum were costing his company US$1 billion last year alone; the fact that its sales in China for the first 11 months last year fell more than 30% compared to the same time frame in 2017 hasn’t helped. The Chinese Association of Automobile Manufacturers also reported a 14% drop in auto sales in the country in November compared to the same month the previous year; for Ford, that number was 50%.
In an attempt to offset the trade war’s impact on Chinese sales, Tesla has cut prices on some of its models in the country. The company, which is speeding up construction of a factory outside of Shanghai, is reportedly operating at a 55% to 60% cost disadvantaged to local manufacturers in the country.
The effect on retailers, meanwhile, has been mixed. After reporting softer-than-expected third-quarter sales last year, ostensibly because of weaker spending from Chinese tourists in the US and Hong Kong, Tiffany’s shares fell 9.6% on November 28. But China was a bright spot for Lululemon and Nike, with Nike boasting 31% sales growth there for its fiscal second quarter ended November 30.
Luxury retail and product companies, however, face a larger threat. Consulting firm Bain has estimated that Chinese shoppers will account for 45% of the luxury market by 2025. While demand from such consumers has declined by just a modest amount, reports of Chinese authorities enforcing stronger regulations around luxury importation has sent shares of companies such as Gucci owner Kering SA, Prada and Shiseido skidding.
