In an ugly New Year’s surprise Wednesday afternoon, Apple announced unexpectedly that it was cutting its first-quarter revenue guidance from $91.5 billion to $84 billion. The move is highly unusual. Apple reportedly last revised a projection like this in 2002.
CEO Tim Cook sent a letter to investors that attempted to explain what had changed so much over the past 60 days. An economic slowdown in China chopped down the company’s iPhone business there, Cook explained. And then in developed markets, it couldn’t make up the shortfall, because fewer people upgraded than had been expected.
It’s a big announcement for one of the world’s largest companies, and for the tech business at large, which is exposed directly to every major economy in the world.
Here are five ways to look at the announcement.
1. “Chimerica” in action
“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Cook wrote. “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”
The American and Chinese economies are inextricably linked. Niall Ferguson and Moritz Schularick coined this symbiosis “Chimerica.” Our own James Fallows has detailed the many linkages not just of financial systems, but of all kinds of enterprise. “No other nation outside North America is as tightly integrated with U.S. corporate production, consumption, distribution, and marketing systems,” Fallows wrote last year.
For many years, China has been important to American companies as a site of production, but over the past 15 years, Chinese consumption of American products has become a major part of global corporations’ business models. So a Chinese economic slowdown is bad for American business.
Is the trade war having an effect? Apple says so: “We believe the economic environment in China has been further impacted by rising trade tensions with the United States.”
2. Apple is an iPhone company
While Apple makes laptop and desktop computers, tablets, and speakers, the sheer size of the smartphone market has meant that Apple has become, roughly, an iPhone company. The trouble in China, then, is really about the company’s phone sales there, not much of anything else.
“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,” Cook continued. “In fact, categories outside of iPhone (Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19 percent year-over-year.”
It’s notable that a slowdown in one country’s iPhone sales could wipe out nearly 20 percent growth in other categories. That’s the relative scale of these businesses.
3. Smartphones are (almost) commodities
Apple has relied on customers to upgrade their phone regularly, as if the newest phone were a necessity because the technologies were changing so quickly. Toward that end, it’s created a financing program and incentives for people to trade in their phone on a regular basis.
The iPhone is a great phone, and always has been. But Google and Samsung also make great phones now. Apple has not really been able to maintain, let alone extend, its lead in things such as camera or battery technology. And it’s those two things, the pull of a new camera and the push of an old battery, that, anecdotally, drive most people to a new phone.
While the Chinese business problem seems most acute, Apple also admitted that there were some iPhone growth problems in developed markets, which is to say North America and Europe, too. “We believe there are other factors broadly impacting our iPhone performance,” Cook said, “including consumers adapting to a world with fewer carrier subsidies, U.S. dollar strength-related price increases, and some customers taking advantage of significantly reduced pricing for iPhone battery replacements.”
As M. G. Siegler noted, it was probably only a matter of time before the “law of large numbers” eventually, finally, caught up to the iPhone business. If you already sell an ungodly amount of phones, it’s hard to keep selling an even more ungodly amount of phones.
4. For most tech companies, corporate growth and profitability are dependent on overseas markets.
If there is a larger lesson in the news, it’s that the American economy isn’t the only place where American companies make money. Roughly 40 percent of the profits generated by companies in the S&P 500 come from overseas. And in markets like smartphones, where Europe and North America are pretty well saturated, the growth investors crave lies in emerging markets such as Brazil, India, and China.
5. As a sign for the global economy, this is … not good
The American economy has been through some ups and downs over the past 35 years, while the Chinese economy has largely boomed, averaging 10 percent growth for decades. Analysts expect that the economy will slow down and go through a structural transformation away from manufacturing. But everyone basically hopes that doesn’t happen too quickly, resulting in a “hard landing.” As a Californian, this long-prognosticated Chinese economic slowdown sounds like the global economic version of the predicted Big One earthquake. Everyone knows it is going to happen—it has to—but no one really lives life expecting that rupture.
And here we are in early 2019 and it’s clear that the Chinese economic slowdown is already bad. Today’s news makes it clear that the slowdown might be very bad, and worsening at a pace that took even Apple by complete surprise.
“So, what is the positive signal?” Jayant Menon, the lead economist at the Asian Development Bank, asked the South China Morning Post, rhetorically, this week. “There isn’t one,” he said.