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COMMENTARY: Apple's Bleaker Outlook Reflects How Both Sides Are Hurting in Trade War

Falling stock markets and slowing growth show companies in both the U.S. and China are struggling and that it’s time for Presidents Trump and Xi to make a deal.

Mark Melnicoe
    Jan 05, 2019 4:35 AM  PT
COMMENTARY: Apple's Bleaker Outlook Reflects How Both Sides Are Hurting in Trade War

As a new year dawns with the U.S.-China relationship in turmoil, it's a good time to take stock of how the two nations' economies might affect trade negotiations.

And as it turns out, one company's fortunes serve as a strong symbol of how things are going. In Apple's shock announcement this week that it was cutting its revenue outlook for the first time in more than 16 years, CEO Tim Cook put much of the blame on weakening demand in China.

The specter of an iconic American company, which builds its flagship iPhone in China and sells millions of them there, should inject a sense of urgency into trade talks that reportedly are about to resume between Washington and Beijing. It certainly put renewed urgency into the stock market, as Apple's announcement caused the Dow Jones Industrial Average to plunge 660 points Thursday. Apple plummeted 10 percent, the most in nearly six years.

Rumblings about whom the tariffs are hurting more may now be beside the point. Companies everywhere are feeling the pain – from agribusiness in California to manufacturers in China's Guangdong province to the big automakers in Detroit.

U.S. economic performance has outperformed much of the world during the past year, but it faces headwinds that include political chaos in Washington caused by an undisciplined and unpredictable White House.

Economies Under Pressure

For China, problems abound. Growth is slowing and probably is well short of the 6.5 percent GDP performance officially reported for last year's third quarter. Few analysts believe those numbers when viewing China through the prism of other indicators.

  • Manufacturing activity contracted in December for the first time in almost two years, with the Purchasing Managers' Index coming in at a surprisingly low 49.4.

  • Chinese authorities have been encouraging banks to lend more by lowering reserve-ratio requirements and changing other rules. But it is trying to thread the needle, targeting more funds for small businesses but not to hugely debt-burdened state-owned companies.

  • Growth in consumer spending is slowing amid an explosion of household debt.  

  • The Shanghai Stock Exchange Composite Index fell 24.6 percent in 2018 – the worst performance of any major market in the world and a likely precursor to more economic woes in 2019.

All of this might point to Beijing trying to make a deal with the Trump administration to end a trade war that clearly is contributing to China's problems. President Trump has already put tariffs on $250 billion of Chinese goods – about half of America's imports from the Middle Kingdom. China has retaliated with taxes on $110 billion of American imports.

Much more damage could be done and the entire global economy is threatened if an all-out trade war ensues between the two largest economies in the world. Companies are starting to move long-established supply lines out of China, fearing the tariffs will persist and price them out of markets.

The Woes of Apple

Apple is so big that its problems rain down on other companies – especially those that make components for its popular products. Stocks of some of those firms also fell sharply this week, and China's tech companies have been plunging for months.

Some argue that Apple's fall signals that Trump is winning the trade war, and that China is being hurt more than the U.S. There are several problems with that thinking. One is that it assumes the U.S. economy will remain as resilient as it has so far. But as the tariffs have barely taken effect, this is not a given.

In addition, pain is already being inflicted on our side of the Pacific. Shanghai is not the only suffering stock market. Wall Street indexes fell in December the most since 1931, with the tech-heavy Nasdaq Composite hitting bear market territory.

Further, while Cook attributed much of his company's woes to China, Apple has other serious issues. It derives more than half of its revenues from one product – the iPhone – and its latest iteration, released in September, isn't selling particularly well anywhere. People are keeping their phones longer than they used to, perhaps because of fewer innovations in the new ones. They are also buying the competition.

"I've argued for a year that Apple is in trouble in China - why buy an iPhone when Huawei is 50 percent cheaper?" Shaun Rein, who runs the Beijing-based China Market Research Group, wrote in a LinkedIn comment. "Many consumers (like my family) have switched to Huawei at 30-50 percent cheaper and as good quality."

Rein noted a secondary reason - the arrest in Canada of Huawei CFO Meng Wanzhou at U.S. behest.

"Many Chinese are protesting Apple products," Rein said. "Apple (not Canada Goose) will be harder hit as consumers see the U.S. more than Canada as the bogeyman."

Few Winners on Either Side

In the end, it's hard to see who wins in a trade war. Trump's goal of prying open China's markets to greater U.S. participation could bear some fruit. But China's consumers are increasingly demanding and fickle, and Xi's propaganda machine can turn them against U.S.-made products.

Some of Trump's other demands, such as a stifling of China's Made in China 2025 technology initiative, likely will go nowhere.

Meanwhile, Wall Street seems to be screaming a message Trump doesn't want to hear: His trade war is having a negative impact on a growing number of American companies.

It's time for leaders in both countries to acknowledge that their markets are reeling, their economies are in jeopardy, and that it's time to get serious about coming to an agreement.