China, which was an afterthought for Appleonce-upon-a-time, has become the company’s second biggest market. In the second fiscal quarter, Apple generated $7.9 billion of revenues from China. This amount was more than three times the revenues a year earlier. As a reference, Apple’s total revenues were $39.2 billion.
A large number of Apple bulls expect Apple sales in China to accelerate, but the data do not support such expectations.
Applied Materials (AMAT), the big semiconductor equipment company, lowered its earnings estimates on Tuesday, citing a slowdown in China. Yesterday afternoon the whole stock market fell out of bed whenCummins (CMI), a truck engine maker, lowered its forecast. One of the reasons given was a slowdown in China.
The day before yesterday after the market closed,Advanced Micro Devices (AMD) lowered its forecast attributing it partly to China.
Previously, Yum (YUM) told us that it was not selling enough chicken in China and McDonald’s (MCD) told us it was not selling enough hamburgers.
Apple products are aspirational products. It is not uncommon for Chinese middle class youth to save money for the specific purpose of buying Apple products. Certainly a case can be made that Chinese may be buying less fried chicken but they will still buy iPhones and iPads.
Macroeconomic data out of China are not encouraging. The Chinese economy is slowing rapidly. As China slows, the risk to Apple’s stock price increases.
Economic indicators can be broadly divided into three categories: the lagging indicators, the coincident indicators, and the leading indicators. I focus on the leading indicators from 23 countries. Examples of leading indicators are vendor delivery schedules, hours worked in a week, and new construction permits.
Early last year, when the consensus was that the torrid growth in China was continuing, I was beginning to write that leading indicators were forecasting a slower economy. By August 2011, we were projecting a dramatic slowdown in the Chinese economy.
Further, in August 2011, to me it was apparent that the peak growth period of the Chinese economy was behind us. Chinese GDP over the prior two quarters had risen 9.6% over the same period in the prior year according to the National Bureau of Statistics of China.
Now the lagging economic indicators have caught up to the leading indicators. It is now universally accepted that the Chinese economy may grow only by 7.5% – 8%. Gone are the heady days of 11% growth. The chart below compiled from the data provided by the National Bureau of Statistics of China clearly shows the picture of slowing growth in China.
For a country that accounts for a growing percentage of Apple sales, China’s slowdown does not bode well for the performance of Apple stock.
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