Poor Apple sales a bellwether of a troubled Chinese economy

Earlier this week, China released the Purchasing Managers' Index data for December 2018. This figure otherwise known as PMI gauges future production sentiment by polling a representative body of purchasing managers in industrial companies.

If the purchasing managers have a positive outlook they will signal either steady or increased intention to purchase supplies to meet demand. If they signal a negative sentiment they will inform of the intent to reduce their future supply orders.

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Any figure that dips below 50 is considered a sign of negative economic activity and lowered output and production. China’s most recent figure stood at 49.4, a clear indication that things are slowing down in China.

Shortly after the release of China’s PMI data, Apple CEO Tim Cook announced that Apple will miss its fourth quarter revenue expectations and attributed the earnings miss to deteriorating sales in China.

Markets reacted swiftly to this double-whammy with the Dow Jones Industrial Average declining by over 650 points at the close of trading on Thursday. Apple in particular paid the price as investors sold Apple shares resulting in a 10-percent single-day decline in value for the company stock.

Given this set of circumstances, how should we read the tea leafs and what is the state of the Chinese economy at the start of 2019? Will there be wider fallout in the global economy as China’s economy decelerates?

For a while it did not appear that the Chinese economy was feeling the effects of the escalating trade war between itself and the United States. Tariffs that cover over $200 billion dollars of Chinese exports did not seem to affect conditions within China in early 2018. Things are different today, and the latest data coming out of China certainly point to a slowdown in its economy. 

Having recently returned from a trip to China, I can say that things are bad, and they are going to get worse. As an export-dependent economy, the imposition of tariffs and other trade barriers are starting to be felt.

During the last half of 2018, Chinese factories were running at full tilt as many American companies ramped up their orders and front-loaded their purchases to get as much inventory into the United States ahead of anticipated tariff increases.

Since then, a new reality has begun to set in. Orders are drying up, and factories in the tradable goods sector have been reporting layoffs. In Dongguan, a manufacturing region located in China’s Guangdong Province, reports of worker dismissals and reductions in work hours have become commonplace. 

Other evidence indicating a slowdown in China includes a drop in automotive sales, excess unsold inventory in the residential real estate market, reduced demand for luxury goods  and a decrease overall in manufacturing activity.

China’s stock market was one of the worst performing stock markets in the world in 2018, recording an annual decline of over 25 percent.

Reaction from China’s consumers has been swift as Apple’s latest sales figures in China show consumer’s hitting the brakes on spending and exercising greater caution as uncertainty has cast a cloud over future economic conditions and looming prospects of unemployment. 

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Will China’s declining economy infect other parts of the world? Over the past 15 years, China has been one of the primary drivers of global growth. Chinese demand for raw materials and energy has lifted resource-rich economies around the world, such as Brazil, Australia, South Africa and the oil-exporting states.

As China slows down, those states will certainly feel the reduction in Chinese demand. The United States will not be immune to China’s decelerating economy, and Apple may soon have company.

A multitude of American companies do business and derive a significant portion of their revenues from the China marketplace. Companies such as John Deere, Caterpillar, Cummins, United Technologies, Boeing, GE, General Motors, McDonalds, KFC, Starbucks, Nike and IBM have significant investments in China.

These are but a few of the many American companies doing business in China today. As the trade war continues, these American companies will suffer collateral damage as they are caught in the crosshairs of the ongoing trade battle between the United States and China.

Arthur Dong is a professor at Georgetown University's McDonough School of Business. He specializes in legal and business engagements between China and the United States.