The shares of Apple Inc. are down 27 percent from their 2015 highs. Why? In a word, China.
The world’s largest company (by market capitalization) is based in the U.S. But when Apple CEO Tim Cook recently said that China’s economic softness hurt Apple’s results, he underlined an important fact. China, which accounted for more than half of Apple’s total revenue growth last year, is the main driver for the U.S. firm’s future growth.
Apple doesn’t report sales by country, but instead segments them into the Americas, Europe, Greater China (including Taiwan and Hong Kong), Japan and the rest of Asia Pacific.
In 2015, the Americas (North, Central and South America) accounted for about 40 percent of net sales. That still represented the largest market. But China is growing a lot faster. In 2015, Greater China accounted for 25 percent of Apple’s net sales. A year earlier it accounted for only 17.5 percent, and just under 16 percent in 2013.
Apple’s overall revenues in 2015 increased by US$51 billion. More than half of that growth — US$27 billion—came from Greater China. The year before, 37 percent of Apple’s total new revenue came from Greater China. So, most of the growth in Apple’s earnings comes from Greater China.
Apple’s big problem is that sales in its largest market, the U.S., aren’t growing. In the most recent quarter, sales in North America actually fell compared to the previous period. That means it will be a lot harder for Apple to grow there without a huge new product, and without taking market share away from other companies.
Apple’s biggest product, the iPhone, has been available in the U.S. since June 2007. In China, the iPhone was available in 2009, but it only hit the big time in 2013, when Apple signed a distribution agreement with China Mobile.
On a related front, about 80 percent of the U.S. mobile-phone owning population has a smartphone. China is a long way from that, as only 45 percent of China’s mobile-phone population has a smartphone. In other words, the U.S. is far closer to its saturation point than China. And in China, the average person uses the same phone for 22 months before getting a new one – compared to 26 months in the U.S.
Apple knows that China is its future. CEO Tim Cook joined the advisory board of Tsinghua University’s School of Economics and Management. There are also plans to set up an Apple University corporate training program in China. Apple opened its first store in China in 2008 and now there are 30 retail sites in China, with 10 more in the plans by mid-year. China now ranks third in terms of store numbers, and will soon pass the U.K. (39 stores, first opened in in 2004). It’s still a long way behind the U.S. (the first of its 268 stores opened in 2001). By comparison, Germany’s first Apple Store also opened in 2008, but now there are only a total of 14 stores there.
A slowing Chinese economy has been a big reason for the recent drop in Apple’s share price. Investors bought into the idea that Apple’s growth rates would continue as China grew. But while recent quarterly sales grew by 14 percent compared to the previous year, and were far stronger than growth in the Americas, it was still disappointing compared to the rapid growth of recent years.
It also hurts that Apple’s competition is getting smarter – and cheaper. Samsung, Lenovo, ZTE, Yulong and Huawei have all sold more smartphones than Apple at various times since the iPhone launched in China. And the gap with Apple, in terms of marketing and design, is closing.
Meanwhile, Apple’s ties to China aren’t popular with some U.S. politicians. Republican presidential candidate Donald Trump has said that he would stop Apple from making its devices in China if he were elected. Although he wouldn’t be able to do this – even if he were president – the sentiment of creating jobs, and saving American jobs, is popular, even if Americans don’t want to do those types of jobs.
(One irony is that Apple directly employs around 76,000 people in the U.S., mostly retail workers, engineers and app developers. By contrast, the company is said to employ more than 500,000 in China, through contract workers who earn around $400 per month.)
Apple’s future is closely tied to China’s future. The company may have headquarters in the U.S., but China is its fastest growing market and where most of its devices are made. And China is likely to be responsible for even more of Apple’s earnings pie, and growth, in coming years.
So, if you are interested in buying Apple stock, watch what happens in China. If the Chinese consumer prospers in the new year, so will Apple.