Future Tense

Nobody Really Knows Why Apple Is Struggling in China

There are many theories and plenty of uncertainty.

A man is reflected on a screen showing the iPhone XR at an Apple store in Beijing.
A man is reflected on a screen showing the iPhone XR at an Apple store in Beijing on Thursday. Wang Zhao/AFP/Getty Images

Apple shocked investors on Wednesday when the company warned that it was lowering its revenue expectations for the first quarter because of flagging sales over the holidays. Apple now expects about $84 billion in revenue for the period, down from its estimate of somewhere between $89 billion and $93 billion. The Nasdaq fell about 202 points and the Dow Jones Industrial Average fell about 660 points after the announcement.

In a letter to investors, Apple CEO Tim Cook wrote, “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.” However, it’s unclear what exactly is causing the shortfall.

The U.S. and China are currently involved in negotiations aimed at averting a trade war. President Trump has threatened to raise tariffs on $200 billion of imports from China from 10 percent to 25 percent if negotiations don’t go well for the U.S. The president has also mused about levying a 10 percent tariff on the $267 billion worth of imports from China that are currently untaxed, including the iPhone, which is primarily manufactured in China.

Many commentators have blamed uncertainty from the trade dispute for dragging Apple’s sales down, though issues within the company and a long-term slowdown in China’s economy could also be at fault.

In order to better understand Apple’s struggles in the context of U.S.-China relations, Slate spoke with Graham Webster, coordinating editor of the DigiChina project at New America. (Disclosure: New America is a partner with Slate and Arizona State University in Future Tense.)

Below is a transcript of the interview, which has been condensed and lightly edited for clarity.

Slate: What was your reaction to the Apple news? Was this surprising to you?

Webster: The news is that Apple was revising downward its sales expectations. My question is: Do those expectations already figure in the fact that the iPhone is in an increasingly competitive market in China? There are Chinese phone makers who are making really great hardware, at lower price points, and the iPhone isn’t necessarily the only prestige product anymore in the Chinese market.

But if they had figured in this shift in the market, then the question is: What mix of other factors are causing this change? I don’t know the answer to that core question of whether Apple’s projections have been overly optimistic about the China market in general.

What’s maybe more interesting than the actual cause is that people really seem to have taken this news as a signal on two fronts. One is the notion that China’s consumer spending and general economic growth seem to be less robust. The other is that, intriguingly, there may be some people who are avoiding Apple because of the confrontation between the United States and China, especially the extent to which it focuses on Huawei and ZTE. These are two Chinese companies targeted by the U.S. government who make cellphones, along with many other things. Regardless of [why] the expectations were missed … the market seems to have taken it as an indication of a decline for Apple in China and maybe a decline for China overall.

How would you say the trade situation between the U.S. and China is generally affecting U.S. tech companies like Apple? Does Apple seem like a singular case?

Apple is an important case because it’s large, and China sales account for roughly one-fifth of its global sales revenue. There aren’t a lot of companies like Apple. It’s not like there’s this row of American giants that are producing every piece of electronics. When it comes to laptops, the global leaders are not generally American companies. So when you look for indications of what’s going on more broadly, Apple is a bellwether. I think that’s why this story has really captured people’s imaginations.

Many commentators attribute Apple’s struggles to an overall slowdown in China’s economy. Do you think this is a result of the trade dispute or of China’s own economic policies?

I’m not a China macroeconomics expert, but experts in the Chinese economy were debating whether there might be a slowdown in growth well before Trump was elected. There’s always a question about whether Chinese growth statistics are real or fake or, more realistically, to what degree they’ve been politicized and manipulated. Even the central government was saying that it was targeting lower growth rates than has been the case during China’s super rapid industrialization and economic growth over the past 40 years. It’s not easy to assign any particular change in indicators to the trade war versus broader macro events in China’s own economy.

I would guess, though, that there is an effect because what the U.S. government has done under the Trump administration is to undertake disruptive economic policies with a very high degree of uncertainty. It’s not clear what will satisfy the Americans [in trade negotiations]. It may not be clear even to the Chinese negotiators. So investors making decisions about their businesses or how to act in the market just don’t know what to expect. If the United States remains a source of uncertainty, this naturally is going to cause increased nerves in China because the two countries have highly interconnected economies.

Trump’s economic adviser Kevin Hassett claimed that the Apple numbers prove that the Chinese economy is under a lot of economic stress, likely because of the trade dispute, which is a good sign for the U.S. coming out on top during negotiations. What do you make of that argument?

It cannot be known with a high degree of certainty the extent to which U.S. policies are affecting Chinese economic health. If anyone on any side is saying confidently that they know what’s going on, they’re overstating what they actually know. I certainly would be very skeptical of messaging from the U.S. administration, because not only do they have obvious political reasons domestically to paint things in a positive light for themselves, but they may also be employing strategic messaging with their Chinese counterparts.

The additional element with the Trump administration is that it remains uncertain the degree to which there’s agreement inside the administration. Some reports are saying that now there’s greater agreement and that U.S. Trade Representative Robert Lighthizer has become the lead strategist here. But it was the case previously that there were very public divisions between Treasury Secretary [Steven] Mnuchin and some of the people who were in favor of more disruptive approaches.

What is the U.S. position? What types of concessions would actually satisfy the administration? It’s clear that the overall demands on the part of the U.S. that China abandon industrial policies that seek to favor its own technological advancement will not succeed. The Chinese government will not abandon efforts to modernize its economy and develop leading tech industries. So that demand is a nonstarter and any apparent concession that Americans might use to declare victory is going to turn out to be a fantasy.

Do you think the Apple earnings will affect U.S.-China trade negotiations at all?

My instinct is that this is not a huge factor. I think it’s an exciting news story. It definitely affected the stock of a huge American company and a bunch of related stocks, but when it comes to the impasse between two governments over industrial policy, market access, intellectual property, the trade balance, a few-percentage-point difference in iPhone sales in greater China isn’t that big a deal.

Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.