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Spokane, Washington  Est. May 19, 1883

Apple’s disappointing outlook spotlights growing China woes

Apple iPhone 15 smartphones are shown on sale at the company’s Fifth Avenue store in New York on Sept. 22.  (Gabby Jones/Bloomberg)
By Ian King, Mark Gurman, Vlad Savov Bloomberg News

Apple Inc.’s disappointing holiday-quarter outlook has cast a spotlight on its mounting problems in China, where the iPhone maker is struggling with the unexpected rise of Huawei Technologies Co. and an increasingly hostile business environment.

Apple, which is trying to reverse several successive quarters of revenue decline, reported its lowest revenue from the greater China region since mid-2022. Chief Executive Officer Tim Cook assured Wall Street that iPhone demand remains strong in China, blaming Mac and iPad weakness instead. But he also predicted flat December-quarter revenue, suggesting Wall Street won’t see the growth rebound it’s banking on. Shares slid 1.7% at 9:33 a.m. in New York on Friday.

Investors have grown skittish about the iPhone’s prospects in China, which accounts for about a fifth of Apple sales and hosts its biggest production base. The country’s consumer economy is reeling, while US businesses face increasing pressure from Beijing as a technology conflict with the US rages. Huawei’s surprise August debut of a smartphone with an advanced made-in-China 5G processor also tapped a vein of patriotism that’s taken sales away from the iPhone.

“The challenges that Apple faces in China are unprecedented,” IDC analyst Will Wong said after the results. “It not only needs to deal with the political tensions and Huawei’s competition but also a different consumer sentiment that is more rational and cautious in spending.”

Apple’s revenue in Greater China declined 2% — a steeper drop than the companywide figure. There are signs that trend may persist: Initial sales of the iPhone 15 in China were 6% lower than its predecessor in part because of incursions by Huawei, according to the consultancy GfK.

Aside from stronger competition, Apple faces growing risk from political tensions between Washington and Beijing.

Beijing has expanded a ban on Apple products to state-backed firms and government-backed agencies. Hon Hai Precision Industry Co. — which assembles the majority of Apple’s iPhones from its Chinese factories — is now under investigation over taxes and land use. Hon Hai, the listed arm of Foxconn Technology Group, and fellow iPhone assembler Pegatron Corp. fell in Taipei on Friday.

Still, Cook said the iPhone continues to make inroads in the world’s biggest smartphone market. Various models accounted for the four top-selling phones in urban China, he said.

“China is an incredibly important market,” the CEO said during a post-earnings conference call with analysts. “And I’m very optimistic about it.” He didn’t face any direct questions about the situation.

The iPhone 15 went on sale on Sept. 22 — only about a week before the quarter ended — so the latest results only provide an early sense of how the device is doing. Investors will get a clearer picture when Apple reports its holiday results early next year.

If the overall China smartphone market is contracting — as analysts have said — Apple’s results suggest that it’s winning market share, Cook said. He also touted that the company is opening a new store in the country this week. It’s coming to Wenzhou in eastern Zhejiang province and will be the company’s 46th in the region.

Cook was in China last month and said he “couldn’t be more excited” about the interactions he had with customers and employees, reiterating Apple’s commitment to manufacturing in the country. Beijing announced its investigation into Foxconn about a week after.

What Bloomberg Intelligence Says

Apple’s conference call did little to ease fears about a potential slowdown of product sales in China, which were notably below consensus at $15 billion, down 2.5% vs. last year, compared with expectations of a 10% increase. Services growth of 16% was the biggest positive surprise, helping to counter weak sales in China, and could be in double digits again in fiscal 1Q. Overall, these results and the 1Q outlook lead us to believe that fiscal 2024 sales growth will likely be about 2% lower than consensus of 5.6%.