Yesterday, Apple revised its sales outlook for the 4th quarter, claiming revenue will drop in at $84 billion, down from its previous estimate of $89-$93 billion. That caused a fright among investors, and Dow futures are down over 300 points as I write this blog (from Rome, Italy). Put into context, that would still represent sales growth of 37.7% from the 4th quarter 2017 – an outstanding achievement.

President Donald J. Trump and CEO of Apple Tim Cook in the Oval Office at the White House. April 25, 2018. In the background: John Bolton, the National Security Advisor. Official White House photo. Public domain. Wiki Commons. Used with permission.

Tim Cook said that the reason sales will be down by $5-9 billion is basically disappointing iPhone sales in China. He blamed the economic slowdown in China for lower sales, stating on CNBC that “It’s clear that the economy began to slow [in China] during the 2nd half… Trade tensions put additional pressure on their economy.”  Traffic in Chinese Apple stores and their channel stores is down as well.

While Tim Cook is right about a slowdown in China’s economic growth (to 6.1% predicted in 2019 by Fitch Ratings), that’s not the real reason that Apple sales are down in the world’s largest economy (China). According to IDC, the slowdown in smart phone sales has been going on since the 4th quarter of 2017. The reasons? “Market saturation, increased smartphone penetration rates, and climbing Average Selling Prices,” according to Anthony Scarsella, the research manager with IDC’s Worldwide Quarterly Smart Phone Tracker. The slow down is concentrated in Samsung and Apple, the chief contributors to the pricing problem. The lower-cost Chinese manufacturers Huawei and Xiaomi saw outstanding sales growth  year over year.

In fact, the 2nd quarter of 2018 welcomed a new leader to the Top 2 in global Smart Phone sales, knocking Apple down to #3. Samsung and Apple have dominated the #1 and #2 position in smart phone sales for a decade. However, Huawei outsold Apple to become the #2 smart phone seller worldwide, with sales of 54.2 million units and 15.8% market share in the 2nd quarter (source: IDC). There are reports that Huawei’s smart phone sales topped 200 million units in 2018. (The final 2018 report from IDC should be available at the end of January.) Here are the most recent numbers from Q3 2018.

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​So, why is Huawei more important than ASP, market saturation and China’s slowing economic growth? Cook is not publicly acknowledging the elephant in the room, although he is smart enough to consider this privately. Huawei is beating Apple in global smart phone sales. The arrest of the Huawei CFO and vice chairwoman Meng Wanzhou is viewed in a negative light – not just by China. Chinese media, other Asian media and many Weibo updates, called the arrest “kidnapping,” referring to the U.S. as a rogue nation. Imagine if Tim Cook were in jail awaiting extradition to China for aiding Tibet in some way.Trade wars don’t just slow economic growth. (The tariffs have actually resulted in a much larger trade deficit with China.) They also tarnish brands. While many Chinese consumers might love their Apple iPhones enough to stay loyal, that becomes increasingly problematic as the U.S. trade policy and the arrest of Huawei’s CFO make headlines in the country. When citizens have to choose between patriotism and a product, it is likely to be the product that suffers.

20% of Apple’s sales come from China, with over 1/3 from Asia Pacific.

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Tim Cook has his work cut out for him. What can he do to compete with the harsh headlines of a U.S./China trade war and the arrest of a major Chinese competitor’s heir apparent? He must find a way to keep Apple beloved and separate from the actions of the current Administration, while also innovating and reconsidering his aggressive pricing. Will he cut a deal with an Asian carrier, to make his smart phone products more affordable (as he did with AT&T when iPhone first launched). Watch for those headlines to understand how Apple will fare in 2019, which may not be featured as predominantly, or covered as widely, as yesterday’s earnings miss was.

Article originally posted on https://www.nataliepace.com

Natalie Wynne Pace is the co-creator of the Earth Gratitude project and the author of the Amazon bestsellers The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street). She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical).

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