From iPhones to autos, global brands rely on China for growth. Now the country’s economic slowdown is putting their earnings at risk.
Apple (AAPL) on Wednesday said that it expected a weaker Chinese economy to hurt its holiday sales numbers, prompting its stock to plunge up to 8% in after hours trading. CEO Tim Cook said in a letter to investors that the company had been blindsided by “the magnitude of the economic deceleration” there.
It isn’t the only company that could suffer. The slump in China’s economy, the second largest in the world, could hit companies like General Motors (GM), Volkswagen (VLKAF) and Starbucks (SBUX), which will report earnings in the coming weeks.
“This year has the potential to be a tough year for western brands,” said Benjamin Cavender, a Shanghai-based analyst at consultant China Market Research Group.
The Chinese economy is flagging after decades of expansion. Growth in 2018 is expected to be the weakest since 1990. The outlook for this year is even worse, as the trade war with the United States and government attempts to curb runaway debt take their toll.
That spells trouble for companies that rely on China’s enormous market to boost their global sales. Chinese consumers could be less willing to part with their cash for the latest smartphone or luxury handbag as they tighten their belts.
“Brands like Apple will struggle in part because consumers are having to think harder to justify premium products and brands,” said Cavender. He points out that China now boasts a number of homegrown smartphone makers, like Huawei and Xiaomi. Many of these offer products that are competitive with the iPhone’s capabilities but are substantially cheaper.
China is hugely important to Apple, making up about 15% of the company’s global revenues. “When you talk about China and Apple, they’re tied at the hip,” said Dan Ives, New York-based managing director of equity research at broker Wedbush Securities. China is “the heart and lungs of the Apple growth story.”
But he thinks the company has made missteps in this market, such as selling some recent models of the iPhone at a price deemed too expensive by Chinese consumers.
Starbucks feeling the squeeze
It isn’t just high-tech names that are likely to feel the squeeze. The cost of a Starbucks latte is substantially less than a new iPhone, but America’s biggest coffee chain is unlikely to escape China’s economic slowdown. The firm has an ambitious expansion plan for China, Starbucks’ second-biggest market after the United States, but sales have been slowing.
The coffee company is considered a luxury brand in the country, said Nick Setyan, another analyst at Wedbush who covers the restaurant business. That makes Starbucks vulnerable if consumers decide to cut back on spending because of the economic downturn.
The problem is magnified because the Seattle-based company is also facing rising competition from local players, like Luckin Coffee, which has been rapidly increasing its number of stores and sells much cheaper coffee.
“We are going to see Starbucks continuing to struggle,” added China Market Research’s Cavender.
Auto market likely to get worse
China has been a source of blockbuster sales for major carmakers for years, as rapid economic growth gave millions of consumers the cash to spend on middle-class status symbols.
For the likes of General Motors and Volkswagen, China brings in more revenue than the United States or Europe. “The China market is extremely important to all carmakers,” said Tu Le, Beijing-based founder of research firm Sino Auto Insights.
But GM, Volkswagen, Jaguar Land Rover and Ford (F) are among those companies that reported late last year that their sales in the country were sliding as the economy lost momentum. Some brands blamed the trade war with the United States, which is making drivers think twice before splashing out on a new ride.
Le thinks that Ford, Volkswagen and Tesla (TSLA) are among the Western automakers that are most vulnerable to China’s slowdown. Ford has struggled to attract drivers there with its line-up of cars in the country, while Tesla faces huge competition from cheaper, Chinese-made electric vehicles.
Experts think things could get worse before they get better, despite recent moves by Beijing to cut tariffs on US auto imports at the end of last year.
“Regaining the momentum towards growth is going to be very challenging in the next year or two if the overall economy stays weak,” said Le.
Shares in companies that provide components for Apple products were among the hardest hit by the fallout from the iPhone maker’s warning.
Hon Hai Precision (HNHPD), better known as Foxconn, fell 2% on Thursday in Taipei. Catcher Technology, a Taiwanese company that makes iPhone cases, dropped nearly 4%.
Danielle Wiener-Bronner contributed to this report.