Apple shocked financial markets Wednesday afternoon with a surprise announcement that its earnings would fall well below projected levels in the upcoming quarter, with the company placing the blame squarely on the China market in general and President Trump in particular.
“We believe the economic environment in China has been further impacted by rising trade tensions with the United States,” CEO Tim Cook wrote in a letter to investors that sent Apple stock plummeting and brought the broader stock market down with it.
In response, White House Council of Economic Advisers chief Kevin Hassett told CNN that Cook is basically right, and that Apple isn’t going to be alone in the feeling the pain.
“It’s not going to be just Apple,” Hassett said Thursday morning. “There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China.”
The president’s top economic adviser saying that the White House’s economic agenda is hurting American companies and causing the stock market to decline is a bit of an unusual tactic. But far from being worried by the prospect of more negative earnings shocks, Hassett sees it as evidence that Trump’s policies are working.
What’s bad for China is good for Trump’s China policy
The basic logic of Hassett’s argument is like this:
Apple’s revenue and share price are falling because the Chinese economy is sliding, so Chinese consumers are buying fewer iPhones. Because this reflects a general problem in the Chinese economy, it ought to end up afflicting not just Apple but a lot of American companies that have significant Chinese sales. About 20 percent of Apple’s revenue comes from China, which is a lot, but companies like Corning, Starbucks, and Intel are even more dependent on China, and even less exposed companies like Nike, Boeing, and 3M still count on China for about 10 percent of sales.
On one level, that sounds pretty bad.
But Hassett is arguing that because the cause of the bad news for American companies is the overall bad news about the Chinese economy, this means that Chinese people are suffering much more. And that’s good because it means the Chinese government is going to have to surrender.
“That puts a lot of pressure on China to make a deal,” Hassett said. “If we have a successful negotiation with China, then Apple’s sales and everybody else’s sales will recover.”
This is the tricky negative-sum logic of trade wars. If US policy succeeds in wrecking the Chinese economy, America’s economy will suffer as well, because the US-Chinese economic relationship is mutually beneficial. But if they suffer more than America does, then the US can perhaps reboot the relationship in a way that is more favorable to the country. The US just needs to grit it out first.
Is trade really Apple’s problem?
Of course, this assumes that Trump’s saber-rattling and tariffs are the real source of Apple’s China sales woes.
There’s some reason to doubt that. After all, in May 2017, before any of this trade stuff was heating up, technology analyst Ben Thompson predicted Apple would suffer iPhone XS sales problems in China, not because of trade but because of WeChat. Chinese people use WeChat for everything, which makes smartphone operating systems less important:
Connie Chan of Andreessen Horowitz tried to explain in 2015 just how integrated WeChat is into the daily lives of nearly 900 million Chinese, and that integration has only grown since then: every aspect of a typical Chinese person’s life, not just online but also off is conducted through a single app (and, to the extent other apps are used, they are often games promoted through WeChat).
There is nothing in any other country that is comparable, particularly the Facebook properties (Facebook, Messenger, and WhatsApp) to which WeChat is commonly compared. All of those are about communication or wasting time: WeChat is that, but it is also for reading news, for hailing taxis, for paying for lunch (try and pay with cash for lunch, and you’ll look like a luddite), for accessing government resources, for business. For all intents and purposes WeChat is your phone, and to a far greater extent in China than anywhere else, your phone is everything.
Whether you own an Android phone or an iPhone, if you’re in China, you are using the same WeChat app to do basically everything. Outside of China, Apple’s sales proposition is phone hardware and a unique operating system. In China, it’s really just the hardware. Thompson predicted this would spell trouble for Apple whenever it tried to market a phone in China that didn’t look new. And right now Apple is trying to market the iPhone XS, a phone that looks identical to the iPhone X.
But it’s also true that there appears to be a very real economic slowdown in China — a slowdown that’s visible in things like Chinese sales tax revenue and auto sales.
But even here, it’s far from clear that trade tensions with the United States are the main source of trouble. Instead, the Chinese government’s ongoing efforts to reduce risk in the domestic banking system appear to have greatly slowed investment and durable goods consumption.
This is a fair assessment. The credit slowdown is roughly 30x larger than the trade impact in direct financial terms https://t.co/qCSsi0Qs2h— PBOC Governor Balding (@BaldingsWorld) January 3, 2019
Strangely, though, it’s in essentially everyone’s interests to put Trump and trade at the center of the discussion even if it’s not true.
The trade story is better for everyone
Apple, for starters, is much better off in a world where people believe declining sales are a hiccup induced by Trump’s trade policies than in a world where people believe they have a structural problem selling their phones in China.
And the Trump administration, naturally, would like to spin bad stock market news as good news about the success of its policies. What’s more, the administration is itself divided over how far to go with the trade war. For guys like Hassett who need to defend Trump publicly on television while internally pushing back against hardcore protectionists, the story that the trade war is depressing stocks is particularly appealing because it suggests that Trump should try to make a deal and declare victory ASAP in order to kick-start a stock market boom.
Meanwhile, the Chinese government would obviously rather blame Trump for the country’s economic problems than blame its own banking policy. To admit that the slowdown is a largely self-inflicted wound because it couldn’t think of a way to reduce bank risk that didn’t devastate domestic demand would make the government look terrible. To say that the buffoon in the White House is responsible, so everyone needs to hang tough while they try to strike a fair deal, sounds much better.
The scenario all these parties are hoping for is roughly a replay of the NAFTA sweepstakes, in which, after a lot of tweets and drama, Trump settled on small changes. But that probably won’t actually solve any of these underlying problems — no matter what deal is reached, China’s economic problems seem to be primarily domestic in nature, and American companies that have come to count on strong sales to Chinese customers have a problem that Trump didn’t cause and probably can’t fix.