Appleocalypse: An unfashionable view

We have become so accustomed to our leaders — political and corporate — lying to us, that when someone actually shares the facts, we choose to overlook them, instead of trying to read between the lines, even if there isn’t much. I am obviously talking about Appleocalypse — which arrived on the first working day of 2019. Apple CEO Tim Cook, (who unlike others didn’t hide behind a faceless press release and instead came out and) addressed the issues directly. And here is what he said that is worth noting:

While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, 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. China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years.

China slowdown is actually a much wider problem. It is unlikely that the Chinese government will ever talk about problems in its economy. So we are slowly starting to see US companies give their assessment of the Chinese economy. For instance, back in mid-December, when all of us were floating on cloud eggnog, FedEx was reporting earnings that pointed to tough times ahead. “The peak for global economic growth now appears to be behind us,” chief marketing officer Raj Subramaniam remarked on a conference call with investors. On the same call, CEO Fred Smith was blunt in his assessment:

“China’s economy has weakened due in part to trade disputes. Most of the issues that we are dealing with today are induced by bad political choices.”

And those suffering the most are fashion and luxury brands. And Apple is part of that group of companies. Over the past ten years, Apple has gone from being a technology company to becoming a fashion brand. Apple product launch events were jam-packed with fashion influencers and designers such as Virgil Abloh. Jony Ive hobnobbed with Anna Wintour, the Vogue doyen. And like many other fashion brands — such as those owned by Chanel, LVMH, Kering, and Richemont — it bet the farm on China. With a booming middle and upper class, like every big fashion brand, Apple benefited from the largesse of the Chinese consumer.

The trade war — which has gone from being a tweet to a tornado that has ripped the roof off one of Silicon Valley’s stalwarts. Trade wars obviously have a consequence, and Apple is suffering like every other luxury and fashion brand that has been too reliant on the Chinese consumer. Like Apple, they too have been puking on the side of the proverbial Wall Street. Tiffany, for instance, is down almost 14 percent over the past three months. Coach is performing even worse, almost as bad as LVMH, the company that owns Louis Vuitton, Loro Piana and a whole bunch of others.

Apple will have to weather this storm and suffer the pain of a trade war inspired slowdown. It should start by holding on to its cash, and instead, start looking to buy more services related revenues. Shopify or Square make sense. And at the same time, work on new must-have products.

January 2, 2019, San Francisco

PS: I plan to write a more expansive piece on the trade war implications later tomorrow.

Featured Photo by Michał Kubalczyk on Unsplash

A letter from Om

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