Is Something Wrong With Apple?

As best I can tell I count among the very few human beings who has never owned or operated an Apple device. That includes iPhones, iPads, iMacs and all of their predecessors. Heck, I haven’t even owned their stock.

Perhaps this means something. More likely, it doesn’t. Though, it certainly would have been a good thing to own the stock… until this week, that is.

From a yearly high of 233, Apple reached a new low of 142 on Thursday. Yesterday it rallied back to 148. That is well within the bounds of a bear market.

Anyway, there is clearly an Apple mystique. The company attracts adherents and true believers. People love its products and are willing to pay up for them. Given my limited experience I cannot tell you whether Apple products are worth the extra cost, but a lot of people think so. And a lot of people helped drive the company market cap to somewhere around $1,000,000,000. Today, it’s around$700,000,000. Still not chump change.

Even Warren Buffet invested heavily in Apple. And Buffett is not a reckless investor. He owns more than 250 million shares of Apple. If he is right about the company he is now loading up on more shares. If he is wrong, he and his investors are about to take a serious bath.

Anyway, the bloom seems to be off of Apple. When the stock fell this week, some analysts, including the ruling elites of Apple, blamed it on Donald Trump’s trade war with China. Sales of iPhones in China have fallen, and why not blame it on Trump.

It turns out, however, that the story is more complicated than that. The Wall Street Journal reports that Apple is losing market share in the gargantuan Chinese market. It is losing out to local companies who are offering equivalent features at lower prices. Chinese consumers seem not to be overly impressed by Apple. They no longer consider its products to be worth the premium. 

As the old saying goes: It’s the market, stupid. The Journal has the bad news:

While Tim Cook, Apple’s chief executive, blamed China’s economic slowdown for weakening sales that hurt its global revenue in the past quarter, the company’s problems run deeper than that. The Cupertino, Calif., tech giant may have underestimated how competitive domestic smartphone makers have become, analysts say.

Once a top-seller in China, Apple has slipped to the fifth-biggest phone seller in that country, trailing four domestic producers that have all been growing in popularity. Despite developing more features targeted at Chinese consumers, Apple’s market share has stagnated.

And also:

Chinese consumers who won’t pay for the status of brandishing the top-priced iPhone model are considered more fickle when it comes to brands, said Mo Jia, a Shanghai-based analyst at market-research firm Canalys. As the economic slowdown pushes consumers to tighten their purse strings, such consumers are generally more inclined to consider cheaper, non-Apple smartphones, Mr. Jia said.

Apple is not just losing out in China. It is losing out in other markets, around the world. The New York Times report complements the Wall Street Journal report, nicely:

To most Americans, the names are unfamiliar, maybe a little hard to pronounce: Huawei, Xiaomi, Oppo, Vivo.

They are China’s biggest smartphone brands. Around the world — although not in the United States — they are making the handset business brutally competitive. This week, after Apple warned of disappointing iPhone sales in China, industry observers said that devices from the Chinese brands were a major culprit.

As the phone market in China reaches saturation and sales shrink over all, the country’s hardware makers are pushing hard, and increasingly winning fans, in places like France, Germany, India and Southeast Asia, where consumers find that the phones can do just about everything an iPhone can do at a fraction of the cost.

Apple sits comfortably atop the market in many countries, including China, for the highest-end handsets. But companies like Huawei have started to do elsewhere what they have done in China, competing with the iPhone on experience and value and luring customers with price comparisons that make them rethink buying Apple’s signature product.

The cost difference is notable: In China, an iPhone XR starts at around $950, while Huawei’s top-end handsets start at about $600, and Xiaomi’s comparable models start at even less. The iPhone XS starts at around $1,250.

A French banker explains his experience:

Clément Blaise, a 25-year-old banker in northern France, has an iPhone for work and a Xiaomi as a personal phone. He said he needed to recharge the Apple device “all the time” but could go two days without charging his Xiaomi.

“We have this false, preconceived idea that Chinese brands are not as good, that their products are of cheap quality,” Mr. Blaise said. “But the price gap leavens the fears. For 150 euros” — around $170 — “what do you risk anyway?”

So, Apple used to win customers by claiming that their products were better. And that Chinese products were cheap imitations. Now, it appears, people around the world are beginning to see that such is not the case. The bloom is off the Apple.

Chinese manufacturers have been having problems penetrating the American market. American government officials fear the Chinese devices will be used to spy on Americans. The result, it has done everything in its power to tamp down sales:

The American government has worked for years to stymie the sale of Huawei’s smartphones and telecom-network equipment, after a congressional inquiry in 2012 deemed Huawei a potential vehicle for cyberspying by the Chinese government. The Trump administration has urged Western allies to do the same.

Security concerns have not dissuaded some buyers across the Atlantic. Giannis Vassilopoulos, a college student in Athens, said he had been bombarded by Huawei ads during his recent travels around Europe. He said he had bought a Huawei phone because the brand felt more familiar, more European even.

I cannot tell you whether the concerns are reasonable or unreasonable. I suspect that they are based on sound analysis of the technology. And yet, the American attitude is certainly good for Apple stock. The world markets are telling another story, and it is not good news for the Cupertino colossus.

Some contrarian investors will see the flurry of downbeat stories as a sign that they should buy Apple stock. Some will say that it’s only the first of many waves. In any case, it’s worth paying attention to the verdict offered by the markets.