China's yuan devaluation could hurt Apple sales, boost supplier profits, analysts say
The Chinese government's decision to deliberately devalue the yuan on Tuesday could have a serious impact on sales of the iPhone and other Apple products, but under the right conditions prove a boon to suppliers like Hon Hai/Foxconn and Pegatron, analysts said.
Sales of Apple products are likely to be hit at first because of weaker consumer demand, and then possibly by Apple deciding to raise prices if another yuan adjustment takes place, Fubon analyst Arthur Liao told the Wall Street Journal.
The iPhone is already an expensive product in China. An unlocked, 16-gigabyte iPhone 6 is priced at RMB 5288 ($836), or $187 more than the same hardware in America. Further devaluation could prompt Apple to hike prices to maintain profits, but potentially at the expense of selling fewer units.
Apple's suppliers stand to benefit though, assuming revenue doesn't change and the perks aren't passed along to Apple, Sanford C. Bernstein analyst Alberto Moel explained to Bloomberg.
Companies like Foxconn pay their workers and local suppliers in yuan, but much of their income is in U.S. dollars. Moel estimated that Foxconn's gross margins could rise by half a percentage point.
"A yuan cut is going to soften the impact of Apple's weak outlook because if there's no room to boost top line, then at least the currency change can help their bottom line," the analyst added.
China is Apple's next-most important market after the U.S. -- during the June quarter, regional revenue was up 112 percent year-over-year to over $13.2 billion. Global iPhone sales did not meet high analyst expectations though, and iPad sales continued to decline. Any setbacks in China could further harm Apple's forecasts.
Sales of Apple products are likely to be hit at first because of weaker consumer demand, and then possibly by Apple deciding to raise prices if another yuan adjustment takes place, Fubon analyst Arthur Liao told the Wall Street Journal.
The iPhone is already an expensive product in China. An unlocked, 16-gigabyte iPhone 6 is priced at RMB 5288 ($836), or $187 more than the same hardware in America. Further devaluation could prompt Apple to hike prices to maintain profits, but potentially at the expense of selling fewer units.
Apple's suppliers stand to benefit though, assuming revenue doesn't change and the perks aren't passed along to Apple, Sanford C. Bernstein analyst Alberto Moel explained to Bloomberg.
Companies like Foxconn pay their workers and local suppliers in yuan, but much of their income is in U.S. dollars. Moel estimated that Foxconn's gross margins could rise by half a percentage point.
"A yuan cut is going to soften the impact of Apple's weak outlook because if there's no room to boost top line, then at least the currency change can help their bottom line," the analyst added.
China is Apple's next-most important market after the U.S. -- during the June quarter, regional revenue was up 112 percent year-over-year to over $13.2 billion. Global iPhone sales did not meet high analyst expectations though, and iPad sales continued to decline. Any setbacks in China could further harm Apple's forecasts.
Comments
Yep. The gains of yesterday almost completely erased so far.
Moneyed people will have no problem paying Apple's price, no matter what happens to markets and exchange rates.
I agree. Isn't this middle class segment 800 million people? And aren't more entering that stratum constantly? Apple is a premium brand. If you're already planning to buy a premium brand, a slight price change isn't going to do much to dissuade you. The demand curve is a lot more inelastic than for brands like Xiaomi.
I also found the mention I kinda sorta remembered, but not all that accurately. Cook said he expects China to be Apple's biggest market at some point. Apple also sold more iPhones in China this past quarter than at home. Did I get that one right this time?
No it isn't. China is only 16% of Apple's revenue.
Do you seriously think a 2% price hike on an iPhone is going to stop many from buying an iPhone? We are talking about $15 more.
And anyway since the iPhones are built in China, Apple will be saving on manufactering costs also. I would think saving 2% on costs to build iPhones for the rest of the world would offset the 2% in China.
@sog35: It's difficult to tell how Apple's revenue would be affected by the Yuan devaluation, but, as usual, I see a lot of misinformation here.
According to Apple's latest 10-Q (June 2015), the net sales from "Greater China" was $13,230 (M) on $49,605. That's about 26% and over 100+% growth (QoQ) -- meaning China's share of Apple's revenue is quite sizable and the revenue driver for the company.
The iPhones are "assembled" in China -- which is a very small part of the BOM -- but the most expensive, crucial components do not come from China.
I agree. Isn't this middle class segment 800 million people? And aren't more entering that stratum constantly? Apple is a premium brand. If you're already planning to buy a premium brand, a slight price change isn't going to do much to dissuade you. The demand curve is a lot more inelastic than for brands like Xiaomi.
I don't know whether the Chinese middle class is growing that much anymore. The most recent growth (over the last year) may have been due to Chinese stock market participation, which probably moved nearly a 100 million Chinese upwards in class. It's possible that the sudden reversal may have caused some slippage down in class for a fraction of those.
People point out that only 7% (or so) of Chinese households participated in the stock market, but that may account for 100 million people and it seems reasonable to me that there may be a lot of overlap between that demographic and those who are buying iPhones. These are the "new money" middle class Chinese. What better way to show you have arrived than to get an iPhone? The 80% (or so) lower class Chinese aren't buying many iPhones (proportionally speaking).
Now, I am not one to react on FUD, so I am waiting for the next real data point to be revealed by Apple with regard to the most recent Chinese sales. (We may have to wait until mid-October for those kinds of details.) But it does in fact seem to me that the serious decrease of the Chinese stock market may cause some slippage in iPhone sales. We can't discount the possibility just because we don't like it (I am long AAPL too) and just because we have no proof yet. It is still possible.
(Edit: noting the argument that the Yuan devaluation was only 2%, I can see that this aspect is not like to have a large effect, so I removed it from the above discussion.)
Thompson
but Great China includes Taiwan and Hong Kong which have different currencies than Mainland China.
So its more like 18-20% of revenue.
Multiply that by 2% and that's not even a material amount.
Honk Kong's "Offshore Yuan" is trading down 2.9% today... even more than the mainland currency.
Still an immaterial amount.
So lets say 27% of Apple sales comes from Greater China. And Apple raises prices 1%. So they lose 1% sales.
1% of 27% = 00.27%
That is a ridiculously small amount of sales "lost"
I agree, but just wanted to keep it all real.
Furthermore, note that the purposeful devaluation of a currency may be a one-time thing, but that doesn't keep that currency (or those related to it, like the one in Hong Kong) from trading down much more. Wall Street has a large contingent of people that try to anticipate economic trends, and they frequently engage in knee-jerk reactions. I think they are worried that the Yuan will fall a lot more than the 2%.
Still an immaterial amount.
So lets say 27% of Apple sales comes from Greater China. And Apple raises prices 1%. So they lose 1% sales.
1% of 27% = 00.27%
That is a ridiculously small amount of sales "lost"
I am more concerned about the sliding Chinese stock market than I am the Yuan.
LOL... I think you meant that for a different thread. :smokey:
Must be a forums problem. I've noticed multiple wrong thread posts.