Retaliatory Chinese iPhone ban could cause 'demand destruction,' hammer Apple's earnings
Apple could face serious "collateral damage" from the Trump administration's bans against Huawei, even if iPhone shipments seem to be on the rebound in the short term, Cowen analysts said on Tuesday.
"We believe the international perception that Huawei is being targeted and unfairly punished as a parallel story in the U.S. and China trade spat could lead Chinese consumers to retaliate as patriotism leads them to support domestic brands while products and services from US companies fall out of favor," the firm wrote in an investor memo. "We believe Apple's iPhone, iPad, and Mac systems are at risk of experiencing demand destruction due to collateral damage from the sales ban to Huawei."
Indeed a "Boycott Apple" movement is already underway in China, where some companies are even threatening to fire people who hold onto iPhones, though simultaneously offering subsidies to switch to Huawei.
Apple's fiscal 2020 earnings per share (EPS) could drop 1% to 8% assuming 5% to 30% "demand destruction" for all the hardware it sells in China, Cowen indicated. Full destruction caused by a retaliatory ban would potentially rip 26% off EPS.
The memo reiterated the point that 25% U.S. tariffs on Chinese imports, which could take effect as soon as June, might knock 11% off EPS if Apple decides to absorb the impact without hiking prices, or between 1% and 4% if it passes along that cost, since it could slash demand anywhere between 10% and 40%.
Cowen's iPhone build forecasts have nevertheless grown from 37 million to 39 million for the June quarter, and are expected to hit 42 million in the September period. Though both figures would still represent year-over-year declines of 7% and 13%, Cowen's analysts suggested that Apple is still beating their conservative expectations.
It's forecast that in the June quarter, 29 million iPhones, or about 74%, will be iPhone X and iPhone XS-series models, the rest being from the iPhone 7 and iPhone 8 families.
Cowen is maintaining an "outperform" rating for Apple stock with a $245 price target.
"We believe the international perception that Huawei is being targeted and unfairly punished as a parallel story in the U.S. and China trade spat could lead Chinese consumers to retaliate as patriotism leads them to support domestic brands while products and services from US companies fall out of favor," the firm wrote in an investor memo. "We believe Apple's iPhone, iPad, and Mac systems are at risk of experiencing demand destruction due to collateral damage from the sales ban to Huawei."
Indeed a "Boycott Apple" movement is already underway in China, where some companies are even threatening to fire people who hold onto iPhones, though simultaneously offering subsidies to switch to Huawei.
Apple's fiscal 2020 earnings per share (EPS) could drop 1% to 8% assuming 5% to 30% "demand destruction" for all the hardware it sells in China, Cowen indicated. Full destruction caused by a retaliatory ban would potentially rip 26% off EPS.
The memo reiterated the point that 25% U.S. tariffs on Chinese imports, which could take effect as soon as June, might knock 11% off EPS if Apple decides to absorb the impact without hiking prices, or between 1% and 4% if it passes along that cost, since it could slash demand anywhere between 10% and 40%.
Cowen's iPhone build forecasts have nevertheless grown from 37 million to 39 million for the June quarter, and are expected to hit 42 million in the September period. Though both figures would still represent year-over-year declines of 7% and 13%, Cowen's analysts suggested that Apple is still beating their conservative expectations.
It's forecast that in the June quarter, 29 million iPhones, or about 74%, will be iPhone X and iPhone XS-series models, the rest being from the iPhone 7 and iPhone 8 families.
Cowen is maintaining an "outperform" rating for Apple stock with a $245 price target.
Comments
Chinese black market demand would soften an “all out ban” significantly
As to Mr Trump’s trade wars, they are easier to start than they are to fix. There are reports that China is preparing to weaponize access to rare earth minerals that are critical to every device Apple sells. America does have some deposits of the rare earths, but they are inferior stock that is much more expensive and dirty to process as they are usually found along with radioactive materials- unlike China’s supply.
How do you think the Chinese people are going to react?
How would we react if somebody started a war against us?
https://investingnews.com/daily/resource-investing/critical-metals-investing/rare-earth-investing/rare-earth-producing-countries/
China is completely fucked if they lose U.S. origined Electronic Design Tools, like Cadence. They will fall way behind the U.S. and the West in Silicon design, and that's on top of being blocked from ARM licenses.
The tl;dr of it is our (US) rare earths are processed in China so the tariffs are hurting them too. Processing rare earths is a nasty, nasty business that is environmentally destructive. The AUS firm that wants to build a processing plant here, already has a suspect environmental track record.
"Lynas is one of the largest rare-earths miners and processors outside of China. However, it has a controversial environmental track record at its processing plant in Malaysia (the country is withholding the plant's license renewal contingent on Lynas removing radioactive processing waste that has accumulated there)." - Ars article
China can do some damage to us, it's true. But we can cause disproportionate damage to them. They cannot withstand a sustained, serious trade conflict. Their economy is simply do dependent on access to our markets. Additionally, Trump is signaling he's wiling to go to mat to get a deal, stating the tariffs could last a year or longer. A lot of what you're hearing is just Chinese bluster. It's why they had their ambassador all over cable news last week. They are desperately trying to sway public opinion because they know they are hilariously outgunned.
It's even bigger than that (China being fucked). China depends on double digit economic growth. Because they export so much, they need access to the world's largest economy (us). The United States could, within a few years, completely disengage from China and still recover. China would be decimated. Chinese trade accounts for 2% of our economy, and U.S markets are 20% of theirs. China is mostly blustering right now. Behind closed doors, they are desperate for a deal.
Whatever your issues with Trump, it doesn't require that the West rollover to China's IP demands.
Trump is in a very strong position in this situation and he knows it. The Chinese and Huawei have already taken some major hits in the first round of this thing, and their trash talk isn't working.This is a simple re-negotiation of a bad trade agreement that the Chinese are blowing out of proportion by personalizing it. Your warning that China may start a war over this is silly. First, they can't afford a war. Second, their economy is already under considerable strain which the escalation of this situation only makes worse. They will continue to sell their rare earth metals because they have to, in order to try and keep their cash flow from going upside down. Apple has more than sufficient means to move all their production jobs out of China to other Asia countries and are already moving their business model away from dependence on sales by pumping up their services. There is no way for China to do any significant damage to Apple. However, they are making a very pedestrian president look like a hero. They are losing big all the way around, and these attempts to make them look dangerous are comical. The mainstream of their population are desperately poor, and they need jobs. China needs to stop the posturing, speak and negotiate responsibly, and take care of their peep's.
It's a matter of credibility. Trump made claims and put demands on the rest of the world to back him in his war. The rest of the world said: "Show me the proof". He couldn't. All he had was propaganda and old, worn out allegations.
Wars, particularly fake ones, help to support politicians but hurt the people.
China at one point, in the 60's & 70's, was a direct and powerful threat to the U.S. capable of taking out any city in the U.S. at a moments notice -- and they still can. We learned that we are BOTH better off cooperating with each other than starting phony, politically based wars -- and for 50 years we have both benefited from that symbiotic cooperation.
The truth:
What Trump has already admitted to being afraid of is that China will soon replace the U.S. as the world's #1 economy. So, rather than strengthen U.S. industry (in a sustainable way rather than borrowing a Trillion $ for massive stock buybacks to boost Wall Street) he has chosen to try to block China's advance.
Since we both win with the cooperative agreements we've had for 50 years,
I never saw that line as being clear as a draft document is by definition - a draft - and open to change. Trump complained about verbal agreements not being followed through on but forgets that the US has a habit of 'agreeing' to all kinds of things but simply not ratifying them later.
In this case something wasn't definitely missing from the picture and perhaps this is what it is:
https://www.scmp.com/news/china/diplomacy/article/3012049/was-moment-us-china-trade-talks-fell-apart
That sounds very Trump like.
Now, the Chinese seem to have dug their heals in and are willing to sit things out until Trump reverses some major decisions. If he doesn't, we'll see how long the markets take to send a message to him.
The Chinese have already off loaded 20 billion dollars of US debt and are looking to 'restrict' US networking technology in China. Other measures will appear sooner or later.
Pretty much everyone now sees the 'national security' line as a blatant attempt to derail Huawei for purely protectionist reasons.
People are beginning to question Trump's methods and also see them as a way of accelerating Chinese efforts to reach complete sustainability. In that sense, Trump is doing untold damage to the US, its allies and consumers.
'America first' and 'America must win' (at any cost it seems) is doing more harm than good.