by Shane Ormond
On Jan 21, 2020
Now that the Chinese factory is complete (and just in time for a deadly virus outbreak), self-proclaimed “Buff Mage” Elon Musk is turning his attention to Germany, where colonies of bats and unexploded World War II bombs threaten to undermine investor confidence. (Those are not metaphors.)
- Apple Has a China Problem
- U.S. Offers to Cut China a Deal
- Home Depot Blames Opioid Crisis for Profit Shortfall
- ISAs: Band Aid for Severed Artery?
Apple Has a China Problem
Apple’s stock dipped this morning, as a new report revealed a 35% drop in iPhone shipments in China (and it’s only partially due to its own incompetence).
According to the report by Credit Suisse, shipments of the iPhone (which costs about three months’ average rent in China) dropped 35.4% in November, compared to the same period last year.
This is the second month in a row sales of the headphoneless wonder have declined by double digits in China, following a 10.3% drop year-over-year in October.
As the second largest economy in the world (and No. 1 builder of concentration camps), China is a deeply desirable market for Apple. The middle class has exploded over the last decade and, for the first time, there’s a real demand for high-end luxury goods.
(Like the One Last Thing alligator-skin blacklist binder with gold trim, available to oppressive regimes and communist dictators for the low-low price of $200k in gold Krugerrands this Spring.)
Apple has made some inroads into the Middle Kingdom, but has struggled to take market share away from homegrown brands Huawei, OPPO, Vivo, and (squints at smartphone market share graph) “other.”
When Apple launched the iPhone 11 family in China, it decided to charge Chinese consumers — who, on average, make a little over $13k a year — a fat premium on the U.S. price, despite the thing probably being assembled right around the corner.
Chinese consumers paid a markup between 10.5% to 12.5% for the iPhone 11, and 8.6% to 23% more for the iPhone 11 Pro. And as pointed out by the straight-up ballers over at Credit Suisse (you know those boys go wild on Friday), total shipments in China are down 7.4% since the launch of the iPhone 11.
“We recognize monthly data can be volatile and the shift in launch timing versus last year is likely skewing year-over-year compares,” the bros at Credit Suisse wrote.
“However, the drop in November marks the second straight double digit decline (-10.3% year over year in October) and total shipments in China since the launch of the iPhone 11 family are now down 7.4% year over year (September to November).”
Now, Apple has always charged Chinese consumers a premium on its products (it’s part of the company’s you-built-it, you-buy-it policy). But the iPhone 11 is notable for being as expensive as butts and missing two key features for Chinese users.
The first missing feature, no headphone jack, is an infuriating Steve-Jobsian attempt to “innovate” by taking away a feature and sell it back to the consumer for $120. (Dumb in any country.)
The second missing feature is a little more egregious and speaks to Apple’s tone-deafness to Chinese demand: the iPhone 11 family shipped without 5G capability.
5G might not be a major concern for the American user right now (we have other stuff to worry about). But it’s very much at the forefront for the Chinese consumer who is bombarded with ads for lightning-fast, life-changing, empire-creating 5G every second of the day.
The Chinese consumer is eagerly anticipating the drop of 5G any day now. And if you buy an iPhone, you’ll be left in the dust with your stupid split-second, just super-fast 4G internet.
However, the biggest factor in the decline in sales is something outside Apple’s control (unless they have a master trade negotiator they haven’t told us about).
I don’t know if you’ve heard, but we’ve been having a little trade tiff with our pals in China this entire year.
Nothing to write home about. Just a little disagreement between two buddies who just so happen to be the world’s largest economies. I’m sure it’ll get sorted any day now. A-a-a-any day now. Yup.
In the meantime, Apple rival Huawei has been able to take the resulting U.S. resentment and turn it into good old fashioned consumer patriotism.
(Incidentally, if you want to show your support for our glorious company, you need to buy the One Last Thing alligator-skin and gold trim patriot hat!… Why did I buy so much alligator skin and gold trim? My wife is going to kill me.)
Per the most recent figures, Huawei has gobbled up almost 40% of the total smartphone sales in China for 2019, up from 29% in 2018. And that’s coming right out of Apple’s share of the market.
The price per share of Apple (AAPL) dropped about 1% this morning. If the U.S.’s scheduled 15% tariffs go into effect this Sunday, the average cost of the iPhone 11 in the U.S. could go up $70. (More on that in today’s third story.)
Home Depot Blames Opioid Crisis for Profit Shortfall
Home Depot warned investors that operating measures would shrink next year due to organized theft caused by the opioid crisis. (Everyone knows opioid addicts can’t stop themselves from building a nice multi-level cedar deck.)
Home Depot CEO and guy who just heard the opioid crisis is a thing Craig Menear said yesterday that Home Depot has seen an uptick of organized theft resulting in millions of dollars in stolen goods and it’s caused by, I don’t know, the opioid crisis or something? What am I, a crime guy?
“This is happening everywhere in retail,” said Craig at an investor and analyst conference, as he googled [crime stuff?]. “We think this ties to the opioid crisis, but we’re not positive about that.”
Menear said one-such opioid-fueled crime occurred at a warehouse in Rochester, New York earlier this year.
The thieves (who had a lot of resources for opioid addicts supposedly hurting for dough) stole $15.5 million of goods from a warehouse shared by multiple retailers. Home Depot lost $1.4 million worth of goods in the hardware heist.
Richard McPhail, the company’s chief financial officer (and presumably a man who’s been through at least one math class in his time) said Home Depot expects operating profit to fall 14% next year with the most the “most significant impact” coming from “shrink.” (Shrink is the business-friendly term for “stuff that got took.”)
Shares of DIY retailer fell about 1.81% yesterday and I guess now we have to solve the opioid crisis or Home Depot will go out of business.
U.S. Offers to Cut China a Deal
The Trump administration has offered to cancel the next round of levies on Chinese goods and slash existing tariffs, according to a guy the Wall Street Journal knows.
“People briefed on the matter” told the Journal that U.S. negotiators made the offer within the last five days in the hopes of working towards a phase one agreement before the Dec. 15 deadline (and saving Christmas and stuff).
In return, the comedy duo of Mnuchin & Lighthizer want China to commit to purchasing a whole bunch of U.S. farm stuff, widen access to the Chinese financial sector, and stop stealing all our tech IPs.
The agreement contains a “snapback provision,” which would reinstate tariffs and allow America to snap the waistband of China’s underwear if it breaks any of its promises.
There’s been no indication if China will accept the terms of the deal, as both sides enter radio silence as the clock ticks down to the Dec. 15 deadline.
The president is meeting with his top economic officials today, so we’ll likely know more tomorrow. Or maybe not. I don’t know what to expect anymore. This has been a long year.
While President Trump refuses to officially say whether or not an agreement could be reached before Saturday, he seemed pretty jazzed about negotiations on Twitter this morning:
In Other News
ONE LAST THING
ISAs: Band Aid for Severed Artery?
Yesterday, we dived into the world of Income Share Agreements (ISAs) — a system that allows universities and private companies to “buy shares” in students in exchange for a percentage of their income after graduation.
It’s an innovative solution to help students deal with the skyrocketing cost of U.S. college tuition. But in the long run, this clever little idea could potentially do more harm than good.
Today we’re going to get down and dirty with the darker side of “selling a slice of your soul to the man.”
Paying More? On average, someone on an ISA agreement will pay more than someone who was able to get a government-backed student loan.
Whether or not an ISA is for your kid depends on how likely they are to pay off that loan in their first 10 years of employment.
ISA’s have a fixed date that they end on. So there’s no way for your idiot kid to stop paying his loan and start racking up interest.
If your kid is a ding dong, then ISAs will ensure that they don’t end up carrying crippling debt into their 30s. (Unless they piss off to France for two years or stop working entirely.)
Better deals for some: The percentage you pay out of every paycheck is decided by your projected earning power based on your major.
The more money you will potentially make, the lower the percentage you’ll have to pay.
This means engineers and scientists will get great rates, while English majors and social workers will have to fork over a significantly larger slice of their paycheck to cover costs.
This will naturally discourage applicants from those subjects (which is good or bad depending on how you feel about paying $40k a year for your kids to read Frankenstein).
Driving up prices: The biggest criticism I have of ISAs is that they are nothing more than a band aid for a flesh wound.
Over the past 40 years, college tuition fees have tripled, far outstripping the rise of income levels and inflation. And while this strategy is an innovative solution that helps students who otherwise wouldn’t be able to afford college, it does nothing to remedy the actual problem.
In fact, by providing students a means to pay for college (through indentured servitude) it only enables the colleges to keep raising their prices. Which can only be bad news.
This might be the straw that breaks the camel’s back… or it could be an interesting investment opportunity if you’re into that sort of thing.
Closing Data for 12/11/19
DIJA $27,909.78 ↑ 0.10%
S&P Index 500 $3,143.46 ↑ 0.35%
NASDAQ $8,657.50 ↑ 0.48%
Gold $1,481.60 ↑ 0.92%
Silver $16.85 ↑0.88%
Bitcoin $7,230.70 ↓ 0.33%
- Nestlé, the world’s largest food company, agreed to sell its U.S. ice cream business to Froneri for $4 billion.
- U.S. stocks rose and the U.S. dollar fell after the Federal Reserve’s interest rate decision yesterday.
- Both Facebook and Google dropped out of the top 10 of Glassdoor’s ‘Best Places to Work’ list, voted on by employees. The No. 1 spot went to HubSpot.
Editor, One Last Thing