Apple poised for pain – and gain – on China’s move to devalue the yuan

“U.S. companies that rely heavily on sales to China, including Apple and KFC’s parent company Yum Brands, could soon feel the pain of China’s move to lower the value of its currency,” Kaja Whitehouse reports for USA Today. “China’s central bank Monday devalued the nation’s tightly controlled currency, known as the Renminbi (RMB) or the Yuan, in response to the country’s economic slowdown.”

“The People’s Bank of China called the 1.9% cut a one-time adjustment,” Whitehouse reports. “But the surprise move has pushed stocks down amid concerns that it will hurt U.S. companies, like Apple, that have been increasingly peddling their products to the world’s most populous nation.”

“Under CEO Tim Cook, China has become Apple’s largest revenue source after its Americas region, which includes the U.S. In the latest three-month period, ended in June, the iPhone maker said China made up $13.2 billion of its overall revenues of $49.6 billion,” Whitehouse reports. “For some companies, the negative impact on sales may be offset by lower production costs, said Adolfo Laurenti, chief international economist for Mesirow Financial in Chicago. Apple, for example, assembles many of its products in China and therefore could benefit that way from the cheaper Yuan. Laurenti also thinks companies with strong enough brands — like Apple — may not be dinged as badly as less popular products because wealthy Chinese consumers may be willing to shell out more to have those name brands.”

Read more in the full article here.

MacDailyNews Take: Perhaps, especially with the strength of Apple’s brand in China, the gain on production costs will outweigh whatever pain Apple might feel in China sales? Apple in China, as in most places on the planet, is an aspirational brand. If you really want an iPhone and the status that comes with it, a fake iPhone from Xiaomi simply isn’t going to cut it.

16 Comments

  1. When it comes to Apple analysts, the idiots are running the asylum. Here is what I predict: Apple will continue to do well in China and elsewhere. The quality of Apple products makes them the best deal out there and people know that. This fear-mongering is just noise.

  2. The ANALists need to dust off the trusty abacus and do some math regarding the yuan:……a $700 iPhone with a 2% increase in price is not nearly as repugnant as a 2% increase on a $25000 car……(see Morningstar below)
    ***********************************************************************

    Additionally, the China suppliers are now cheaper in their parts sales to Apple……..
    Under CEO Tim Cook, China has become Apple’s largest revenue source after its Americas region, which includes the U.S. In the latest financial quarter ended in June, the iPhone maker said China made up $13.2 billion of its overall $49.6 billion in revenues. That was up 112% from the same quarter in 2014, when China made up just $6.2 billion of Apple’s overall revenue.

    Yum Brands also has broad exposure to China due to the popularity there of its KFC fast-food chain. Some 52% of Yum Brands’ revenue comes from China, according to Goldman Sachs.

    Baby formula maker Mead Johnson Nutrition, meanwhile, derives 31% of its revenue from China, while electric car maker Tesla has been making moves to sell in China after the nation broke a record for car sales in 2013. Wynn Resorts, which runs casinos and hotels, has a massive 83% of its sales exposed to China, Goldman said.

    Plenty of chip makers and other tech companies also derive a large percent of their revenues from China, according to Goldman Sachs, including:

    *Chip maker Qualcomm, which has 61% of its revenue exposed to China.

    *Chip maker Nvidia gets 54% of its revenue from China.

    *Chip maker Intel Corp. which gets 36% of its revenue from China.

    For some companies, the negative impact on sales may be offset by lower production costs, said Adolfo Laurenti, chief international economist for Mesirow Financial in Chicago. Apple, for example, assembles many of its products in China and therefore could benefit that way from the cheaper Yuan.

    Laurenti also thinks companies with strong enough brands — like Apple — may not be dinged as badly as less popular products because wealthy Chinese consumers may be willing to shell out more to have those name brands.

    “Chinese consumers in particular have an appetite for American brand, especially marquee products. So the adjustment in price won’t deter them that much,” Laurenti said.

    The bigger concern is what the devaluation move suggests about China’s larger economy, said Francisco Torralba, senior economist with Morningstar Investment Management. “My main concern is the depreciation of the RMB is interpreted by markets as a signal that Chinese economy is weakening more than we think,” Torralba said.

  3. I don’t really think that the stock market dip/correction in China or the devalued yuan is going to stop Chinese inelastic demand for buying iPhones or cigarettes. Econ 101. But the dip in production costs goes straight to profit – no need to debate that point – so let’s go with stupid.

  4. Good news for Apple!.
    Just came back from China. People I met are switching from Android to Apple because the Chinese Government is disabling the Google Android OS so that the Android phones don’t work, or at least don’t work well. Apple will see increasing sales in China. People have lots of money for this type of thing and want the best, which now is Apple.

  5. China manipulates the value of its currency?!?! DUH. Typical China. They fraudulently locked the value of the Yuan to the value of the US dollar. That’s been going on at least a decade.

    A couple results:

    1) The actual value of the Yuan will sort of happen, resulting in Apple, etc., getting lower profits from sales in China. As seen in Europe, Apple typically raises prices in response to devalued currencty.

    2) Apple’s spending on costs of its Chinese contractors, such as their Foxconn, will provide better profit. Chinese wages will effectively drop.

    How much these two will offset one another… my guess is that the lowering of contractor wage costs will be more significant that the lowered profits from a deflated Yuan value. Therefore, happiness and tranquility. Well, except that there is likely to be a consequential drop in sales of iOS devices in China as their cost effectively increases. Round and round it goes.

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