Tesla and Apple face China risks as share prices plunge

The major headwinds against Apple in China

Apple e Tesla face major headwinds in China, which is contributing to investor jitters around the two US tech giants.

Tesla shares fell 12% on Tuesday after the electric carmaker reported deliveries that fell short of analysts’ expectations, while Apple fell more than 3% on resurgent concerns about demand for the company’s flagship iPhone in the quarter of December

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Challenges in China are partly behind the stock falls. The world’s second-largest economy accounts for around 17% of Apple’s sales and 23% of Tesla’s revenue, making it an important market for both US firms.

“China is the heart and lungs of demand and supply for both Apple and Tesla. The biggest concern for the Street is that China’s economy and consumer are curbing spending and this is an ominous sign” for Apple and Tesla , Daniel Ives, senior equity analyst at Wedbush Securities, told CNBC.

“In 2022 the concern was supply chain issues and zero issues related to Covid, 2023 is the demand concern and this has caused a huge spillover in both Apple and Tesla, who are heavily dependent on the Chinese consumer.”

Apple iPhone demand concerns

For Apple, investors have an eye on Apple’s fiscal first quarter results that are likely to be released later this month, covering the crucial December holiday period.

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But in October, the world’s largest iPhone factory in Zhengzhou, China, was hit by a Covid outbreak. Taiwanese company Foxconn, who runs the plant, imposed restrictions. In November, the factory was rocked by worker protests over a wage dispute with many employees leaving the company. Foxconn tried to lure workers back with bonuses. Reuters reported on Tuesday that Foxconn’s factory in Zhengzhou has almost returned to production.

The episode highlighted Apple’s reliance on China for iPhone production. In early November, after Foxconn imposed Covid restrictions on the factory, Apple said the plant was operating at “significantly reduced capacity”.

The world’s largest iPhone factory, located in China and run by Foxconn, has faced disruptions in 2022. This is likely to trickle down to Apple’s December quarter results. Meanwhile, analysts have questioned demand for the iPhone 14 from Chinese consumers.

Nic Coury | Bloomberg | Getty Images

Analysts at Evercore ISI estimate a revenue shortfall of $5 billion to $8 billion for Apple in the December quarter. Apple could report a 1% annual decline in revenue in the December quarter, according to Refinitiv consensus estimates. That worries investors who were hoping for a good presentation for the iPhone 14 series, Apple’s latest smartphone.

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But it’s not just supply chain issues facing Apple now. China has reversed course on its zero-Covid policy as it seeks to reopen the economy. Beijing’s policy has involved strict lockdowns and mass testing to try to control the virus. There are now outbreaks of Covid-19 in much of the country which could affect demand for iPhones.

“The main challenge is expected to be on the demand side, particularly as resilient high-end consumers could begin to shift their spending to travel, while some may have shifted their focus to medical supplies. The shift in spending will mean a key challenge in the near term,” IDC research director Will Wong told CNBC.

Tesla’s failure to deliver

Tesla’s share price plunge on Tuesday was driven by a failure in vehicle deliveries, the closest approximation of sales revealed by Elon Musk’s electric carmaker. The 405,278 cars delivered in the fourth quarter of 2022 fell short of expectations for 427,000 deliveries.

Again, China’s demand story is in focus, as is the supply chain.

Throughout 2022, Tesla faced Covid disruptions at its Shanghai Xigafactory. But analysts also said there are concerns about demand from Chinese consumers.

“Tesla will point to supply disruptions and blockages as the main issue in China in 2022. While these are real headwinds, it cannot hide the fact that demand has softened for various reasons and that its order book is a 70% lower than before. to the Shanghai blockade,” Bill Russo, CEO of Shanghai-based Automobility, told CNBC.

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Lockdowns in Shanghai began in late March 2022 as the megacity’s government sought to contain a Covid outbreak.

Investors are also concerned that Tesla will have to cut prices to attract buyers that could squeeze margins. In China, Tesla cut the price of its Model 3 and Model Y vehicles in October, reversing some of the price increases it made earlier in the year.

But another major headwind for Tesla in China is growing competition from domestic rivals such as child e Li Auto as well as lower-priced competitors, which will launch new models in 2023.

“Tesla models have been on the market for a while and are not as fresh for the Chinese consumer as other alternatives. What we are learning is that the life cycles of electric electric products are short as they are bought for their technological features. Buy a older electric vehicle is like buying last year’s smartphone,” said Russo.

“They need new or refreshed models to revive the market. Just a lower price can damage their brand in the long run.”

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