“Forget the Crimea annexation or a U.S.-Russia standoff. The biggest international threat to U.S. economic growth is the slowdown in China, say economists polled by The Wall Street Journal (WSJ).”
That was last week’s headline in the WSJ. These, of course, are the same economists who have been busy telling us for years that China was set for further decades of rapid growth, and would overtake the US as the world’s largest economy.
Of course, this is the low-risk way to behave. Stick with the consensus, and then claim “nobody could have foreseen that such-and-such happened to destroy the dream”. At the same time, ignore the people who have the courage of their own convictions, and who bother to do their own research – such as the blog’s Research Note last month
We saw this happen during the subprime crisis, where the concerns of the blog and others were routinely ignored as the disaster of Q4 2008 developed. Now it is happening again, as people search for excuses to explain why their previous strongly-expressed views turned out to be wrong.
Another example, again relating to China, highlights the same picture. How many times have you read in the past few years about China’s millions of “middle-class consumers”, supposedly all lining up to create a perpetual growth machine for any company with products to sell?
We pointed out in chapter 4 of Boom, Gloom and the New Normal that this was a complete myth, and forecast that “The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels.”
Now this forecast is coming true, but not before far too many companies have been taken in by the hype and invested vast sums as a result. Thus the WSJ also reported that:
“Total smartphone shipments in China fell 4% in Q4 2013. This could signal harder times for both domestic and foreign smartphone companies looking to China for growth.”
Indeed it could. And hard times for all those companies who have set up to supply them with raw materials.
The truth is that the market only developed due to the lending bubble. People earning just a few dollars a day, the position of most Chinese, could otherwise never have afforded to pay even $100 for a low-end smartphone, let alone $750 for an Apple model. Not everyone was fooled of course. As one long-standing Asian reader wrote to the blog:
“This was something waiting to happen. The penetration rate of smart phones has been one of the highest for any product the world over (thanks to easy & cheap money) and has outpaced the speed of innovation. With smart phone improvements becoming more marginal the rush to upgrade is diminishing.”
Sadly, even within companies, such sensible arguments have been routinely ignored. Instead, the bonuses and promotions have often gone to those pushing forward ever-grander projects, whilst credulous investors believed growth would never end, and pushed the share price ever-higher.
Just for the record, therefore, this is what the blog wrote in January 2013. Because, yes, it was perfectly possible for anyone to see what was coming, if they wanted to know:
“One of the great myths of recent years has been that China – whose population mainly earns less than $10/day – has somehow become ‘middle class’.
“It is certainly true that some of China’s 1.3bn population have done well since the economy reopened to the world after Mao. And equally true that the house price bubble created the illusion of wealth in the major cities, even though incomes remain relatively low on a global scale. But Apple’s problems with its iPhone sales highlight how reality is starting to puncture the myth:
- The iPhone 4 was launched in September 2010 at a price of $750
- In January 2010, analysts Morgan Stanley had forecast a “potential for Apple to sell 4-5 million units annually (in) an attractive addressable market of 50 million consumers”
- In July 2011, Apple said its China stores “have more than 40,000 visitors per day – four times average traffic in the US stores”
- But last week it emerged the iPhone is now in only 6th place in China’s smartphone market
“The reason is affordability. As Bloomberg comment, “the lack of low-cost products limits the iPhone-maker in emerging markets“. Apple’s market share was apparently down to 15% in Q3 2012 “as it struggled to lure consumers earning an average of $577/month”.
Apple’s problem highlights the dilemma facing a vast number of companies, as they slowly realise their business strategy for China has been misguided. There never were 50m ‘middle class’ consumers in China. Instead, as the blog has noted several times, there were 50 million who earned more than $20/day ($7300/year).
“This is not quite the same thing.”
Benchmark product price movements since January 2013 are below, with ICIS pricing comments:
PTA China, down 25%. “The downstream polyester sectors remained slow, struggling to consume the huge supply overhang in the key China markets”
Benzene, Europe, down 7%. “With renewed macroeconomic concerns regarding China, there is no real sense that demand from key end-use markets is supporting any continued bullishness on benzene.”
Brent crude oil, down 4%
Naphtha Europe, down 2%. “Traders expect increased future US gasoline demand for naphtha as a blendstock,”
US$: yen, up 15%
HDPE US export, up 21%. “Global demand remained weak, particularly in China, where the post-Lunar New Year bump has failed to materialise”
S&P 500 stock market index, up 26%
Monday night update. A blog reader has kindly forwarded another WSJ article today, which highlights exactly the same smartphone need for ‘affordability’ in Indonesia. “Cheaper, less fancy smart phones are hot sellers in Indonesia, as lower-income buyers choose affordability over top-of-the-line features”.