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The Fall In Apple”s Share Price And China’s “Middle Classes”

Business, China, Company Strategy, Economics, Technology
By John Richardson on 26-Jul-2015


By John Richardson

SOMETHIING very important happened last week when investors wiped $30 billion off the value of Apple’s shares in the space of just one day, even though it had just delivered another excellent set of quarterly results.

According to the Financial Times, the reason for the slump in the value of Apple, however temporary, was down to this:

The fluctuations of the Chinese stock market have raised questions over the spending power of its middle class, who are driving the iPhone’s popularity in Apple’s second-largest market.

Tim Cook, Apple’s CEO, was absolutely right when he said that the recent collapse in China’s stock markets were not in themselves that much of an issue for the spending power of the country’s middle classes, as only a “narrow slice” of the country’s population gamble in equities.

But I actually think that the underlying reason why investors took fright was another example of what I first talked about earlier this month: The growing realisation that there are no “magic pill” solutions to the country’s economic problems, which has been prompted by the decline in China’s equities,

The next phase will be when the consensus view shifts to understanding that this is what it really means to be middle class in China, based on data from China’s National Bureau of Statistics:

•High Income groups in urban areas had $9,000 income in 2013, versus $4,000 in 2007. Great progress, but, of course, this is a long, long way from being middle class by Western standards.

•The Middle Income group in urban areas had $4,000 in 2013 versus $1,600 in 2007, and the Low Income group had $1,900 versus $700.

•And the High Income group in rural areas had just $3,500 income in 2013 versus $1,300 in 2007.

•The rural Middle income in rural areas had only $1,300 in 2013 versus $500 in 2007, and the Low Income had only $400 versus $180.

The problem for companies that sell to China in general is that for far too long, this kind of data was ignored in all the excitement created by the 2009-2013 economic stimulus package. Too many people thought that China had suddenly become a Western-style middle class country, virtually overnight, when the reality was that the “wealth effect” created by that stimulus package was never sustainable.

Where do we go from here?

I actually think that whilst the sales growth of Apple iPhone will likely further decline in China, they will be OK as there will always be enough rich people in China and elsewhere who can afford to buy all of their products.

The bigger risk is for ‘mid-market” overseas smartphone producers that lack Apple’s brand appeal. They will suffer very badly from cheaper Chinese alternatives, such as Huawei and Xiaomi.

The parallels for the chemicals industry are obvious here. You either provide high-end solutions or very, very cheap chemicals and polymers. But what you must not do is be caught in the no-man’s land of the middle ground.