Tesla and Apple face China risks as share prices fall

apple and Tesla The two US tech giants are facing major headwinds in China, causing investor confusion.

Tesla shares fell 12% on Tuesday after the electric car maker reported shipments that missed analysts’ expectations, while Apple fell more than 3% in the December quarter as concerns about demand for the company’s flagship iPhone resurfaced.

Troubles in China are partly behind the fall in stocks. The world’s second-largest economy accounts for about 17% of Apple’s sales and 23% of Tesla’s revenue, making it an important market for both American firms.

“China is the heart and lungs of both supply and demand for both Apple and Tesla. The biggest concern for the Street is the Chinese economy and consumer spending restraint, which is an ominous sign,” Daniel Ives, senior equity analyst at Wedbush Securities on Apple and Tesla , told CNBC.

“In 2022, supply chain issues and zero Covid issues, 2023 were demand concerns, leading to huge growth in both Apple and Tesla, who are very reliant on the Chinese consumer.”

Apple worries about iPhone demand

For Apple, investors have one eye on Apple’s first-quarter financial results, likely later this month, before the crucial December holiday.

But in October, the world’s largest iPhone factory in Zhengzhou, China was hit by the Covid epidemic. Taiwanese company Foxconnwho managed the plant, set restrictions. In November, the factory was rocked by labor protests over a wage dispute, with many workers leaving the company. Foxconn tried to win back its workers with bonuses. Foxconn’s Zhengzhou factory is almost back to full production, Reuters reported on Tuesday.

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 operated by Foxconn, faced disruptions in 2022. This will likely filter through to Apple’s December quarter results. Meanwhile, analysts questioned the demand of Chinese consumers for iPhone 14.

Nic Coury | Bloomberg | Getty Images

Evercore ISI analysts estimate a revenue shortfall of $5-8 billion for Apple in the December quarter. According to Refinitiv consensus estimates, Apple could report a 1% year-over-year decline in revenue in the December quarter. This worries investors who are expecting a strong showing for Apple’s latest smartphone, the iPhone 14 series.

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

“The main challenge is expected to be on the demand side, especially as continued high-end consumers may begin to shift their spending towards travel and some may focus on medical supplies. The change in spending will be the main challenge. Short-term,” IDC research manager Will Wong told CNBC.

Missed Tesla delivery

Tesla’s share price tumbled on Tuesday after a failure to deliver vehicles, the closest estimate of sales released by Elon Musk’s electric car maker. Deliveries of 405,278 vehicles in the fourth quarter of 2022 fell short of expectations for 427,000 deliveries.

Again, the Chinese demand story is in focus along with the supply chain.

During 2022, Tesla faced Covid-related disruptions at its Shanghai Gigafactory. But analysts also said there were concerns about Chinese consumer demand.

“Tesla will see supply disruptions and shutdowns in China as a major challenge in 2022. While these are real headwinds, it cannot hide the fact that demand has softened for a variety of reasons and orders are 70% lower than before. The Shanghai lockdown,” said Bill Russo, CEO of Shanghai-based Automobility. told CNBC.

Quarantines in Shanghai began in late March 2022 as the megapolis’ government tried to contain the Covid outbreak.

Investors also worry that Tesla will have to cut prices to attract buyers, which could put pressure on margins. In China, Tesla cut the price of its Model 3 and Model Y cars in October, reversing some of its price hikes earlier in the year.

But another big headwind for Tesla in China is growing competition from local rivals Nio and Lee Auto as well as lower-priced rivals launching new models in 2023.

“Tesla’s models have been on the market for a while and are not as fresh for Chinese consumers as other alternatives. What we’re learning is that the life cycles of EV products are short because they’re bought based on technology features. It’s like buying an old EV. I’m buying last year’s smartphone,” Russo said. said.

“They need new or refreshed models to reignite the market. Just lower prices can hurt their brand in the long run.”

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