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Tesla and Apple face risks in China as share prices fall

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Apple's Big Headwinds in China

Litter and tesla are facing major headwinds in China, which is contributing to investor jitters around the two US tech giants.

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

Challenges in China are partly behind the stock declines. The world’s second-largest economy accounts for about 17% of Apple’s sales and 23% of Tesla’s revenue, making it a significant market for both US companies.

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

“In 2022 the concern was supply chain issues and zero Covid-related issues, 2023 is the demand concerns and this has thrown a huge burden on Apple and Tesla who are heavily dependent on the Chinese consumer.”

Apple iPhone demand concerns

For Apple, investors are eyeing Apple’s fiscal first quarter results, likely to be released later this month, which cover the crucial December holiday period.

But in October, the world’s largest iPhone factory in Zhengzhou, China, was hit by a Covid outbreak. Taiwanese company Foxconn, which manages 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 is almost back to full 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 factory 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 seep into Apple’s December quarterly results. Meanwhile, analysts questioned demand for the iPhone 14 from Chinese consumers.

Nico Coury | Bloomberg | Getty Images

Analysts at Evercore ISI estimate a $5 billion to $8 billion revenue shortfall for Apple in the December quarter. Apple may report a 1% year-on-year decline in revenue for the December quarter, according to consensus estimates from Refinitiv. This is worrying investors who were expecting a good showing from the iPhone 14 series, Apple’s latest smartphone.

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

“The main challenge is expected to be on the demand side, especially as sophisticated and resilient consumers may have started to shift their spending towards travel, while some may have shifted their focus to medical supplies. The shift in spending will pose a key challenge in the short term,” Will Wong, research manager at IDC, told CNBC.

Tesla delivery failure

Tesla’s share price tumble on Tuesday was driven by a failure in vehicle deliveries, the closest approach to sales reported by Elon Musk’s electric car maker. The 405,278 cars delivered in the fourth quarter of 2022 fell short of expectations of 427,000 deliveries.

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

Throughout 2022, Tesla has faced Covid outages at its Gigafactory in Shanghai. But analysts also said there was concern about demand from Chinese consumers.

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

Lockdowns in Shanghai began in late March 2022 as the megacity government was trying to control a Covid outbreak.

Investors are also concerned that Tesla will have to cut prices to attract buyers, which could put pressure on margins. In China, Tesla reduced 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 hurdle for Tesla in China is growing competition from domestic rivals like no and Read Auto as well as competitors with lower prices, which launch new models in 2023.

“Tesla models have been on the market for some time and are not as new to the Chinese consumer as other alternatives. What we are learning is that EV product lifecycles are short as they are bought for their technological features. last year’s smartphone,” said Russo.

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