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Tesla and Apple face China risks as stock prices fall

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Apple's big headwinds in China

Apple and You’re here face major headwinds in China, contributing to investor jitters around the two U.S. tech giants.

Shares of Tesla fell 12% on Tuesday after the electric car maker reported deliveries below analysts’ expectations, while Apple fell more than 3% as concerns resurfaced over demand for the car. the company’s flagship iPhone in the December quarter.

Challenges in China are partly behind the stock slide. 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 US companies.

“China is the heart and lungs of demand and supply for Apple and Tesla. The biggest concern on the street is that the Chinese economy and consumers are holding back their spending and that is a worrying 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 Covid issues, 2023 is demand concern and that has thrown a major overhang on both Apple and Tesla who are heavily reliant on the Chinese consumer .”

Apple iPhone asks for worries

For Apple, investors have their eye on Apple’s fiscal first quarter results expected to be released later this month, which covers 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 foxcon, which runs the factory, has imposed restrictions. In November, the factory was rocked by worker protests over a pay dispute, with many employees leaving the company. Foxconn tried to bring the workers back with bonuses. Reuters reported on Tuesday that Foxconn’s Zhengzhou plant 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, faced disruptions in 2022. That is expected to impact Apple’s December quarter results. Meanwhile, analysts have questioned Chinese consumer demand for the iPhone 14.

Nic Coury | Bloomberg | Getty Images

Evercore ISI analysts estimate a $5 billion to $8 billion shortfall for Apple in the December quarter. Apple could report a 1% annual decline in revenue in the December quarter, according to Refinitiv consensus estimates. This worries investors who expected a strong performance from the iPhone 14 series, Apple’s latest smartphone.

But it’s not just the supply chain issues that Apple is currently facing. China has backtracked on its zero-Covid policy as it seeks to reopen the economy. Beijing’s policy involved 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 impact demand for iPhones.

“The main challenge should be on the demand side, especially as resilient high-end consumers may have started to shift their spending towards travel, while some may have shifted their focus towards medical supplies. Shifting spending will pose a major challenge in the near term,” Will Wong, research director at IDC, told CNBC.

Missed Tesla delivery

Tesla’s share price tumble on Tuesday was driven by a lack of vehicle deliveries, the closest approximation to sales disclosed by Elon Musk’s electric carmaker. The 405,278 cars delivered in the fourth quarter of 2022 are below expectations of 427,000 deliveries.

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

Throughout 2022, Tesla faced Covid disruptions at its Shanghai Gigafactory. But analysts also said Chinese consumer demand was a concern.

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

Lockdowns in Shanghai began in late March 2022 as the megacity’s government sought 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 cut the price of its Model 3 and Model Y vehicles in October, undoing some of the price hikes it made earlier in the year.

But another major headwind for Tesla in China is growing competition from domestic rivals like Nio and Li-Auto as well as cheaper competitors, which launch new models in 2023.

“Tesla’s models have been on the market for a while and are not as new to the Chinese consumer as other alternatives. What we are learning is that EV product life cycles are short because they are bought for their tech features. Buying an older EV is like buying last year’s smartphone,” Russo said.

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

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