Smartphone sales decline begins to impact global stock markets

The bad news continues for the world’s smartphone manufacturers and their suppliers.  And President Trump’s decision to add a 25% tariff on smartphone component imports from China from June 25 is unlikely to help. Morgan Stanley estimate it will add $160 to the current US iPhone XS price of $999, whilst a state-backed Chinese consumer boycott of Apple phones may well develop in retaliation for US sanctions on Huawei.

Chances are that a perfect storm is developing around the industry as its phenomenal run since 2011 comes to an end:

  • Global sales fell 4% in Q1 as the chart shows, with volume of 330m the lowest since Q3 2014
  • China’s market fell 3% to 88m, whilst US volume fell 18% to 36m
  • Apple has been badly hit, with US sales down 19% in Q1 and China sales down 25% in the past 6 months
  • Foldables have also failed to make a breakthrough, with Gartner estimating just 30m sales by 2023

This downbeat news highlights the fact that replacement cycles are no longer every year/18 months, but have already pushed out to 2.6 years.  Consumers see no need to rush to buy the latest model, given that today’s phones already cater very well for their needs.

Apple’s volumes confirm the secular nature of the downturn, as its volume continued the decline seen in 2018 as the iPhone comes to the end of its lifecycle. Its market share also fell back to 13%, allowing Huawei to take second place behind Samsung with a 17.9% share.  This decline came about despite Apple making major price cuts for the XS and XR series, as well as introducing a trade-in programme. Meanwhile, Samsung saw its profits fall 60%, the lowest since its battery problems in 2017.

The President’s tariffs are also set to impact sales, as manufacturers have to assume that today’s supply chains will need to be restructured. Manufacturing of low-end components can perhaps be easily relocated to countries such as Vietnam and other SE Asian countries.  But moving factories, like moving house, is a very disruptive process, and it is certainly not easy to find the technical skills required to make high-end components – which represent the core value proposition for consumers.

This highlights how second-order impacts are often overlooked when big announcements are made around tariffs and similar protectionist measures.  Not only do prices go up, as someone has to pay the extra costs involved. But companies along the supply chain see their margins squeezed as well – Apple suppliers Foxconn and Pegatron saw their gross margins fall to 5.5% and 2.3%, the lowest level since 2012, for example. So they will have less to spend on future innovations.

We can, of course, all hope that the current trade war proves only temporary. But President Trump’s decision to embargo Huawei from US telecom equipment markets suggests he is digging in for a long battle. Ironically, however, Huawei was one of the few winners in Q1, with its volume surging 50% despite its planned 2018 US entry being cancelled due to congressional pressure.  And other governments seem notable reluctant to follow the US lead.

The bigger risk, of course, for investors is that the profit downturn caused by protectionism cannot be “solved” by central bank stimulus. Since 2009, as the chart of the S&P 500 shows, they have rushed to support the market whenever it appeared poised for a return to more normal valuations. But it is hard to see how even their fall-back position of “helicopter money” can counter the impact of a fully-fledged trade war between the world’s 2 largest economies.

Trump’s trade war hits Wall Street as tech downturn begins

President Trump no longer tweets regularly about new record highs for US financial markets.

The tweets were a core activity in the first year of his Presidency, when he was still feeling his way into the job.

But now, as last week’s sackings of his Secretary of State and National Security Advisor confirm, his focus has returned to the promises made in his Gettysburg speech, before the election:

“I will begin taking the following 7 actions to protect American workers (my emphasis and status unpdate):

FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205 – UNDERWAY
SECOND, I will announce our withdrawal from the Trans-Pacific Partnership – DONE
THIRD, I will direct my Secretary of the Treasury to label China a currency manipulator – TRADE WAR NOW BEGUN
FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately – UNDERWAY
FIFTH, I will lift the restrictions on the production of $50 trillion dollars’ worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal– UNDERWAY
SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward – UNDERWAY
SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure – WITHDRAWN FROM UN CLIMATE CHANGE PROGRAMME”

Trump knows he faces a tough fight in November’s mid-term elections, when the Democrats could win control of Congress.  So he is refocusing on the issues that won him the White House in 2016. As I noted before his Inauguration:

“If President Trump pursues the policy program on which he was elected, we are therefore about to live through a paradigm shift in America’s role in the world. This is his right as President, and America’s right as a free country. But it is critical that all of us recognise the change about to take place.

This programme is quite different from the historical Republican platform focused on free trade and sound money.

The comparison between President Reagan’s 1986 tax reform and Trump’s tax cut last year highlights the different agenda.  Reagan built consensus over 3 years, and ensured his reform was revenue neutral. Trump simply used the Republican majority to force through the tax cut, and ignored warnings that it could add $1tn+ to the deficit.

FINANCIAL MARKETS HAVE BEGUN TO TUMBLE AS THE FAANGS’ MARKETS MATURE
Wall Street has had a great run, as the chart of Prof Robert Shiller’s CAPE Index confirms.

Its Price/Earnings ratio peaked in January at 33.6 – even higher than 1929’s top of 32.6.  Only the dot-com bubble at the end of the Boomer SuperCycle was higher, at 44.2.

Essentially, markets have been operating on the “5 Everyone concept”© .  There are 3 core “Everyones”:

  • “Everyone knows” stocks are over-valued, but believes they are clever enough to spot when it is time to exit
  • “Everyone believes” the Federal Reserve will always rescue them, if markets did happen to tumble
  • “Everyone assumes” that every correction is therefore a buying opportunity, as markets can never fall

But since January, the benchmark S&P 500 Index has seen these “3 Everyones” start to be questioned:

  • It peaked at 2839 in January, and by February “Everyone assumed” its 2581 level was a “buying opportunity”
  • But the March peak was just 2783, and prices then tumbled to 2588 on Friday
  • If prices now go below 2581, then they risk trending much lower, with “lower highs and lower lows”

The key issue is the growing doubt over the outlook for the super-hot tech sector, and the FAANG tech stocks.  This challenges the 4th “Everyone” – that “Everyone agrees” Facebook, Apple, Amazon, Netflix, Google (and Chinese companies such as Alibaba and Tencent), will dominate the global economy for decades ahead.

Last year, as the Financial Times chart confirms, the world’s Top 7 companies by market value were all tech-based.

But what if this idea is wrong?  Can tech really continue to grow to the sky, or are its markets starting to mature?

  • We know, for example, that the smartphone market has peaked, as I discussed last month
  • Price competition is also intensifying as companies focus on market share, not profit
  • Apple CEO Tim Cook is also very worried by the potential impact of trade wars
  • Can Apple and its rivals continue to increase their earnings, given these challenges?

Similarly, the growing political storm over Facebook suggests its days of stellar revenue and profit growth are ending.

Questions are also being raised about the viability of tech’s business model, which depends on users giving up their personal information for free.

After all, history shows that even the highest-flying companies and markets eventually mature.  At that point, Price/ Earnings ratios begin to drop, and investors start to refocus on dividend payments instead.

Unfortunately for Wall Street, it seems that Trump’s attack on free trade may turn out to be the catalyst for their discovery that tech’s days of exponential growth are over.

INVESTORS FACE 5TH “EVERYONE” CHALLENGE, AS “EVERYONE REALISES” MARKETS HAVE PEAKED
Trade wars are not normally good for business.  Nor is political uncertainty – which is certain to rise as President Trump energises core voters ahead of the mid-terms.  His Gettysburg policies set out, after all, “to protect American workers“.

If Trump’s initial focus on financial markets was indeed purely tactical, markets now have a bumpy ride ahead. The risk is that gradually, a 5th “Everyone” will become apparent – that “Everyone realises” markets have peaked.

The post Trump’s trade war hits Wall Street as tech downturn begins appeared first on Chemicals & The Economy.

The digital vortex is coming to a business near you

Digital vortexThe average smartphone now has “more computing power than the computers used during the Apollo era to put the first men on the moon.“ The question facing all of us, is “How will this power be used to disrupt our current business?

We can already see some of the early impacts from the transformation taking place:

□  Most people today buy music via streaming services such as iTunes, rather than buying CDs
□  Businesses such as Amazon, Alibaba and eBay are busy disrupting the retail business model
□  Google and Facebook are starting to dominate the advertising market
□  A whole range of new business models are being developed by companies in financial technology (fintech)
□  There are countless other examples such Uber, Airbnb and the development of the “sharing economy”

And this is only the start.  Reliance chairman, Mukesh Ambani – India’s richest man – has just spent Rs 1,50,000 crore ($2.25bn) on the launch of the Jio network in India.  As he told The Times of India yesterday:

“I believe 50 years from now when you write history, one technology that would have changed human civilization is going to be the mobile internet. In 2011 it was hazy. In 2002, it was even hazier. But today, I have no doubts, the world has no doubts, that mobile internet is a life-changing, world-changing technology of this century. Yes, it will evolve into many different things. But as a core technology it is a huge opportunity. And only the people who take some risks will reap rewards.”

As the chart above highlights, from an excellent new book titled Digital Vortex from Cisco and IMD Business school:

“Digital disruption” sounds like another business buzzword – until it happens to your company. Out of nowhere, startups and other tech-savvy disruptors attack. Customers flee and revenues stall. In months instead of years, you’ve gone from market leader to also-ran.”

The key issue is the need to make the connection between our own behaviour in our personal lives, and what this means for our businesses.

There is no rule that says new companies will succeed at the expense of existing companies.  It is all a question of mindset – does everyone in your company still assume that tomorrow will always be the same as yesterday?  Or are they already developing the new business models that will be needed for future success?

As the chart also suggests, digital disruption is impacting businesses in different timescales:

□  Technology, media, retail and financial services been the first to be disrupted
□  Now it is the turn of telecoms, education, travel and manufacturing
□  Next will be healthcare, utilities, oil & gas and pharmaceuticals

The encouraging aspect of the coming transition is that we already know the broad outline of how it will develop.

In manufacturing, for example, the arrival of 3D printing is going to lead to a revolution in supply chains as production takes place close to the end-user.   Big money is already being spent on turning this concept into reality – only this week, US firm GE paid $1.4bn for 2 European start-ups in the 3D printing for aerospace market.

Of course, not everything will change overnight – some people still read newspapers today, even though most now receive news online via channels such as Facebook.  But if we take the plastics industry as an example, it is easy to see how manufacturing processes might change. 3D printing won’t just impact the supply chain:

□  Traditional manufacturing involves taking a block of polymer, or a sheet of film, and cutting it down to size
□  This process is very inefficient, as large amounts of waste are then often left on the factory floor
□  3D printing is “additive” in nature, however, as it simply adds new layers of polymer to create the required shape
□  This reduces waste and, therefore, overall demand for the polymers themselves

Car repairs are an obvious opportunity. If you have an accident, and need a replacement part, your local garage will be able to download the design and print it for you, whilst you have a cup of coffee. There’ll be no need to wait for it to come from the manufacturer.

This model is already operating in the aircraft industry, as I highlighted last year.

Nobody at this stage can know just how digitalisation will impact individual businesses around the world.  But today, we all have the chance to shape the future, rather than having it shaped for us by others.  As Unilever CEO, Paul Polman, has said:

Individuals change course, not technology. While they may adopt technology, it will still be people and leadership that  set the course of our future.