Why China's Slowdown Won't Hurt Apple, Inc.

Image source: Apple.

Chances are, you've been hearing an awful lot about China lately. The Middle Kingdom's broader macroeconomic slowdown has been weighing on markets recently, particularly this last week. China's economy is indeed slowing, and it has now devalued the yuan to stimulate exports while also cutting interest rates to spur economic activity. Chances are, you've also heard about all of this as it relates to Apple's (AAPL +2.62%) business, since China is the Mac maker's second-largest, fastest-growing market.

To be clear, China's deceleration may very well have some impact on Apple. I mean, how could it not? But investors seem to be overweighting this concern, when they should really delink the current emotional sentiment from the reality of just how strong Apple's business is in China is. Apple's business in China is far more resilient and much less vulnerable to macroeconomic conditions than you may think.

Stop me if you've heard this one before
Let's back up a few years. The fact of the matter is that China's economy has been slowing for years. It's put up such stellar growth rates over the past decade that this is inevitable, if not expected. Just glance at these headlines over the past several years:

• June 2010: China Slowdown Fears Hit Global Markets (CNNMoney)
• July 2011: China Slowdown Is the World's Next Nightmare (The Guardian)
• July 2012: China's Slowdown Deepens, Raises Risks to Global Economy (CNNMoney)
• April 2013: China's Slowing Economy: What You Need to Know (Bloomberg Business)
• March 2014: Risks in Focus as China's Economy Slows (CNNMoney)
• January 2015: China's Slowing Economy: The Worst Has Yet to Come (Fortune)

OK, so this process has been going on for years. All the while, Apple's Greater China business has skyrocketed. You also need to appreciate the relative youth of Apple's China business. Apple only really started focusing on China in earnest in 2009. Greater China revenue in all of fiscal 2009 was less than $900 million. That figure has now risen to $52.5 billion in trailing-12-months revenue, all over the course of six years. The slowing macroeconomy barely affected Apple as it launched the iPhone, inked new carrier partnerships, pursued affordability initiatives, catered to local preferences and tastes, and expanded its retail footprint.

Let's get more specific with concrete data points. Here's how Apple's Greater China segment has grown against a backdrop of slowing GDP growth in China since 2010.

Source: SEC filings and The World Bank. China GDP growth measured in constant local currency. Calendar years shown.

Clearly, China's ongoing slowdown didn't do too much damage.

That's what he said
There is more information to consider. Apple doesn't break out iPhone unit sales geographically, but Cook and Co. do often share statistics and data points on conference calls, particularly the more pertinent ones like iPhone unit growth. I've aggregated the comments related to the iPhone units in China since 2012 below.

Source: Conference calls.

Even though investors don't have any hard numbers to base these percentages on, the stark contrast between China's GDP growth rates and iPhone growth rates over the years is apparent. There is no measurable correlation.

The last three quarters have been particularly strong as Chinese consumers embrace the larger iPhones. There was only one known quarter where iPhone units fell in China, and they only fell by a modest 4% on a sell-through basis.

Apple has also noted the lack of a correlation between China's economy and its performance. For instance, on the July 2012 call, Cook noted, "We look at the economic reports as all of you do and see the press. But again, we did not see something that we would attribute to the economy in China." Then-CFO Peter Oppenheimer added, "As Tim said, we saw no obvious evidence of the economy impacting our sales in China in the June quarter or in the U.S., but we are reading the same things that you all are about these economies."

There are more examples, but you're probably tired of reading conference call quotes by now. The point here is that Apple's China business doesn't rely on macro conditions.

The $52.5 billion question
None of this is to downplay the very real risks coming from China right now. Today's global economy is so intertwined that everything affects everything, but it becomes a question of how much weight investors should assign certain risk factors. It seems that the market is giving far too much weight to the China risks right now when it comes to Apple. As you can see, Apple has fared quite well all this time, and China's economy has been slowing all this time.

Taking an even broader view, here's the only real question that actually matters: Does the ongoing macroeconomic slowdown pose a meaningful threat to the longer-term trend of China's booming middle class? This is the key to Apple's future in China -- and the answer is no. Cook has noted before that the majority of iPhone sales in China are going to the growing middle class (I'll spare you another quote), so as long as this demographic continues to expand rapidly, then Apple will be just fine.