Saturday, August 15, 2015

Apple Feels the Pain of China's Yuan Move

Yuan

Apple’s Discomfort on China’s Yuan Move

U.S. companies relying greatly on sales to China which includes Apple as well as fast food chain Yum Brands are feeling the discomfort of China’s move to weaken its currency. On Tuesday, in reply to the country’s economic slowdown, China’s central bank undervalued the nation’s tightly controlled currency, the Renminbi – RMB or the Yuan.

The 1.9% cut, its biggest one-day drop in decade,was called as a onetime adjustment by the People’s Bank of China though the surprised move had moved the stocks down together with concerns that it would affect U.S. companies, like Apple which have been on the rise selling their products to the world’s most populated nations. China had become Apple’s leading revenue source under CEO Tim Cook, after its Americas region, including the U.S.

The iPhone maker, in the latest financial quarter ending June had stated that China had made up around $13.2 billion of its overall $49.6 billion by way of revenues. This was up by 112% from the same quarter of 2014, when China had made up just around $6.2 billion of the overall revenue of Apple.

Several Companies Deprived of Huge Percentage

Yum Brands also had broad exposure to China owing to the popularity of its KFC fast food chain and about 52% of its revenue came from China as per Goldman Sachs. Mead Johnson Nutrition, the baby formula maker, in the meanwhile developed 31% of its revenue from China and Tesla; the electric car maker had been moving to sell in China after the nation had broken a record for car sales in 2013.

 Wynn Resorts that runs hotels as well as casinos gained a massive 83% of its sales to China, according to Goldman. Several of the chipmakers together with other tech companies too derived a huge percentage of their revenues from China as per Goldman Sachs which included:

  • Chipmaker Qualcomm with 61% of its revenue exposed to China 
  • Chipmaker Nvidia got 54% of its revenue from China 
  • Chipmaker Intel Corp that got 36% of its revenue from China

Negative Effect on Sales – Offset of Lower Production Cost

The negative effect on sales could be the offset of lower production cost for some of the companies, according to Adolfo Laurenti, chief international economist for Mesirow Financial in Chicago.

Apple for instance assembles several of their products in China and hence could benefit from the cheaper Yuan. Laurenti also mentioned that companies having strong brands, such as Apple could not be rejected as badly as the less popular products since wealthy Chinese consumers would be willing to spend more to have those brands name.

He further added that `Chinese consumers in particular preferred American brands especially marquee products and so the adjustment in price would not deter them much’. The major apprehension is what the devaluation move would recommend about the larger economy of China, according to senior economist with Morningstar Investment Management, Francisco Torralba and his main concern is that the depreciation of the RMB is construed by markets as a sign that Chinese economy tends to be weakening more than what they contemplated. He adds that should it occur, sales to China will be affected by more than just currency cost.

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