U.S. Tech Giants Tesla and Apple Face Uncertainty as China Worries Push Share Prices Down

Both Apple and Tesla are currently facing significant challenges in China, which is causing investors to become increasingly anxious about the two American tech giants.

Tesla's stock plummeted 12% on Tuesday after the electric car manufacturer reported deliveries that did not meet analyst predictions, while Apple's shares dropped more than 3% as worries about the demand for the iPhone in the December quarter resurfaced.

The stock market has seen a decline due to issues in China. This country is the second-largest economy in the world and accounts for a large portion of the sales and revenue of both Apple and Tesla. Approximately 17% of Apple's sales and 23% of Tesla's revenue come from China, making it a major market for both American companies.

Daniel Ives, senior equity analyst at Wedbush Securities, told CNBC that China is a major source of both demand and supply for Apple and Tesla, and the Street is concerned that the Chinese economy and consumers are cutting back on spending, which could be a bad sign for the two companies.

In 2022, the concern was centered around supply chain problems and the absence of Covid-related issues. However, in 2023, the worry has shifted to demand, creating a significant cloud of uncertainty for companies such as Apple and Tesla that depend heavily on the Chinese market.

Investors are keeping a close watch on Apple's upcoming fiscal first-quarter results, which will provide insight into the company's performance during the important December holiday season.

In October, the largest iPhone factory in Zhengzhou, China, experienced a Covid outbreak. Foxconn, the Taiwanese company that operates the plant, implemented restrictions. The following month, the factory was disrupted by worker protests concerning a pay dispute, resulting in many employees leaving. Foxconn has tried to bring the workers back with bonuses. According to Reuters on Tuesday, Foxconn's Zhengzhou factory is almost back to its regular production rate.

The episode brought to light Apple's dependence on China for the production of iPhones. In the beginning of November, after Foxconn implemented Covid-19 safety measures in the factory, Apple reported that the plant was running at a "considerably reduced capacity."

Evercore ISI analysts have predicted that Apple could experience a revenue shortfall of between $5 billion and $8 billion in the December quarter. Refinitiv consensus estimates suggest that Apple may report a 1% decrease in revenue year-over-year. This news has caused concern among investors who were expecting the iPhone 14 series, Apple's newest smartphone, to be a success.

Apart from the supply chain issues, Apple is also facing the consequences of China's change in policy. Beijing had previously implemented a zero-Covid policy, which included lockdowns and mass testing, in an effort to contain the virus. However, now there are Covid-19 outbreaks in many parts of the country, which could potentially affect the demand for iPhones.

Will Wong, research manager at IDC, told CNBC that the main difficulty is anticipated to be on the demand side, particularly since affluent consumers who are resilient may have started to redirect their spending to travel while some may have shifted their attention to medical supplies. This change in expenditure will present a major challenge in the near future.

Tesla's stock price dropped on Tuesday due to a shortfall in vehicle deliveries for the fourth quarter of 2022. The actual number of cars delivered, 405,278, was lower than the anticipated 427,000. This figure is the closest approximation of sales that Elon Musk's electric car company discloses.

Once more, the Chinese market is the main focus, as well as the supply chain associated with it.

Throughout 2022, Tesla experienced setbacks at its Shanghai Gigafactory due to the Covid pandemic. Analysts have also expressed worry over the demand from Chinese customers.

Tesla will likely attribute supply disruptions and lockdowns as the primary cause of their struggles in China in 2022. However, Bill Russo, CEO of Automobility in Shanghai, informed CNBC that demand has weakened for a variety of reasons and their order backlog is 70% lower than it was before the Shanghai lockdown.

In late March 2022, the government of Shanghai implemented lockdowns in an effort to contain a Covid outbreak in the megacity.

Investors are worried that Tesla may have to reduce prices in order to draw in customers, which could have a negative effect on their margins. In October, Tesla lowered the cost of their Model 3 and Model Y vehicles in China, undoing some of the price increases they had implemented earlier in the year.

Tesla is facing a significant challenge in China due to the emergence of domestic competitors such as Nio and Li Auto, as well as the introduction of more affordable models in 2023.

Tesla's vehicles have been available for some time, and they are not as new to Chinese customers as other options. We are discovering that the life cycles of electric vehicles are short, as they are sought after for their technological features. Purchasing an older EV is similar to buying a smartphone from the previous year, according to Russo.

In order to stimulate the market, companies need to introduce new or updated products. Lowering prices alone can have a negative effect on their reputation in the long term.