WSJ: 'A reality distortion field sure would come in handy right now.'

From Dan Gallagher's "Apple Has No Easy Road Out of China" posted Monday by the Wall Street Journal:

Apple's short-term problems depend on the patience of its most lucrative iPhone buyers. Its long-term problems will require the patience of a much larger constituency...

Growing unrest in China furthers the questions for Apple’s long-term direction beyond just near-term iPhone sales. Substantially all of the company’s products are manufactured in China. That reliance has grown more tenuous as tensions have risen between China and the U.S.

The unprecedented nature of the latest protests adds a new element of risk that is likely to hang over any foreign business operating in China, and Apple isn’t just any foreign business.  It is the world’s most valuable company and is so large that it requires its own “city” just to build iPhones, shipments of which now exceed 230 million units every year. In a note earlier this month, Bank of America analyst Wamsi Mohan wrote that “meaningful diversification from China-based manufacturing is many years away” for Apple.

A reality distortion field sure would come in handy right now.

My take: It only Apple's (unannounced) mixed-reality goggles came with a built-in RDF setting ... now that would be a killer app!

13 Comments

  1. Gregg Thurman said:
    Give journalists a meme and they’ll write about it ad infinitum, even if they don’t know what they’re righting about.

    8
    November 28, 2022
  2. Bruce Oran said:
    Maybe I am naive, but it seems to me that Tim Cook didn’t just pick up the WSJ this morning and decide he better do something! Cook has been dealing with the Chinese leadership for a long time, and he is no fool. I would bet anything (and I am sticking with Apple) that he has been in a tactical mode for quite some time and is working hard behind the scenes to extricate Apple from this situation without throwing the baby out with the bath water. It’s a delicate dance but if anyone can do it, Tim can!

    15
    November 28, 2022
    • Neal Guttenberg said:
      Bruce,

      Well said.

      Maybe other companies aren’t affected like Apple is because their products aren’t selling so they don’t have as big disruptions of their supply chain. But I would guess any popular product will be affected, and not just Apple’s products. TC usually can figure out a way to minimize the impact. We will see if that is true when the actual numbers come out.

      1
      November 28, 2022
  3. Steven Philips said:
    One forgets that RDFs are not only actuated by Apple. Look at all the attempts at usage from WSJ, NYT, Bloomberg, Barrons et al. I would put it this way: Apple’s RDF is “Honest” in what it’s trying to do. The above noted media is anything but!

    2
    November 28, 2022
  4. Fred Stein said:
    Gallagher suffers from reality distortion, and lacks basic math skills. The NPV of the impact (as worst case, as reported) on a DCF, discounted cash flow, is negligible. Likewise, down selling to non-Pro costs a small percent of profit on a small percent of phones sold. So estimate 10% * 5% = .5% of iPhone profit which is 40% of sales, so .2% impact, maybe – margin of error.

    Gallagher contradicts himself saying WS has not factored in the impact and then say AAPL is down 2% for a 1% shift in revenue by a few weeks that happen to cross a fiscal boundary.

    Later he questions “Apple’s long-term direction”, despite the fact that Apple has already taken steps to diversify out of China, as a supplier and as a market. The decisions and plans were made long ago.

    Beyond RDF – fun house mirror. He knows nothing about Apple or finance.

    7
    November 28, 2022
  5. Bart Yee said:
    Sure, Dan Gallagher would like some kind of smoke and mirrors to appear, or a Jobs like savant to magically appear and solve a series of situations that are caused by a dominant autocratic government, it’s single minded public health policies, and it’s failure to acknowledge usage of ineffective Covid vaccines and lagging development of effective vaccines, all the while having access and even licensure for much more effective options in reducing Covid infections and / or hospitalizations. Not exercising those options seems to be a nationalistic exercise in cutting off one’s nose to spite its face and “justifies” continued draconian lockdowns on its population and economic engines.

    So what can Foxconn and Apple by extension do in the short term? Foxconn is having difficulty with newest workers because of poor communications, fairly typical employer biased pay policies, and an inability to properly address worker conditions and treatment during lockdowns. I doubt many American companies could have dealt with the same conditions here with demand high instead of falling and Covid raging locally.

    So yes, Foxconn needs to treat its workers much more fairly, pay them as agreed, and protect them and the facility. Apparently the newest workers weren’t working out, so they paid them to go home. They’re trying to pay again for experienced workers to come back. And / or the factory will have to work at reduced capacity regardless of the demand situation.

    As for S Lawton’s concerns about quality assembly and quailing control, Apple is not going to tolerate getting partially defective or poorly assembled iPhones out and then having to deal with complaints and warranty issues, not to mention further negative publicity. If Foxconn F***s up here, they can kiss their contracts good bye.

    3
    November 28, 2022
  6. Fred Stein said:
    Sorry, can’t resist. What if the Watch Ultra exceeds? Sure, it won’t pick up the two week delay of $6B of iPhone, but it helps.

    OT: My brother just bought a new MacBook Pro to get that M-series.

    Point is: Gallagher is still counting iPhones. iPhone sales seasonality, cyclicality, and supply chain rumors have minimal predictive value.

    5
    November 28, 2022
    • Bart Yee said:
      @Fred
      I thought about that too. If Watch Ultra has really solid first mover sales, or upsells from regular Watch 8 sales, and AirPods Pro also sell well, Wearables could conceivably increase 5, 10, maybe 12% YOY, from $14.7B in Q1 2022 to $15.43B, $16.2B, or $16.5B respectively. A real beat would be 15% or $16.9B, but even with that, it’s only $2.2B more revenue. Apple Watches sold 46M units total in 2021, averaging 11.5M units/ quarter. If the additional $2.2B was all Watch Ultras, that would be 2.75M sold and a 20% increase in total Watch units this quarter. But this is not counting AirPods Pro, Beats, AirTags growth, additional bands, etc. Could we dare hope for a 12-20% increase in Wearables purchases as less expensive gift options while iPhone Pro models were in constrained supply?

      A $2.2B increase in Wearables would be a good 30% chunk recovered of the potential $6-7B iPhone shortfall. Could then services, iPad and Mac make up the rest?

      1
      November 29, 2022
      • Greg Lippert said:
        Love my AW Ultra and my marathon running friend does, too! The better GPS and battery are GameChangers for him!

        0
        November 29, 2022
  7. Alan Trerise said:
    We have yet to get any details about the mixed reality goggles out of the supply chain. This would suggest they have yet to tool a production line for it. While its too late for the iPhone it is not too late for the goggles to find a more stable environment for their manufacture.

    1
    November 28, 2022
  8. Jonny T said:
    Strikes me that the distortion field was something Jobs made use of when Apple was in a very different place to where it is today (or has been over the last 12 years). It has absolutely no need of any such thing. Just watch those quarterly numbers which will keep on coming. Journos would like to think Apple is a bit stupid (read ‘normal’) when it is truly on another level. And I don’t see ANY signs of that changing.

    0
    November 29, 2022
  9. Romeo A Esparrago Jr said:
    Reflecting on past reality, regarding the recession of Dec 2007 to June 2009, I found this article :

    “ How Alphabet, Amazon, and Apple Fared in the Last Big Recession “

    ‘ By Keith Speights – Apr 9, 2022

    Alphabet, Amazon, and Apple stocks fell close to 60% in the last big recession.
    Each recession is different — and these companies have also changed a lot since the Great Recession.
    The most important lesson for investors is that each stock bounced back strongly over time. ‘

    2
    November 29, 2022
    • Romeo A Esparrago Jr said:
      I’m not saying history will necessarily repeat itself since the factors for now are so different, what I’m saying is :
      TC and his staff gain experience from each so-called crisis and uses the learnings, and what they themselves bring to Apple, to manage situations big & small that would impact the Company, it’s Customers, and its Shareholders.

      1
      November 29, 2022

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