The trump trade policies (specifically, the China tariffs) have reduced the exposure of many US firms to Chinese goods. A lot of factories shifted to Vietnam and other SE Asian countries. Europe is already showing early red flags in their stock indexes, due to their closer ties to China.
If COVID-19 spreads further throughout SE Asia unchecked, expect the SP500 to catch up with reality in a hurry.
Vietnam is becoming more and more locked up from the virus every day. For example, all of the schools are closed until further notice and the borders have also been restricted as well.
Would it be better or worse for China if the disease spread to countries that compete with it economically? If it helps China at all, would China be able to resist the temptation to allow infected individuals to travel to those countries?
Well, I suppose in terms of comparative advantage, misery loves company, so better. In terms of absolute number of people with rice in their bowl on any given day, I suspect worse.
The stock market is very divorced from the economy and global events at present. The money faucets have been pumping non stop to stopgap all liquidity shortages within financial trading. As long as you grease the wheels, the market won't collapse.
That said, the coronavirus has also been ignored as a whole until now. AAPL's downward guidance is a big, big fucking deal and is almost certain to cause a short term impact on prices. However, it'll also be transitory much as the rest of the shit is.
Only a few companies reported any material impact because of coronavirus. I recall SBUX, NKE, UA reporting decreased sales in the 1st quarter of 2020 during their Q4 2019 earnings calls.
AAPL is the first “big” company to report an impact. Check out /NQ and /ES in 16 minutes if you want to find out, I’d wager NQ will gap down .5% and ES will gap down .25% in the ETH session tonight. As to where they go from there, I’m betting on 3400 (with actual money)
Well. The market is closed today. Since this is the first official guidance revision related to the virus (at least from a major corporation) you can expect to see some red tomorrow.
I'm guessing that AAPL March call option I bought is going to take a beating tomorrow morning. AAPL saying, "we ain't gonna make our numbers" might be enough to start to drag on NASDAQ a bit. Worse, perhaps it will start some closer examinations of other supply chains.
Given the economic effect of health hazards of viruses like this on big companies like Apple, I wonder if Apple itself couldn't justify investing into research for treatments and vaccines as a hedge against supply line damage. Makes sense purely in terms of business, doesn't it?
Near as I can tell, most of the vaccine development (outside of China) is being funded by charities right now. Drug companies were burned by Ebola investments and are not interesting in working on COVID-19. But if Apple thought they could speed up recovery by even a short time with careful investment here they'd more than make their money back.
>"One would think that the industry has the reserves to jump at this challenge. But none of the four top vaccine companies has shown significant interest," says Dr Ellen 't Hoen, director at medicines law and policy at University Medical Center Groningen in Amsterdam.
>Also speaking at last week's Aspen Institute event, Dr Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases, said no major pharmaceutical company has come forward to say it would manufacture a vaccine for Covid-19. He called it "very difficult and very frustrating".
>"Companies that have the skill to be able to do it are not going to just sit around and have a warm facility, ready to go for when you need it," Dr Fauci said.
> I wonder if Apple itself couldn't justify investing into research for treatments and vaccines as a hedge against supply line damage. Makes sense purely in terms of business, doesn't it?
I would say they already do by building the best laptops, tablets and smartphones in the world, increasing the productivity of the biomedical researchers who use their products.
In addition, their investments in Apple Watch and Apple Health long term I think are the future of healthcare. In 30 years I'd expect everyone will have the equivalent of their own doctor's office/diagnostic lab in their home. There won't be counterproductive mass-runs on hospitals because most things will be diagnosed at home. I think you can draw a pretty direct line from where Apple Watch is today to that future.
> Drug companies were burned by Ebola investments are not interesting in working on COVID-19.
Yes, the BBC articles mentions they are mostly smaller companies funded by things like the Bill and Melinda Gates Foundation. This feels like a coordination problem given the size of the economic damage from stuff like this.
Ideally it would be governments picking up the slack, but if we are so inefficiently allocating money to vaccines that have such big impacts on Apple's supply lines, there's a business case for them hedging with investments of their own.
The Chinese New Year, Jan 17 through Feb 8, is also a period where less manufacturing activity normally occurs. Why I know this? I had to plan our inventory and sales logistics around this period every year for seven years. We would order production so that it would be completed and shipped to us prior to Chinese New Year, or start production immediately after. We never wanted production to occur across the three week down period.
I strongly suspect that large company logistics team, and certainly an expert like Tim Cook, already have this contingency in place. However, since CV has extended beyond the New Years time frame, those contingency plans will start to break down.
One problem Apple faces is getting factory workers who went to their hometowns back to the factories. Apple had actually planned to ramp up production starting in the end of February. So this interruption is a larger hit than you might expect at this time of year.
It is also the period in which deliveries out of China and Chinese-influenced countries slow down to a crawl. Basically everybody's gone home and nothing gets done for a while. Pretty obvious if you use ebay for a while.
If the US ever decides to invade China, or if Taiwan decides to declare independence, it would probably happen within this window.
This doesn't seem to have affected the stock price today, including in after-hours trading. So either it's been gradually priced-in, or...
...is this actually expected to affect Apple once the year is over? Presumably people will just wait a couple months to buy a new phone, and below-average sales now will be matched by a wave of above-average sales afterwards?
The need to upgrade your phone doesn't go away. And wouldn't all cell phone manufacturers be similarly hit these days? So it's not like switching brands away from Apple is more of an option?
Just curious... happy for someone to correct me if I'm making wrong assumptions here.
You’ll see the impact even more with hardware startups, who don’t have the means to keep a stockpile of products (like a capacitor to production woes).
For example, Hiome builds its products in Chicago, but we get the PCB boards printed in China and are scrambling to adjust now that our boards are indefinitely delayed.
I’m curious to see what the eventual ripple effects are to the industry from this hiatus.
I’d expect anything that is manufactured in China to be in a similar situation.
POs have already extended out significantly (some of our parts have more than doubled). Those estimates are at best guesses, I would be surprised if they don’t continue to slip.
Manufacturing supply chains are at incredibly low levels.
The second reason (slow sales in China) would really only affect things that are there, obviously.
Totally. Regardless of whether its China or some other place on earth, almost complete centralization of manufacturing supply chain from teddy bears to cold rolled steel and everything in the middle; we're gonna have a bad time. Now if that said country offers nothing in return in terms of fairness, flat-out bans foreign business from competing, subsidizing national corporations in return for citizen information, ruled by an authoritarian regime with fascist underpinnings, and has a public health emergency; boy we're headed towards a recession until the rest of the world equips with multiple points of failure in their supply chain. I am sure this small dip will lead to unoptimization of local optima and leads us into a stronger future where there is fair competition, stronger supply chain, and efficient international trade.
I am sorry to bring up political aspects, but I hope it only portrays the objective state of the situation without any prejudicial color.
Anything PC is impacted now. February is always slow and inventory is tight. Quantities of many devices that are typically 10 days to fulfill are getting pushed back to April or May delivery.
I know folks who sent teams out to clear out certain devices at retail to have a stockpile for replacements or new hires as a contingency.
Most people already know this. All estimates made within spreadsheets are based on averages. Nothing left tail is ever considered more than a small probability event. In general, they make 3 different models - bull case, bear case and normal. Even the bear case will just project a negative 2 sigma possibility at most. Nothing too much black swan is accounted for cos it'll just drag down estimates considerably and the rest of the happy-go-lucky market will keep pumping up prices while you sit and stare at your low price target that was achieved weeks ago.
I've heard that our quest for incessant optimization in warehousing and inventory management means this pandemic is catching everyone flat-footed.
The McKinsey consultants of the world have pushed for more and more "turns" (how many times your inventory turns over completely in a warehouse - most orgs aim for 3+ turns a year) and minimizing your "cash to cash" cycle (you pay for manufactured inventory, you need too turn it BACK to cash QUICKLY - don't have it sitting on warehouse shelves)
Now we don't have enough slack in the supply chain. Doesn't really matter much (except economically) for iPhones etc - but means a lot when you're running JIT (just-in-time) inventory management for things like hand sanitizer or medical masks.
Then again, all those people who can’t buy these products now due to temporary shortage aren’t going to just forget that they wanted to buy a new iPhone.
I believe there was a similar reason for the auto industry to come back so strongly after the 2008 financial crisis. All those people who held off on car purchases in hard times exited the crisis with aging vehicles that needed to be replaced.
I would think that this sort of shortage would harm a consumables company like Coca-Cola a lot more than an “appliance” company like Apple, Toyota, or Whirlpool.
Consumers in China who wanted a new iPhone would probably rather stay at home than go out to buy a discretionary consumer device like an iPhone. Many will have less income with which to get by, meaning they wouldn't be able to afford an iPhone even if they were willing to go buy one. And with Apple stores closed in China, it's kind of tough to buy an iPhone there.
Meanwhile, people who really need a smartphone elsewhere will take this opportunity to buy a different phone.
Economic shocks have long-lasting aftereffects. Don't assume that the result of this hit to iPhone production is simply a phase shift of Apple's product cycle and consumer demand. For example, Apple will probably take cash away from its next stock buyback in order to cover the upfront costs of this hit to its revenue. And they may not be able to provide the kind of pricing and incentives that they were planning to provide before the virus hit.
I'm not so sure. So much consumption these days seems to be discretionary.
For your example in the auto industry, one large reason the industry bounced back was because of the Cash for Clunkers program. The US government spent $3 billion to make sure the auto industry would "come back strongly."
Without similar stimulus here, I don't see how the bottom line of Apple and other companies will escape being affected.
Building slack into the supply chain would be a very inefficient way to stockpile for emergencies, compared to actually stockpiling for emergencies. As you've said, it would make no sense in the case of the iPhone. The McKinseys of the world are absolutely right about this.
The problem is that the old system created a positive externality (coincidentally storing a bit of inventory for emergencies, though inefficiently and in no way planned) that the new one doesn't. It's the sort of thing that should be fixed by government incentives.
There is really no other way to improve supply chain efficiency in real time than to bring everything as JIT as possible. Inventory turnover is an entirely different concept. It is dependent on the industry. Hand sanitizers and such have a very high turnover already (they're what the marketing students call fast moving consumer goods). It's true that they squeezed a shit ton of slack from it over the past few decades, but demand for these products has always been high and markets have consistently kept opening up everywhere to meet it.
So you can have JIT implemented in a slow turnover industry - imagine ferrari having a JIT assembly line that gives you your vehicle in less than a day after you place your order - but it doesn't make economic sense.
That said, introducing slack into the industry is not useful. What you need is increase in inventory stockpiling. And as any good financial analyst would tell you, an increasing stockpile number either implies a big future order coming through or that your product isn't selling. With consumer staples companies (the GICS sector term for companies that manufacture fmcg products like toothpaste and hand sanitisers), there is hardly a new market opening or some giant ass retailer coming out of nowhere to place large orders. So stockpiling almost certainly means slowing sales.
It's an interesting thought. Though I wonder if they're better off worrying about around the globe redundancy of supply and production chains rather than buffer size. Important things should be manufactured in many locations.