Apple continues to grow, but profits fall as costs rise

For years, Apple has been driving large-scale manufacturing and increased sales in China. But lately, the tech giant’s reliance on the world’s most populous country has gone from strength to vulnerability.

China’s efforts this spring to combat Covid-19 disrupted iPad production and hurt retail sales across the country, denting Apple’s profit and contributing to its first profit drop in nearly two years.

On Tuesday, Apple reported a 2 percent rise in sales to $82.96 billion for the three months ending June, at least $4 billion less than the company said it would have grossed had it avoided the Covid-related factory closures in Shanghai. The company said profit fell 10.6 percent to $19.4 billion, its biggest quarterly drop since 2019.

Apple was able to downplay the fallout from China because of its strategic shift in recent years from selling more devices to selling more software and services. Although the combined sales of products such as iPhone, iPad and Mac fell in the most recent quarter, the company generated $19.6 billion in the quarter for app sales and subscriptions to Apple Music and Apple TV +. The 12 percent increase in services sales was the smallest quarterly gain for that business in two and a half years.

The results exceeded the expectations of Wall Street analysts who had forecast a drop in iPhone sales.

“Tim Cook and his team masterfully threaded the needle,” said Mike Frazier, president of Bedell Frazier, a $600 million Bay Area-based company under management that counts Apple among its largest holdings. But Frazier said it was clear that even Apple’s wealthy customer can cut spending a bit, which will most likely reduce profitability in the future.

Apple CEO Tim Cook has made a big bet on China, consolidating the vast majority of the company’s manufacturing within a country known for its low-cost labor and business-friendly policies. After the coronavirus outbreak began there in 2019, Apple shut down iPhone production and lost sales. It later benefited from steady production as China brought the virus under control while many Western countries battled outbreaks.

But China’s “zero Covid” policy, which saw it lock down Shanghai in the spring to quell an outbreak, again exposed the risks of Apple’s reliance on the country to produce and export its devices. In the most recent quarter, production interruptions meant Apple was unable to fully benefit from the launch of MacBooks with more powerful processors, some of which were put on hold until August.

“Investors are worried about the China connection,” said Dave Harden, chief investment officer at Summit Global, a company near Salt Lake City with an investment of about $2 billion. It also has Apple among its holdings. “They want to know: Will Apple ever develop the iPhone outside of that part of the world?”

Apple shares rose 3 percent in after-hours trading on Thursday.

Apple’s mixed results for the quarter were emblematic of broader trends hitting the global economy. Revenue fell 1 percent in China, where the country’s economy grew at its slowest pace since early 2020, but sales rose in the Americas, where retail spending has resisted increases in inflation.

The slowing economy will put Apple’s decade of growth to the test. He navigated through the Great Recession behind the introduction of the iPhone, which would become the best-selling product in history. But it has gone from groundbreaking product innovations to incremental improvements in recent years, leading analysts and investors to wonder if customers will put off buying new devices in times of financial tightness.

Apple relies on the iPhone for about half of its total sales. It has expanded its customer base in recent years by offering seven models ranging in price from $429 to more than $1,500. Premium prices mean Apple customers tend to be wealthier than the average smartphone buyer, but about a third of them earn less than $50,000 a year, according to Consumer Intelligence Research Partners, a technology research firm.

Other tech giants, including Google’s parent company Alphabet and Facebook’s parent company Meta, have responded to the economic downturn by announcing that they will cut back on hiring. His changes come as business has slowed after rapid expansion during the pandemic.

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