Apple (AAPL) dropped sharply in after hours trading on Wednesday, when the company indicated that first-quarter revenues would come in weaker than expected. Apple CEO Tim Cook blamed "economic deceleration, particularly in China" for the shortfall.
The seeds of Apple's troubles were sown just over a year ago, when the company introduced the iPhone X. At that time, the company made the controversial decision to push its price points higher. Since then, Apple has learned that not every consumer is keen to spend a thousand dollars on a smartphone, especially when the existing models are working just fine.
That strategic error came at a time when Apple had its competition over a barrel. In 2017, just prior to the introduction of the iPhone X, Samsung was forced to recall its Galaxy Note 7 due to a dangerous defect. Apple could have used that opportunity to recruit Samsung's customers by offering a superior product at a competitive price point.
However, that pricing issue is company-specific. There is a bigger problem involving China's economy, and it has little to do with Apple.
On Dec. 30, China's Manufacturing PMI (purchasing managers index) for December was released. This is a diffusion index that uses the number 50 to represent the status quo. Any result above 50 indicates growth, while figures below 50 represent contraction. The result for December was 49.4.
That's bad news, and unfortunately, it's not an anomaly. The Caixin Manufacturing PMI, which also measures the health of China's huge manufacturing sector, confirmed that weakness on Jan. 1, when it came in at 49.7. The Caixin PMI figure is significant because it comes from a private source, and has been declining steadily for months, as seen below.
Why is this weakness in manufacturing so serious? China is the world's biggest exporter, and it mainly exports goods that it manufactures. If its manufacturing sector falls apart, it could take down China's entire economy.
There were additional signs of trouble on Dec. 13, when several economic reports were released. China's retail sales report for November came in weaker than expected, as did industrial production -- again, showing weakness in the crucial manufacturing sector.
This confluence of weak statistics involving China's manufacturing sector would seem to indicate that, while Apple has made some missteps, its troubles are a symptom of a bigger problem. Don't be surprised if we see similar issues with other U.S. companies that do significant business in China in the weeks and months ahead.
Ed Ponsi is a regular contributor to Real Money Pro, our premium site for active traders and Wall Street professionals. Click here to get great columns like this every day from Ed Ponsi, Paul Price, Doug Kass and many others.