Even su­per­pow­ers at risk in our fast­chang­ing world

Ap­ple and China’s problems show that today’s ti­tans may not rule the world to­mor­row, writes Will Hut­ton for the Observer.

Otago Daily Times - - OPINION -

OUR men­tal geog­ra­phy is bounded by what has gone be­fore. What has hap­pened in the re­cently re­mem­bered past is most likely to con­tinue. In­flec­tion points, when trends de­ci­sively change, are more in­fre­quent than the many in­stances when things go on as they have done.

Two of today’s trends seem un­stop­pable. China’s as­tound­ing growth will con­tinue, so the story runs, un­der­writ­ing its ar­rival as the sec­ond eco­nomic su­per­power.

To get a share in that China ac­tion, un­der­pin­ning the en­tire growth of Asia, is one of the prime eco­nomic ar­gu­ments for Brexit. Aban­don scle­rotic Europe, em­brace the pros­per­ity of Asia — even if it is a world of semi­democ­racy at best, au­thor­i­tar­ian govern­ment at worst. It can be guar­an­teed to grow.

Sec­ond, the West Coast big tech com­pa­nies, from Face­book to Ap­ple, are the new wonders of the uni­verse. They are the be­wil­der­ingly suc­cess­ful face of the in­for­ma­tional, data­driven econ­omy whose value con­tin­ues to soar. Ap­ple, then Ama­zon, be­came the first tril­lion­dol­lar cor­po­ra­tions last year, both ex­em­plars of how first movers in in­no­va­tion with their trans­for­ma­tive tech­nolo­gies have be­come 21stcen­tury ti­tans, driv­ing stock mar­ket growth and chang­ing so­ci­ety alike.

How­ever both trends were de­ci­sively chal­lenged re­cently in what looks like a world­ chang­ing in­flec­tion mo­ment, one where con­sen­sus as­sump­tions start to un­ravel. Ap­ple an­nounced that for the first time in 17 years it would not meet its fore­casts for rev­enue growth — and by a big mar­gin.

Its CEO, Tim Cook, ex­plained to in­vestors and staff that apart from the problems fac­ing all mak­ers of mo­bile phones — it is be­com­ing a ma­ture mar­ket — there was un­ex­pected sales weak­ness in China. This was not just down to in­tense com­pe­ti­tion, but be­cause China’s con­sumers were spend­ing much less.

Ap­ple’s share price plunged. Cu­mu­la­tively, its value has fallen by $US 400 bil­lion ($NZ587 bil­lion) in a cou­ple of months.

But surely China, land­ing its ro­botic satel­lite on the far side of the moon, is suf­fer­ing no more than a typ­i­cal cycli­cal set­back, in­ten­si­fied by Don­ald Trump’s trade war? Per­haps, but look more closely and it is ever clearer that long­stand­ing problems are start­ing to en­velop this con­ti­nen­tal econ­omy.

It was only eight years ago that China reg­is­tered 12% growth as the govern­ment turbo­boosted its econ­omy with a mas­sive stim­u­lus in the wake of the fi­nan­cial cri­sis, growth that staved off a world slump. But since then its of­fi­cial growth rate has been con­sis­tently slid­ing, now halved at 6%, and China’s con­sumers have started to no­tice what last year’s 25% fall in China’s stock mar­ket is also sig­nalling.

Along­side Ap­ple’s state­ment, re­cent sur­veys show­ing China’s famed man­u­fac­tur­ing sec­tor is set to de­cline in 2019 and fur­ther weak­ness in re­tail sales were more ev­i­dence that all is not well. China’s con­sumers are read­ing the runes.

Part of the is­sue for both Ap­ple and China is the law of large num­bers. Three­fifths of Ap­ple’s sales are iPhones and there just aren’t enough global con­sumers with pock­ets deep enough to keep up the growth mo­men­tum. China’s is­sues are even more pro­found. There comes a limit, even in a state­con­trolled econ­omy, to ma­nip­u­lat­ing growth through debt and ex­ports when the num­bers reach as­tro­nomic lev­els.

China’s to­tal debt, even on dis­trusted of­fi­cial fig­ures, is ap­proach­ing three times its GDP, a flash­point ra­tio for ev­ery econ­omy when bank bal­ance sheets, and their bor­row­ers, just be­come too over­stretched.

This was the trig­ger for Ja­pan’s eco­nomic de­pres­sion 30 years ago. More­over, if China’s ex­ports car­ried on grow­ing as fast as they had, they would crowd out ev­ery other ex­port from ev­ery coun­try in the world by the mid­2020s. This was never likely, eco­nom­i­cally or po­lit­i­cally.

If Trump had not launched his trade of­fen­sive, an­other US leader would have done so. Ap­ple and China, bluntly, are in a fix.

The Chi­nese Com­mu­nist party is in a gath­er­ing cri­sis of le­git­i­macy. If the growth rate sinks below 6% (un­of­fi­cial fig­ures now place growth at un­der 2% in 2018), its job­gen­er­at­ing ca­pac­ity starts to fal­ter and ques­tions will be asked about the com­pe­tence of the party. Past lead­ers have re­sponded to crises by in­ten­si­fy­ing the pace of tran­si­tion to­wards a cap­i­tal­ist econ­omy and boost­ing in­fra­struc­ture spend­ing as a quick fix.

These are not op­tions for Xi Jin­ping. So high has in­fra­struc­ture spend­ing been for so long that the fi­nan­cial re­turns to jus­tify fur­ther debt are nonex­is­tent. Nor can he free the econ­omy fur­ther with­out en­dan­ger­ing the party’s con­trol. His op­tions are a com­bi­na­tion of hop­ing hitech, driven by ex­trav­a­gant R&D spend­ing, will of­fer a stronger econ­omy (along with more re­pres­sion as a safety fall­back and find­ing en­e­mies around which the coun­try can unite).

The speech warn­ing China might go to war to end Tai­wan’s in­de­pen­dence was the most bel­li­cose of any Chi­nese leader since Mao. Be in no doubt — if eco­nomic dif­fi­cul­ties worsen, Xi may be com­pelled to rally his restive pop­u­la­tion around a lim­ited con­flict just to stay in power.

In a mir­ror im­age, Ap­ple is spend­ing as ag­gres­sively on R&D as China, hop­ing that will solve its problems, too. Ap­ple is in­du­bitably in­no­va­tive and the scale of its re­search should throw up new prod­ucts; it is al­ready de­vel­op­ing a great ser­vice busi­ness.

For China, the mes­sage is even starker.

A one­party state can’t risk any bumps — and there are more than bumps ahead.

Noth­ing, not even the won­drous suc­cess of the iPhone, lasts for ever. And that is es­pe­cially true for a dys­func­tional Chi­nese econ­omy, and the party that runs it. — Guardian News and Me­dia

❛ Noth­ing, not even the won­drous suc­cess of the iPhone, lasts for



How long will it last? Cus­tomers gather as they take part in a class to learn how to use their iPhones this month at an Ap­ple Store in Bei­jing, China. The greater China re­gion ac­counts for al­most 20% of Ap­ple’s rev­enue.

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