Apple (AAPL) CEO Tim Cook, an industrial engineering major in college, has worked in the computer industry for his entire career, including long stints at Compaq and IBM. But this week, Cook put on another hat, offering extensive economic commentary on the Chinese stock market and the fate of the country's growing middle class.
To gauge how he did, we asked a handful of China experts to evaluate Cook's comments, which come as Apple is enjoying incredible growth in China.
Apple reported sales there of $13.2 billion last quarter, up 112% from a year ago, and operating profit of $5.1 billion, up 147% from a year ago. Fully 50% of all of Apple's revenue growth and 61% of the increase in operating income came from China in the company's current fiscal year, which started last October. And it's not just luck -- Cook has been adding stores in China at a furious pace while also adding features, such as gold-colored devices and larger-screened phones, that Chinese consumers crave.
But with China's stock market in turmoil, some analysts are questioning the stability of the Chinese economy. Apple investors had some concerns, concerns Cook sought to assuage on his call with analysts on July 21.
Here's what Cook said on the call and how the experts would grade him.
On China's falling stock market
Cook pointed out that most Chinese don't own stocks and ownership is concentrated among a small group of wealthier people. "This has been, at least as we see it, maybe it's not true for other businesses, that this worry is probably overstated," Cook said. "And so we're not changing anything. We have the pedal to the metal on getting to 40 stores mid next year."
The experts tended to agree, failing to make the connection some equity analysts did between falling Chinese stock prices and slower iPhone sales.
"I am not sure the stock market performance in China has much to do with sales of Apple goods there," says Franklin Allen, a professor of economics at the University of Pennsylvania's Wharton School. "I would be surprised if these did not continue to grow as Tim Cook suggests."
A longtime China scholar who recently joined the faculty of the International Business School of Suzhou, Ron Schramm quipped, "Trying to correlate China’s stock market performance to Apple sales is a little like going to a fortune teller for tax advice."
On China's growing middle class
Cook pointed to the larger trend of China's growing middle class providing a solid foundation for sales of Apple's product. "I can't overstate this," Cook said. "The rise of the middle class there is continuing, and it is transforming China." Upper middle class households will grow to make up 54% of all households by 2022 from just 14% in 2012, Cook said citing a study by McKinsey.
If anything, the experts thought Cook might have underestimated the benefits to Apple from the upward economic mobility in China. In addition to a "vast" middle class, "there will remain a vast underclass who cannot afford these things but will want something to show for all their hard work and an Apple product fits the bill," Schramm said. "In this sense I am a bit more optimistic – the market is in fact much broader than the emerging middle class."
Steven Lewis, a China expert at Rice University, agreed. "Even lower income Chinese want trendy Apple products, and given that many young people in urban areas have relatively high amounts of disposable income -- they live with parents for free and do not want to buy a car -- you can get Chinese of lower income also buying Apple as well," Lewis says.
And even if Chinese economic growth is slowing, the middle class will continue to grow, argues Joe Foudy, an economics professor at New York University's Stern School of Business. "Whether China grows GDP at 5% or 7% and hits a rough patch or dodges a recession, there are several hundred million people on the cusp of entering the middle class," he says.
Apple products sell well even in tougher economic times, Foudy adds. "Spending on phones, it's just not like cars, consumer durables order things like vacations, which tend to rise and fall with the business cycle," he says. "Combine this with a Chinese preference for products that can serve as public signals of success and Apple is well positioned there for future growth."
What Cook missed
Cook's overarching outlook on China was completely positive for Apple. "China is a fantastic geography with an incredible unprecedented level of opportunity there," he said. But the experts had some concerns that the CEO didn't mention.
They worry China will eventually try to raise home-grown competitors aimed at capturing Apple's local market share. Chinese state-owned enterprises would be able to compete with the benefit of favorable loans, as well as legal and regulatory actions in their favor, noted Steven Lewis. The Chinese government "has a long history of welcoming foreign advanced technology only as long as it takes raise up a domestic competitor to replace the foreign company," he warned.
"The real question is the competitive playing field for firms like Apple in the high tech industry in China," warns Schramm. "Local firms such as Xiaomi, Meizu, Huawei and ZTE all have the advantages that government support can offer – and having the support of China’s government means everything in this market."
Other U.S. tech giants have been hit in the past, he notes. "Apple will have to continue to fight for every sale and continue to work hard at currying the favor of the Chinese government – Google being a good poster child counter-example," Schramm says.
So far, Cook has worked hard to avoid that fate, traveling to China frequently and snuffing out any controversies. The trips also appear to have given the CEO a sharp view of the Chinese economic scene.