Bloomberg Daybreak: Asia EditionApple CEO Tim Cook visited China last week for his first visit of the year, amid a burgeoning trade war with the US. He met with officials in Beijing, stopped by a local Apple store and visited students in Hangzhou, among other events. The trip could serve as a case study in how multi-national corporations will navigate business across the Pacific. We explore how Apple's deep business ties in China may be impacted by upcoming reciprocal tariffs with Catherine Thorbecke, Bloomberg Opinion Columnist in Tokyo.
Plus - we look at how this week's tariffs and a number of other key economic events may resonate through global markets. We're joined by James Abate, Managing Director & Chief Investment Officer at Centre Asset Management.
Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Daybreak Asia Podcast. I'm Doug Krisner. The tone in markets this morning is very much risk off ahead of those new US tariffs. Reciprocal levies are set to be unveiled on Wednesday, and in a moment we'll get some perspective from the US side from James Abat at Center Asset Management. But we begin in Asia where many industries are especially vulnerable to those new US tariffs, among them the chip makers. You know, this group is already struggling given signs of slower data center growth, and it puts a company like Taiwan Semi in a very tight spot. Nearly seventy percent of the company's revenue comes from the US, and TSMC is obviously not alone. Consider Apple for a moment. It is still unclear whether Apple will be exempt from these new US tariffs. The story on Apple is certainly complicated by the fact that the company he's got a very close relationship with China. Apple supply chains seem to be woven right into the Chinese economy. Let's take a closer look now at the Apple situation with Bloomberg opinion columnist Katherine Thorbek, who's joining from our studios in Tokyo. Catherine, thank you so much for making time to join us. Can we begin with you giving me a sense of the degree to which Apple is entangled in China right now?
Right, so, we just saw Tim Cook in China last week for his first visit to the country of the year. And you know, we've really seen over the years over Tim Cook's tenure, really Apple just becomes sort of more and more entangled in China, and at this point it would be very, very difficult for Apple to sort of unentangle its supply chains from China. But it's also one of the rare US companies that's also very reliant on Chinese consumers. You know, it does have a big presence in China. So it's a very very difficult task for Cook right now. As you mentioned, it's not immediately clear if he'll be able to get out of tears this time around the same way he did during Trump's first term. And at this point we really don't know, and I wouldn't be surprised if he doesn't actually get an exemption this time, but we will have to see.
I remember, during the first Trump administration the trade war with China, when Chinese consumers were favoring domestic smartphone brands out of a sense of let's call it nationalism, And it seems like the Chinese smartphone industry now is in a much stronger position to compete with Apple. Is that fair?
That's right, Doug. And you know Tim Cook has said himself, the Chinese market is the most competitive market in the world. And you know, one thing that's really a disadvantage for Apple right now is that they still haven't brought their Apple Intelligence features to the latest iPhone to the China market. And Chinese you know, consumer interest in personal AI features personal artificial intelligence is very, very high. So this has been a real stumbling point for Tim Cook. And you know, we saw in the December quarter iPhone sales in China actually fell eighteen percent, which is quite a dramatic drop. So, you know, Cook was just in China and we've really seen him, you know, trying very hard to sort of appeal directly to Chinese consumers and sort of build up enthusiasm. But he really needs to find a way to bring this Apple intelligence to the China market. So he has made some headway. You know he is working with Ali Baba, which has sort of become an AI darling in China and bay Do as well, but it still hasn't rolled out, and I think that's really sort of holding back iPhone sales at a very very critical time for Apple right now in China.
What are some of the big smartphone brands in China. I'm thinking Huawei as one that really represent the greatest threat to Apple in that market.
Yeah, and so we did see a sort of hangover from some of the anti American sentiments was Huawei was really sort of propped up by Beijing, and Huawei has really sort of come back stronger than ever. Huawei has definitely become a very big threat in the premium smartphone segment in China. There's also Shaomi, but yes, there's just been the rise of so many domestic brands, and many of them are already offering AI features on their smartphones, and so you know, consumers now in China are sort of going for those models over Apple right now.
You and I have spoken in the past about the Deep Seek moment. It seems like that only that was the spark that started a lot of this in terms of attracting interest and generating capital flow. Are there many more companies now playing in that same space and at the end of the day becoming a competitor to deep Seek.
Yes, the deep Seek excitement has absolutely lit a fire on the Chinese AI sector. And we did see Tim Cook visit sort of the home base of this which is Hung Joe, which is where deep seek was founded, and he visited the university where deep Sek's founder went to. He praised deep Seek on his trip, and he sort of met with some of the young developers, some of the what he called the next generation of developers, and announced a new sort of donation to this Chinese developer's fund. And I really think it's going to take sort of the enthusiasm of these Chinese programmers and of these you know, young Chinese minds to build consumer products for the AI iPhone. I think that's what it's going to take to really sell the iPhone in China at this point.
But when you look at the attempts that the Chinese government has made to try to really address the vibrancy of this kind of entrepreneurial mindset in technology, particularly artificial intelligence, it seems like Apple has a very very difficult challenge ahead, right because there's so much pressure kind of coming from the government to focus on domestic technology companies.
Absolutely, you know, I think Tim Cook is in a very very difficult spot right now, and we're seeing it a little bit from both sides. Both sides. You know, there's the obviously tariff threat coming from the US, and then on the Chinese side, you know, there's you know, been a sort of a rise in anti American sentiment and so many domestic consumers, so many domestic competitors is sort of taking off. So I think it's you know, going to be sort of the biggest tests yet for Cook in his tenure. So I think, you know, as we've sort of spoken about, is AI is huge, and we've actually seen Apple Intelligence. The rollout of Apple Intelligence outside of China, you know, in the US has been a little bit underwhelming. I think this month, you know, even some of the most long standing Apple supporters have sort of realized that their their in house AI efforts are not as far along as you know, people had hoped, and they did have to sort of indefinitely delay some of the more exciting features that they had really advertised to sell the iPhone sixteen, So I think in some ways it's almost a blessing in disguise that they've had this delay in China. But I think at this point they really need to get it right when they do eventually launch it, and we're expecting it later this year, hopefully by May. And I think, you know, being forced by regulators in China to work with these partners, with Ali Baba and Baidu, I think that can actually really help them in China. But at the same time, you know, as you mentioned, there's so many headwinds right now, so it's going to be very difficult for Tim Cooks.
I'm listening to you, I'm wondering whether or not this puts some much more pressure on Apple to diversify itself away from China and move even more aggressively into a market like India.
I think absolutely. But at the same time, you know, they've been trying to do this for years and in a lot of ways, and you know a lot of data that sort of suggests that they've actually become more reliant and more entangled with China in that same time, and I think it's going to be very hard for them to sort of replicate the supply chains that they've built over really decades in China, in India and Indonesia and in other places. And you know, I think that there's some consequences to sort of becoming so beholden to Beijing at this point. And we've sort of seen that with you know, Cook going to China now and you know, really sort of laying it on thick in terms of sort of trying to appeal to the Chinese and you know, really complementing Chinese technology and developers and deep seek. And I think that's, you know, become a very difficult time to sort of play both sides the way he's done very well for the past twenty years.
And he's also, we should point out, spend a little bit of time at the White House speaking with President Trump. And whether or not he is successful in getting some type of exemption from these new tariffs, we'll have to wait and see. Catherine. Thank you so much for joining us. Bloomberg opinion columnist Katherine Thorbeck joining us here as we talk Apple on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. There'll be a flurry of market moving events in the coming week. Obviously, we have the announcement on those US reciprocal tariffs that is set for Wednesday. We've got a list of FED speakers, and then on Friday it's the employment report. Joining me now is James Abat. He is managing director also the chief investment officer at Center Asset Management. James, it's always a pleasure. Can I begin by getting your take on the most critical event of the week. I'm going to imagine you think it's the tariff announcement on Wednesday, right.
Clearly that's what's been driving the markets in terms of giving pressure to indices because in essence, what we're doing is you're, you know, taking a complete revamp of the foundations of the stock market. You know, clearly, you know what we think about. You know, what's driven the market over the last twenty plus years has been globalization and all the benefits that that's basically brought to profits. So when you think about, you know, what Trump's plan is to bring back manufacturing and on shing, you know there are some hidden pitfalls that you know, people I don't think are yet aware. So clearly the generally recognized you know, risk are that you know, profit margins in the United States have been much higher due to lower tax rates, lower interest costs, but also and probably most importantly, much lower labor costs. And that's easily seen on an income statement, and is if we progress to more on shoring of manufacturing and labor. Clearly, if labor costs go up, profit margins go down. I think the thing that's being missed by markets which could lead a further derating and perhaps even a bear market. And remember Wall Street is not the same thing as Main Street. And what I mean by that is what's missed is the balance sheet aspect of corporate America. You know, we've moved a lot of our cyclicality offshore to China, Mexico, et cetera, since you know, two thousand with just in time, inventory management, outsourcing, and factory production in particular. So what we've done here in the United States is that we've reduced the amplitude of our own business cycle tremendously. I would argue, you know, since the early nineteen nineties and naft IS introduction and then later with China's into the WTO. You know, even if you look back at the two thousand and one, two thousand and two recession. It was very mild compared to typical business cycle downturns like we had in the nineteen sixties and seventies for example. Well, even the global financial crisis was really a banking in real estate regulatory fiasco, not a classic business cycle bust. So, you know, the Keith remember is that there's a reason why the US stock market trades that are premium multiple to other more cyclical markets like China and Europe. You know, they trade it like ten or twelve times earnings, not twenty two times like the United States. So the point that I'm trying to make is that you know, there are you know, keen inferences that one needs to look at in terms of the market, not just in terms of profits, but also in terms of bringing back a higher level cyclicality, potentially from on shoring, if that's the objective of what the tariff argument is.
But the tariff argument has created, i think, and inflection point that could be, as you point out earlier, quite damaging. I'm looking at the latest GDP now estimate from the Atlanta FED. I think they're looking at first quarter growth contracting at a rate of two point eight percent, and if you look at the recent data from the University of Michigan on Consumers Center. But yes, it was weak. Maybe a little bit more troubling though, the fact that consumers now see inflation rising five percent over the next twelve months. So when we're talking about slower growth and higher inflation expectations, this is a situation where stagflation as a term becomes a real threat.
Right absolutely, And that's why, you know, this has been such a difficult year. And you know, people say, well, you know, if we want to look at price charts, I'm not a technician, but you know, one of the things that looks like it, you know from a perspective of you know, breaking through two hundred day moving average and kind of the you know euphoria that you've had with the Magnificent seven and having lived through and managed mon you know during that time. You know, is this like the year two thousand and one prior to nine to eleven, So it's not a crash, you know, but kind of like a controlled demolition. I hate to say, but I would argue it's it's harder to navigate than two thousand and one because you know, first off, you don't have a natural hedge long treasures back then offered an excellent alternative. You know, today the correlations between socks and bonds is not persistent of swipping back and forth, so you don't have a natural hedge in net regard even options. You know, while where they've worked for us earlier in the month when the VIC spiked, it's been relatively low, and it's really highlighting the no safe harborst So to your point, what we're seeing is and as you could appreciate, any CFO or CEO who's faced with a high degree of uncertainty with regard to the tariffs is going to hold back on capital spending plans, They're going to hold back on hiring. So we have an environment now which is service is starting to slow for the first time. And as we could recall, you know, global manufacturing has been in a malaise really for the last three years, but we're starting to see, you know, global manufacturing, not just the United States but Europe and olth places starting to basically come out of that two to three year malaise.
So if we can accept the notion that the administration has been very deliberate in telegraphing its economic policies to the market and the FED at the same time has been as transparent as possible. Yes, they're data dependent. I'm wondering about the extent to which a lot of what we have been describing has already been discounted by markets, or is there a lot more in the way of downside as that price adjustment continues.
Yeah, I think there could be, because again, where you're seeing is a lot of contradictory statements out of the White House. So there's a lot of talk right now about the Mara Lago Accord, which is, you know, some people are using a parallel to the Plaza Accord to weaken the US dollar. Now, if you're sitting here and having a policy which is specifically geared towards bringing inbound US investment, having a weaker dollar explicitly contradicts basically that type of policy. And then when you sit here and announce a strategic crypto reserve, you know, why would the US government want to undermine the US dollar when it needs to attract foreign investment and capital flows. So I think the problem that you have, and this can go from a correction to a bear market, is that, you know, when we entered the year, we were looking essentially from the valuation perspective through our lens, which is essentially future growth reliance. And what we said was the measure wasn't this optimistic on future profit creation since two thousand and nine and also back to the all time high which was two thousand and two. Both of those were at the bottom of very deep recessions on the on the cup of very sharp cyclical recovery. Also in the s and P five hundred was trading at multiples at eleven or thirteen times, respectively, not twenty two times now. So if you continue to essentially for go economic growth because of uncertainty, and you know the big elephant in the room, which is the Magnificent seven, which essentially you know, has contributed all of their earnings growth for the last couple of years, and we start to see that to slow down, particularly with the deep Seak announcement and the dud ipo of core Weave this week, raising questions about the efficacy of these investments. It's quite possible that we have in an environment of stale to flat or maybe even declining earnings coupled with a negative derating and that's essentially the definition of a bear market. And that's what played out. And I lived through, and you lived through during two thousand and one and two thousand and two and didn't really bottom until the this spring of two thousand and three.
So, James, have you turned barish then on the AI trade?
Well, what we've seen is and one of the things that's really changed my mind is that, you know, going into this and studying this greatly, is that I've always been raising the questions and trying to figure out, you know, what makes us different than the bus back in the dot com era, you know, having managed equity funds and technology funds back then, because the key was, you know, where's the leverage that can bring this down, you know hard? You know. For example, you know, back in two thousand and one, Exodus Communications, I don't know if you recall, but at that point in time was the world's largest web hosting provider, and it was the data center darling at the dot com and telecom build out, and it went from having a market value over thirty two billion dollars at that point in time in two thousand to being bankrupt you know, a year later, because it was leveraged and its biggest customer at that point in time. Global crossing was highly leverage as well. You know, in two thousand and eight we saw the leverages in the banking sector.
Today.
The thing that's kept me somewhat optimistic about Magnificent seven is that we have a closed loop, you know, where I AI instructure is being paid for by Microsoft, Meta, ALP Belt, Amazon, etcetera, who are enormously casual positive and have very large cash CHRISTI and so capex is high. You know, Amazon is going to spend thirty five percent more this year. So it's tough to call the end of in Vidia's you know gains and so forth. But I think this all that's being said. You know, thing that opened up my eye this week is that the dout IPO of core Weave, you know, the new data center Darling has some glaring problems worth examining if the AI boom is really going to you know, move in a different direction. You know, seventy seven percent of its revenue comes from just two customers, sixty two percent of Microsoft. It's got eight billion dollars in debt due next year. So it's data centers are also stacked within vidious Hopper GPUs, which are you going to be outdated as soon as Blackwell comes out. So, you know, like Exodus, you have a highly leveraged business with you know, equipment that's got a useful life of two to three years and the concentration in a customer base that could pull the plug at any time. You know, in the words of Warren Buffett, you know, only when the tide goes out are we going to see who's swimming naked? As Buffett used to say. So, you know, there's a lot more outside of the Magnificent seven that in this AI infrastructure that you know, we may not be aware of the leverage it's in the system, which was very apparent back in two thousand and one, but it's starting to become more and more evident as we move forward.
Here, great point, James will leave it there, always a pleasure. Thank you so much. I hope you have a productive week ahead. James Abonte there. He is a managing director also the chief investment officer at Center Asset Management. Joining us here on the Daybreak as your podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Chrisner, and this is Bloomberg
