On Wednesday, January 2nd, 2019, Apple slashed its Q1 revenue guidance from earlier $89-$94 billion to $84 billion. This is due to weaker than expected iPhone sales, particularly in China. Apple stock fell about 7 percent on the news.
Is this a one-off quarter miss or it signals a larger trend impacting businesses and industries worldwide including our IT services outsourcing. In my opinion, it signals two things loud and clear. The first is China slowdown and second is geopolitics and trade war. I am hearing about China slowdown in the automotive industry from last few months. There were two visible trends in the Chinese automotive industry. First is an overall slowdown and second is a decline in sales of many foreign brands. I think the same thing is reflected in Apple’s Q1 guidance. The impact in Apple case is further amplified by geopolitical tensions between the US and China. There are reports that Chinese consumers now prefer Huawei over Apple though exact impact cannot be quantified.
I think both these trends (China slowdown and geopolitics) can impact IT services outsourcing going forward. Four ways I think it can impact:
- Decline or uncertainty in discretionary digital spending: The growth in IT services for almost all service providers is coming in from new and digital part. If enterprises start seeing slowdown or uncertainty, they might hit a pause or relook in some of the discretionary digital spending.
- Increase outsourcing in run the business: The flip part of the above argument is that during the slowdown, enterprises will be more inclined in reducing their cost of operations and open to outsourcing. This will be a significant change in enterprises’ strategy as there has been an increase in insourcing or GIC activity in the last couple of years. GICs in India are growing faster than service providers and pressure on costs can make few enterprises to relook that which can be good news to IT service providers.
- Local business increase: One outcome of geopolitics is the rise in local or regional business in both services and manufacturing. Foxconn announced the opening of their factory in India to assemble higher-end iPhones for the Indian market is one example. While local manufacturing away from China is good news for Industry 4.0 sector, local IT service preference may not be good news. It might mean more local hiring in different geographies for service providers. Also, if Chinese domestic companies in automotive, consumer electronics gain share in China, they will hurt global companies. Chinese enterprises, unlike their global counterparts, don’t outsource globally, so an adverse second order impact for service providers.
- Client-specific concerns: Many service providers and their CEOs got bad press in the last couple of years for their inability to forecast and mitigate the impact of client-specific concerns. This uncertainty can hurt many enterprises which are dependent on sales in China or components from China and can result in a decline in business for their IT service providers.
Bottom line: ” One swallow doesn’t make a summer. We must watch for the next couple of quarters to call it a trend. Many of above points are directionally different, and their combined impact might neutralize with each other and there might not be a significant change in overall IT services sector growth estimates of a high single-digit in 2019 but for few service providers impact may be different =) “