Can Apple Dodge New US Tariffs?
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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 U.S. tariffs. Reciprocal levies are set to be unveiled on Wednesday. And in a moment, we'll get some perspective from the U.S. side, from James Zabate at Center Asset Management. But we begin in Asia, where many industries are especially vulnerable to those new U.S. 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 70% of the company's revenue comes from the U.S. And TSMC is obviously not alone. Consider Apple for a moment. It is still unclear whether Apple will be exempt from these new U.S. tariffs.

The story on Apple is certainly complicated by the fact that the company's got a very close relationship with China. Apple's 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 Catherine Thorbeck, 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 U.S. companies that's also very reliant on Chinese consumers. You know, it does have a big presence in China. Right.

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 tariffs 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,

So 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 18 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 forward.

Apple intelligence to the China market. So, he has made some headway. He is working with Alibaba, which has sort of become an AI darling in China, and Baidu 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 Xiaomi. 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 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 DeepSeek 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 Hangzhou, which is where DeepSeek was founded. And he visited the university where DeepSeek's founder went to. He praised DeepSeek 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 developers fund.

And I really think it's going to take sort of the enthusiasm of these Chinese programmers and of these 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. You know, there's the obviously tariff threat coming from the U.S. and then on the Chinese side, you know, there's been a sort of a rise in anti-American sentiment and

So many domestic consumers, so many domestic competitors just sort of taking off. So I think it's going to be sort of the biggest test 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 U.S. has been a little bit underwhelming. I think this month, you know, even some of the most longstanding Apple supporters have sort of realized that 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 realized.

really advertised to sell the iPhone 16. 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 Alibaba and Baidu, I think

that can actually really help them in China. But at the same time, as you mentioned, there's so many headwinds right now. So it's going to be very difficult for Tim Cook. As I'm listening to you, I'm wondering whether or not this puts 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 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 China.

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, you know, the past 20 years. And he's also, we should point out, spent 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 Catherine Thorbeck joining us here as we talk Apple on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. There'll be a flurry of market moving events in the coming week. Obviously, we have the announcement on those U.S. 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 Abate. He is managing director, also the chief investment officer at Center Asset Management. James, it's always a pleasure to be here.

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 you're doing is you're...

taking a complete revamp of the foundations of the stock market. Clearly, what we think about what's driven the market over the last 20 plus years has been globalization and all the benefits that that's basically brought to profits. So when you think about what Trump's plan is to bring back manufacturing and onshoring,

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,

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 if we progress to more onshoring 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 to 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 2000 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 1990s and NAFTA's introduction and then later with China's entry into the WTO, you know, even if you look back at the 2001-2002 recession, it was very mild compared to

typical business cycle downturns like we had in the 1960s and 70s, for example. And even the global financial crisis was really a banking and real estate regulatory fiasco, not a classic business cycle bust. So, you know, the key to remember is that there's a reason why the U.S. stock market trades at a premium multiple to other more cyclical markets like China and Europe. You know, they trade at like 10 or 12 times earnings, not 22 times like the United States. So

The point that I'm trying to make is that there are 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 of cyclicality potentially from onshoring if that's the objective of what the tariff argument is.

But the tariff argument has created, I think, an 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 2.8%. And if you look at the recent data from the University of Michigan on consumer sentiment, yes, it was weak.

Maybe a little bit more troubling, though, the fact that consumers now see inflation rising 5% over the next 12 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 this has been such a difficult year. And people say, well...

If we want to look at price charts, I'm not a technician, but one of the things that looks like it from a perspective of breaking through 200-day moving average and the euphoria that you've had with the Magnificent Seven and having lived through and managed money during that time,

you know, is this like the year 2001 prior to 9-11? 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 harder to navigate than 2001 because, you

you know, first off, you don't have a natural hedge. Long Treasuries back then offered an excellent alternative. You know, today, the correlation between stocks and bonds is not persistent. It's flipping back and forth. So you don't have a natural hedge in that regard. Even options.

you know, while they worked for us earlier in the month when the VIX spiked, it's been relatively low and it's really highlighting the no safe harbor. 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 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, you know,

services is starting to slow for the first time. And as we could recall, you know, global manufacturing has been in a malaise recently.

really for the last three years. But we're starting to see, you know, global manufacturing, not just the United States, but Europe and other 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've 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, what 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 Mar-a-Lago Accord, which is, you know, some people are using a parallel to the Plaza Accord.

for to weaken the U.S. dollar. Now, if you're sitting here and having a policy which is specifically geared towards bringing inbound U.S. 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 U.S. government want to undermine the U.S. 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 2009 and also back to the all-time high, which was 2002. Now, both of those were at the bottom of very deep recessions on the cut.

The very sharp cyclical recovery. Also, in the S&P 500 was trading at multiples at 11 or 13 times respectively, not 22 times now. So if you continue to essentially forego economic growth because of uncertainty and, you know, the big the big elephant in the room, which is the Magnificent Seven, which essentially, you know, has collapsed.

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 seek announcement and the

the dud IPO of, of core weave this week, raising questions about the efficacy of these investments. It's quite possible that we have in an environment of, of, of stale to flat, or maybe even declining earnings coupled with a negative D rating. 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 2001 and 2002 and didn't really bottom until the, uh,

this spring of 2003. So, James, have you turned bearish 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 bust 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,

You know, back in 2001, Exodus Communications, I don't know if you recall, but at that point in time, it was the world's largest web hosting provider. And it was the data center darling of the dot-com and telecom build-out. And it went from having a market value over $32 billion at that point in time in 2000 to being bankrupt today.

You know a year later because it was leveraged and its biggest customer at that point in time Global crossing was highly leveraged as well, you know in 2008 We saw the leverage in the banking sector today the thing that's kept me somewhat optimistic about magnificent seven is that we have a closed loop of

you know where i ai structures being paid for by microsoft meta alpha belt amazon etc who are enormously cash flow positive and have very large cash cushions so capex is high um you know amazon's going to spend 35 more this year so it's tough to call the end of nvidia's uh you know gains and so forth but i think this all that's being said

You know, the thing that opened up my eye this week is that the dud IPO of CoreWeave, 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, 77% of its revenue comes from just two customers. 62% is Microsoft.

It's got $8 billion in debt due next year. So its data centers are also stacked with Nvidia's Hopper GPUs, which are gonna be outdated as soon as Blackwell comes out. So like Exodus, you have a highly levered business

with 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. In the words of Warren Buffett, only when the tide goes out are we going to see who's swimming naked as Buffett used to say. So there's a lot more outside of the Magnificent Seven that in this AI infrastructure

that we may not be aware of the leverage that's in the system, which was very apparent back in 2001, but it's starting to become more and more evident as we move forward here. Great point. James, we'll leave it there. Always a pleasure. Thank you so much. I hope you have a productive week ahead. James Abate there. He is a managing director, also the chief investment officer at Center Asset Management, joining us here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories 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 Krisner, and this is Bloomberg.

Thank you.

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