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iPhone Sales Fall in China, Tesla Preview · Bloomberg Intelligence

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Speaker 2: Apple China iPhone sales dive nineteen percent in the worst
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Speaker 2: quarter since twenty twenty. And this is a big issue
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Speaker 2: because we know that China represents approximately twenty percent of
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Speaker 2: the sales for Apple. It's obviously critical to their supply chain.
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Speaker 2: So if there's one company that at least in my
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Speaker 2: mind that has quote unquote China risk associated with it,
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Speaker 2: it's it's Apple. Man Deep Singh joins us here. He's
0:49
Speaker 2: a senior technolog channels for Bloomberg Intelligence. He joins us
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Speaker 2: here in our New York City studio. So mandeb Apple
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Speaker 2: China iPhone sales dive nineteen percent in the first quarter,
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Speaker 2: the worst twenty what's your takeaway there?
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Speaker 3: I mean, it's not new news, so we knew this
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Speaker 3: was coming. There was some counterpoint data I think last
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Speaker 3: month that their March sales were pretty bad, so expected,
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Speaker 3: but it kind of solid Desfies the point that you know,
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Speaker 3: the China weakness is playing out much worse than what
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Speaker 3: people expected, and the China revenue probably is gonna be
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Speaker 3: like this for the foreseeable future unless something changes at
1:32
Speaker 3: the geopolitical level, or Apple launches a new device that
1:36
Speaker 3: everyone wants, that latest iPhone that everyone would want. But
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Speaker 3: for now, Huawei and the domestic competitors seemed to be
1:43
Speaker 3: catching up in terms of features, and that's enough to
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Speaker 3: take the share in the domestic market.
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Speaker 4: So this is a story then of consumer shifting to competitors,
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Speaker 4: or is it just that demand for phones is down
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Speaker 4: because there's some macro weakness in the Chinese consumer.
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Speaker 3: Think There is a policy element to it as well,
2:02
Speaker 3: so obviously a lot is kind of driven by what
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Speaker 3: is done at the government level. First they banned the
2:10
Speaker 3: use of iPhones, and now they're making sure that the
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Speaker 3: domestic vendors have a good chance of taking share. And
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Speaker 3: because the phone is comparable in features, then I guess
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Speaker 3: the Apple lock in that everyone thought was so strong
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Speaker 3: that you just can't get out of your iOS isn't
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Speaker 3: really helping or like in this case, and they are
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Speaker 3: able to kind of move out of the iOS ecosystem
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Speaker 3: and you start using this new phone.
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Speaker 2: What's Apple say about their position in China? What they
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Speaker 2: may need to do to regain momentum. Do they have
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Speaker 2: any strategy they've articulated.
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Speaker 3: I mean, look, they are having an event on May
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Speaker 3: seventh where they're launching a new iPad lineup. There will
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Speaker 3: be something very similar for the iPhone. They will launch
2:56
Speaker 3: a new device with AI capabilities. So their play is,
3:00
Speaker 3: we will launch a new phone, a new tablet with
3:04
Speaker 3: AI capabilities that everyone is looking for, and hopefully that
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Speaker 3: drives the refreshed cycle.
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Speaker 4: And how does the slumping demand in China compare to
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Speaker 4: the US demand? Because I have to admit a lot
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Speaker 4: of people feel very pure pressure to stay with an
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Speaker 4: iPhone versus a different device, simply because if you're in
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Speaker 4: a group chat and you have blue text messages like
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Speaker 4: it seems like that's actually a really strong feature that
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Speaker 4: can ramp up demand, at least in the US. So
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Speaker 4: how does that compare it and how are you so?
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Speaker 3: I will say, I think Apple is still gaining share
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Speaker 3: in other markets US, India, other pockets as well outside
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Speaker 3: of China, but that China revenue is almost twenty percent
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Speaker 3: of their sales. And if it's going to be zero
3:50
Speaker 3: a couple of years from now. Then you have to
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Speaker 3: ask yourself what makes for that revenue shortfall and for
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Speaker 3: a variety of reasons, as we talked about, you know,
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Speaker 3: related to China, But even if they are doing well
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Speaker 3: in other regions, it's just pressure in terms of unit
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Speaker 3: sales and what do you do. Do you keep raising
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Speaker 3: the prices of the phone, which they may have to
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Speaker 3: because they have to relocate the supply chains out of China.
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Speaker 3: That's the other aspect of the cost pressures when it
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Speaker 3: comes to making this phone. They will have a lot
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Speaker 3: of that because they have to relocate those supply chains
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Speaker 3: and it's not easy.
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Speaker 2: I'm surprised they haven't take any more aggressive approach in India,
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Speaker 2: like maybe a lower cost model to appeal to that marketplace.
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Speaker 2: What's their India strategy?
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Speaker 3: I mean, so far, I think they are catering to
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Speaker 3: that premium segment and they have had success, you know,
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Speaker 3: in terms of that one percent or two percent penetration
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Speaker 3: that they have had, you know, in terms of the region.
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Speaker 3: But a low cost phone it's hard in India simply
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Speaker 3: because how low can you go? And Apple has tried
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Speaker 3: that with different skews in the past, they haven't had
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Speaker 3: a ton of success with low CON's phones because again,
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Speaker 3: the competitors are quite fierce when it comes to you know,
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Speaker 3: the feature said and the quality of the phones that
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Speaker 3: they offer, and so it will be an interesting strategy
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Speaker 3: if they decide to pursue that. But for now, I
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Speaker 3: don't think anything can make up for that China revenue
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Speaker 3: shortfall because it's declining at a very rapid pace.
5:23
Speaker 4: So their earnings aren't until May second. They have that
5:27
Speaker 4: launch event on May seventh, but we do have some
5:29
Speaker 4: other big tech earnings coming this week. Can you talk
5:32
Speaker 4: about that?
5:32
Speaker 3: Yeah, I mean, look, Meta, I think it's a company
5:36
Speaker 3: that has had a great turnaround story, and we know
5:40
Speaker 3: turnarounds are tough intech, but Meta has shown that, you know,
5:43
Speaker 3: it's a remarkable story when it comes to laying off
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Speaker 3: twenty five percent people and then growing revenue twenty five
5:50
Speaker 3: percent in subsequent quarters. I mean, it just speaks for
5:54
Speaker 3: how well they have executed and now they are at
5:56
Speaker 3: the top of the game and it comes to having
5:58
Speaker 3: their own large a model, So that could make a
6:02
Speaker 3: difference in terms of, you know, the new revenue stream
6:04
Speaker 3: that everyone wants to see with meta and probably the
6:07
Speaker 3: metaverse may become a side show. I think another company
6:12
Speaker 3: that I feel is not very well understood and probably
6:16
Speaker 3: everyone thinks they're going to get disrupted is Google Alphabet,
6:19
Speaker 3: and that's where it would be interesting to see what
6:22
Speaker 3: they do around search because all the survey work that
6:25
Speaker 3: we have done, it shows that, you know, the new
6:28
Speaker 3: companies chat GPT, Perplexity, they have taken some share when
6:33
Speaker 3: it comes to the search queries. Now. Still, the counter
6:36
Speaker 3: argument is everyone still needs to go to Google Maps
6:40
Speaker 3: or Google Search to look at what chat GPT is
6:44
Speaker 3: generating because they're not sourcing the links. So in the end,
6:48
Speaker 3: Google is still getting the traffic, but obviously the search
6:52
Speaker 3: is starting somewhere else, and that's the key risk that
6:55
Speaker 3: they have to address.
6:56
Speaker 2: All right, so does does Google have an AI play
6:59
Speaker 2: per se?
7:00
Speaker 3: Yeah? So their Gemini large anglid model. I mean, we
7:03
Speaker 3: all know it wasn't a success initially, but now they
7:06
Speaker 3: have caught up in terms of features and look, Google
7:09
Speaker 3: doesn't want to integrate Gemini everywhere because that's going to
7:12
Speaker 3: hurt their ad revenue. So they're very careful with how
7:15
Speaker 3: they roll out and how they make those UI changes
7:18
Speaker 3: because it's going to be disruptive to their incumbent position.
7:21
Speaker 3: When it comes to digital.
7:22
Speaker 2: Ads market, do you use Gemini?
7:24
Speaker 3: I do, and I think for certain tasks like generating
7:28
Speaker 3: summaries and you know, video editing, that kind of stuff,
7:31
Speaker 3: image editing, it's great. But I don't use it for
7:35
Speaker 3: my search yet because when it comes to the traditional
7:39
Speaker 3: Google search, it's still the go to place. When I
7:42
Speaker 3: think about you know certain things to do, and that's
7:44
Speaker 3: the behavior I think.
7:45
Speaker 2: All right, you're a guy, Men Deep sing Senior techounts
7:48
Speaker 2: when you go. When you start using something, I'll start
7:50
Speaker 2: using it when men and when Anna Rock tells me
7:52
Speaker 2: to upgrade my phone, all upgrade my phone. That's how
7:54
Speaker 2: I roll Men Deep Seeing Senior Tech outs or Bloomberg Intelligence.
7:57
Speaker 2: Join us live here in our Bloomberg Interactive Brokers Studio
8:01
Speaker 2: iPhone China Apple. It's a big, big challenge for them,
8:05
Speaker 2: as many you've said, almost twenty percent of the revenue
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Speaker 2: comes out of China. They need to figure that out.
8:12
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Speaker 2: Emily Grafao, Paul Swen, you're live here in the Bloomberg
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Speaker 2: INTERACTI Broker Studio or streaming live on YouTube as well.
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Speaker 2: Emily Grafao a proud graduate of the University of Richmond.
8:40
Speaker 2: I'm sorry University of Virginia. Sorry slip slip. As is
8:43
Speaker 2: our next guest, Garrett Nelson, Vice president and Senior equity
8:46
Speaker 2: analyst at cfr A Research. Garrett, my notes here, say
8:50
Speaker 2: you're in Richmond, Virginia. How'd you work that scam?
8:55
Speaker 5: That's right, only only an hour from Charlottesville. So as
9:00
Speaker 5: a as a proud who, very happy living so close
9:05
Speaker 5: to the album.
9:06
Speaker 2: Marler, all right, very good. I'm surrounded by UVA folks. Hey,
9:09
Speaker 2: Garrett Elon Musk, let's talk Tesla. You're the auto dude
9:13
Speaker 2: at CFRA. What does he have to do on the
9:17
Speaker 2: conference call today? It seems like he's got to pull
9:20
Speaker 2: a rabbit out of some kind of hat here to
9:22
Speaker 2: reverse the bad mojo around the stock.
9:25
Speaker 1: Yeah.
9:26
Speaker 5: Look, there's no question the stakes are extremely high heading
9:30
Speaker 5: into this earnings release. The stock is down more than
9:33
Speaker 5: forty year to date, coming off a year in which
9:36
Speaker 5: shares more than doubled. Tesla's earnings execution also hasn't been great.
9:42
Speaker 5: They've missed on the bottom line each of the last
9:45
Speaker 5: two quarters, you know, but we think the challenges they
9:50
Speaker 5: face at this point are well understood by investors. They're
9:54
Speaker 5: having issues with the ramp up of production of the
9:58
Speaker 5: cyber truck. The TV market overall is oversaturated and growth
10:03
Speaker 5: rates have slowed tremendously. And you know, there's some uncertainty
10:09
Speaker 5: regarding the future product pipeline when they might bring to
10:12
Speaker 5: market the mass market ev or ROBOTAXI. You know, that's
10:17
Speaker 5: not really clear right now. So certainly a lot to
10:20
Speaker 5: look for. There's always a lot on the line. Tesla
10:24
Speaker 5: is one of the most anticipated earnings releases every quarter,
10:27
Speaker 5: but even more so this quarter.
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Speaker 4: Yeah. Can you talk a little bit about Tesla's efforts
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Speaker 4: to cut prices on their vehicles and how that is
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Speaker 4: going to play into the earnings. I see a lot
10:40
Speaker 4: of headlines about cutting costs. They recently slashed prices I
10:44
Speaker 4: think two weeks ago on most of their models. Is
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Speaker 4: that something that investors should be watching for? Even more
10:51
Speaker 4: today in the earnings.
10:53
Speaker 1: Yeah.
10:53
Speaker 5: So Tesla's been cutting prices steadily for over a year now.
10:57
Speaker 5: Remember just after the New year twenty twenty three, they
11:01
Speaker 5: announced a price cut, a series of price cuts, and
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Speaker 5: there have been, you know, several price cut announcements since then.
11:08
Speaker 5: So it's going to impact both the top line and
11:13
Speaker 5: the bottom line. You're really going to see it in
11:15
Speaker 5: the gross margins that they report. So but you know,
11:20
Speaker 5: also Tesla's at a point where they opened two new
11:23
Speaker 5: factories just a couple of years ago, in Austin and
11:26
Speaker 5: in Berlin, and they're still in the process of ramping
11:29
Speaker 5: those plants up to full capacity. So you know, if
11:34
Speaker 5: they can do that cut prices and drive sales higher,
11:39
Speaker 5: they can drive down their unit costs by doing so.
11:43
Speaker 5: Auto manufacturing is a very high fixed cost business, so
11:45
Speaker 5: ultimately they want to run those plants at the highest
11:48
Speaker 5: possible capacity utilization rate without surrendering too much margin.
11:54
Speaker 2: So I guess to me, thank you blue Button, to me, Garrett,
11:59
Speaker 2: I think the most fundamental issue here, and I'm not
12:01
Speaker 2: sure Elon Musk can really address it, is what is
12:04
Speaker 2: the overall fundamental long term demand for EV's. You know,
12:10
Speaker 2: there's a lot of folks out there that are saying
12:12
Speaker 2: it's it's it's not great, it's not what maybe the
12:15
Speaker 2: industry once thought. What's your view on that.
12:19
Speaker 5: Yeah, I think that's a big reason behind the sell
12:21
Speaker 5: off in Tesla and other EV manufacturers. I mean, look
12:25
Speaker 5: at the stock price of Ribby and Lucid Fisker. Is
12:29
Speaker 5: that the growth rates have disappointed, you know, compared to
12:33
Speaker 5: what investors thought growth would look like just two or
12:37
Speaker 5: three years ago. So you know, it's been a disappointment.
12:41
Speaker 5: And one thing you can point to is that governments
12:43
Speaker 5: around the world are putting EV mandates in place, and so,
12:48
Speaker 5: you know, we think that's a big positive for Tesla.
12:50
Speaker 5: Obviously as an EV peer play. You're also seeing a
12:54
Speaker 5: number of traditional auto manufacturers really pull back on their
12:58
Speaker 5: planned EV investment. So over the longer term, there should
13:01
Speaker 5: be a lot less competition in the EV market for Tesla,
13:05
Speaker 5: which really opens up the market opportunity.
13:08
Speaker 4: What else makes Tesla different than other pure play EV manufacturers.
13:14
Speaker 4: If you read the Walter Isaacson biography of Elon Musk's,
13:17
Speaker 4: you kind of get a sense that Musk never wanted
13:21
Speaker 4: Tesla to just be an EV company, but thinks of
13:24
Speaker 4: it more as an AI company, a battery company. How
13:27
Speaker 4: much does that matter to investors right now when the
13:30
Speaker 4: stock is down, you know, forty percent year to date.
13:34
Speaker 5: We argue it should matter. I mean, look, they have
13:37
Speaker 5: an energy business, energy storage that if you look last year,
13:42
Speaker 5: it's been growing faster than the auto business. They hardly
13:45
Speaker 5: get any credit for that business, and so you know,
13:49
Speaker 5: we think it should matter. But really, the big distinguishing
13:52
Speaker 5: factor when you look at Tesla relative to to other
13:57
Speaker 5: competitors is its balance sheet. You know, this, this isn't
14:00
Speaker 5: the Tesla of three or four years ago that was
14:02
Speaker 5: just barely getting by. Tesla had today has an investment
14:06
Speaker 5: grade balance sheet. They're sitting on over twenty nine billion
14:09
Speaker 5: dollars of cash, They have some of the highest gross
14:12
Speaker 5: margins in the industry, and we think they have an
14:16
Speaker 5: attractive development pipeline. So you know, that's really you've seen
14:20
Speaker 5: a bifurcation in the market where you know, some of
14:23
Speaker 5: the smaller, newer ed players like the ones I mentioned,
14:27
Speaker 5: you know, some of them have either declared bankruptcy or
14:31
Speaker 5: are flirting with bankruptcy. So you know, Tesla is really
14:35
Speaker 5: in a much different position than those companies, and in fact,
14:38
Speaker 5: a lot of traditional automnifact and manufacturers don't even have
14:42
Speaker 5: investment grade balance sheets, so you know, they're in a
14:44
Speaker 5: better position than those companies in our opinion.
14:48
Speaker 2: Garrett has, do you have the confidence that Tesla can
14:54
Speaker 2: profitably make an EV at a thirty thirty five thousand
14:58
Speaker 2: dollars price point?
15:00
Speaker 5: Going to be difficult. So you know, when Elon Musk
15:03
Speaker 5: first started talking about this mass market EV years ago,
15:08
Speaker 5: it you know, it was a twenty five thousand dollars
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Speaker 5: EV and that just isn't you know, with inflation that
15:15
Speaker 5: we've experienced since then and the economy continues to experience,
15:20
Speaker 5: we think, you know, if this happens, it's it's more
15:23
Speaker 5: likely to have a price point somewhere north of thirty thousand,
15:26
Speaker 5: maybe thirty or thirty five thousand, And that's really a
15:30
Speaker 5: price point that they're that they're going to need to
15:33
Speaker 5: produce it profitably in this environment.
15:37
Speaker 4: I have two questions. One quick question we talked about
15:40
Speaker 4: the balance sheet. Does Tesla still have bitcoin on their
15:43
Speaker 4: balance sheet? Remember when that news came out like two
15:46
Speaker 4: years ago?
15:49
Speaker 5: They do, And you know, that was a drag on
15:52
Speaker 5: on Tesla for a while. When bitcoin was falling. With
15:55
Speaker 5: bitcoin having rebounded, you know, they've divested some of the bitcoin,
15:59
Speaker 5: but they do have some amount on the balance sheet.
16:03
Speaker 5: I would have to check the ten K for the
16:04
Speaker 5: exact amount, but they do. They do still have some bitcoin.
16:08
Speaker 4: The other question I had was just when the earnings
16:11
Speaker 4: come out, you know, what are you looking for? Best
16:14
Speaker 4: case scenario? You know, what kind of headline would you
16:17
Speaker 4: have to see to you know, start buying more Tesla
16:20
Speaker 4: after the earnings.
16:25
Speaker 5: Really the biggest thing is we're looking for some certainty
16:28
Speaker 5: regarding the cyber truck. From as far as we can tell,
16:31
Speaker 5: from the time they made first deliveries of that vehicle
16:34
Speaker 5: in November, you know, through the end of March, they've
16:38
Speaker 5: only produced maybe a few thousand units of the cyber truck.
16:44
Speaker 5: Now the reservation count for that model is somewhere north
16:47
Speaker 5: of two million, So you have two million customers out
16:50
Speaker 5: there who are waiting delivery of their cyber truck. They're
16:53
Speaker 5: having difficulty ramping up production. There was a recall just announced,
16:59
Speaker 5: and so you know, we're looking for some certainty regarding
17:05
Speaker 5: when they might hit certain production milestones for the cyber truck,
17:09
Speaker 5: which is going to have an impact on their full
17:12
Speaker 5: year deliveries obviously, and then looking ahead into twenty twenty five.
17:17
Speaker 5: But you know, if you look across the street, Earning's
17:19
Speaker 5: estimates have come down massively for twenty twenty four, and
17:23
Speaker 5: so we think they're at a level which are much
17:25
Speaker 5: more achievable here, and so the really the story becomes
17:30
Speaker 5: more of a twenty twenty five and beyond story, which
17:34
Speaker 5: is what investors are looking for, you know, taking the
17:36
Speaker 5: longer view, but also they want to see better execution
17:40
Speaker 5: in the near term.
17:41
Speaker 2: All right, Garet, thanks so much for joining us. Really
17:43
Speaker 2: appreciate it. Garrett Nelson, Vice president's Senior Equity analytcfr A Research,
17:47
Speaker 2: A proud Wahoo from the University of Virginia, somehow working
17:52
Speaker 2: his scam from Richmond, Virginia, one of my favorite towns
17:55
Speaker 2: anywhere my twins are born. There a great city, great
17:58
Speaker 2: place to live. Garrett's got it figured out there doing
18:01
Speaker 2: the Wall Street thing from Richmond, Regina. Good for him,
18:04
Speaker 2: Tesla after the close, that's going to be big.
18:09
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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18:24
Speaker 2: One of the big names reporting today is UPS, big
18:26
Speaker 2: brown profit higher than analysts estimates, talking about headcount management,
18:31
Speaker 2: restructuring of its delivery rats are beginning to bear some fruit.
18:34
Speaker 2: Let's check in with the expert on all things transport
18:37
Speaker 2: and that would be one lead classical. He's a senior
18:39
Speaker 2: transportation's logistics analyst at Bloomberg Intelligence. He's safely a sconce
18:44
Speaker 2: down in our Princeton office and he joins us there
18:47
Speaker 2: via zoom. So, Lee, it looks like this UPS put
18:51
Speaker 2: us some good numbers. What are really the drivers here?
18:55
Speaker 6: Yeah, hey Paul, thanks for having me on.
18:57
Speaker 1: Yeah.
18:57
Speaker 6: I think it's really about what they're doing on the
19:00
Speaker 6: cost side. I think that's really the driver of the
19:04
Speaker 6: outperformance in EPs, because revenue did come in slightly lower
19:08
Speaker 6: than expectations on lower volumes. You know, they're dealing with
19:12
Speaker 6: lower volumes from last share last year when they you know,
19:18
Speaker 6: were negotiating their labor contract and a lot of shippers
19:21
Speaker 6: kind of try to find other alternatives in case there
19:24
Speaker 6: was an issue with their network, you know, from a strike.
19:27
Speaker 6: But obviously that didn't happen now they're being pretty busy
19:30
Speaker 6: trying to win back that share, so, you know, I
19:33
Speaker 6: think what they're all in all, it was a good quarter.
19:37
Speaker 6: I think if UPS is you know, meeting or beating expectations,
19:41
Speaker 6: that's a good thing. Because they've had a rough year,
19:44
Speaker 6: driven a lot by that labor negotiation, which increased costs
19:48
Speaker 6: considerably and resulted in a lost amount of volume, which
19:52
Speaker 6: you know, for a company like UPS, the deleveraging effect
19:56
Speaker 6: on margins is quite substantial. But there are definitely some
19:59
Speaker 6: good news in the report today that you know, we
20:02
Speaker 6: remain optimistic that they might be even looking to possibly increase,
20:08
Speaker 6: you know, their full year guidance for twenty twenty four,
20:11
Speaker 6: especially as the US postal service contract which they recently
20:15
Speaker 6: won from FedEx starts hitting their.
20:17
Speaker 1: P and L.
20:19
Speaker 4: When you talk about average daily package volume down, your
20:22
Speaker 4: over year revenue down year over year, how much of
20:26
Speaker 4: the softer demand for UPS is related to macro economic
20:30
Speaker 4: factors and maybe coming out of the pandemic consumers shipping less.
20:35
Speaker 4: Is that a factor here?
20:37
Speaker 6: Yeah, I think it's a you know, probably a trieffective things.
20:42
Speaker 6: It's probably a softer great outlook all together that coupled
20:49
Speaker 6: with tougher comparisons, and the fact that they are you know,
20:53
Speaker 6: are still trying to win back the share that they
20:55
Speaker 6: lost from their labor contract negotiation. So I think think
21:00
Speaker 6: those three things are kind of weighing on their their volumes,
21:04
Speaker 6: probably more than maybe their competitors like a FedEx or
21:08
Speaker 6: a DHL Hayley.
21:10
Speaker 2: I know, labor is a big deal with UPS and
21:13
Speaker 2: these companies here. I know UPS they had a new
21:15
Speaker 2: labor contract that really pushed up wages and benefits starting
21:21
Speaker 2: I guess this year. But then on the other side,
21:24
Speaker 2: they also cut twelve hundred or twelve thousand white collar jobs.
21:28
Speaker 2: That's like fourteen percent of the workforce here. So talk
21:32
Speaker 2: to us about the labor and component they're in the
21:34
Speaker 2: cost structure.
21:36
Speaker 6: Yeah, I mean that they're they're doing the right things.
21:39
Speaker 6: You know, the contract might have a you know, with
21:44
Speaker 6: the team serves, might have had a negative impact to margins,
21:47
Speaker 6: but you know, we are going to anniversary those in
21:49
Speaker 6: the second half of the year, so those comparisons won't
21:52
Speaker 6: be as bad. And also, you know, does provide them
21:56
Speaker 6: with a steady labor force, because you know, if your
22:00
Speaker 6: labor is happy, you're gonna have less turnover. You have
22:02
Speaker 6: less turnover, you probably have better service and better safety,
22:05
Speaker 6: and that usually yields better profits. So I think, like
22:09
Speaker 6: when you if you look longer term, beyond the initial
22:12
Speaker 6: shock of that new contract, which is very front loaded,
22:16
Speaker 6: you know, the increases aren't as bad. As we get
22:19
Speaker 6: to year two, it's not going to be as bad.
22:21
Speaker 6: And listen, you know UPS and FedEx and a lot of
22:24
Speaker 6: these companies, you know they did get a little on
22:27
Speaker 6: the fat side, if you will, on their corporate ranks,
22:30
Speaker 6: and I think they're both doing the right things and
22:32
Speaker 6: terming in terms of trimming it for the new normal
22:35
Speaker 6: of what their operating environment is today.
22:39
Speaker 4: How should investors be thinking about UPS? The stock is
22:42
Speaker 4: up one point five percent right now, but it's down
22:45
Speaker 4: about six percent year to date, underperforming the broader market.
22:50
Speaker 6: Yeah, and if you even look even further over the
22:51
Speaker 6: last twelve months, you know it's down almost twenty five percent,
22:55
Speaker 6: underperforming not only the broader market, but you know it's
22:57
Speaker 6: closest peer fed X, which is up around eighteen percent
23:01
Speaker 6: over the last twelve months. So you know, I think
23:04
Speaker 6: what they need to do is they need to execute.
23:06
Speaker 6: They do not only to execute on their twenty twenty
23:08
Speaker 6: four plans, but their twenty twenty six plans, and I
23:12
Speaker 6: do as I said earlier, I think there is some
23:14
Speaker 6: opportunity for some upside surprise. Given their US postal service contract.
23:18
Speaker 6: It wasn't didn't really make that much money for FedEx.
23:21
Speaker 6: But I think UPS's network is very different than fedexits.
23:24
Speaker 6: It's more integrated, it's not a hub and spoke network,
23:27
Speaker 6: and that will provide them with some profitability. And management
23:30
Speaker 6: is pretty confident, at least it peers confident that this
23:33
Speaker 6: business is going to be not only creative to earnings,
23:35
Speaker 6: but a creative to margins. And that's kind of what
23:38
Speaker 6: you know, we as we look at the company, really
23:40
Speaker 6: want to see. We really want to see those domestic
23:42
Speaker 6: margins start to improve.
23:44
Speaker 2: Haylee, what are the companies saying about kind of normalized
23:47
Speaker 2: growth rates in terms of I guess, unit volume. Where's
23:51
Speaker 2: this US economy in terms of just packages? Is it
23:54
Speaker 2: a GDP kind of number? Is that kind of the story.
23:58
Speaker 6: Yeah, it's a GDP kind of number. But you know,
24:00
Speaker 6: UPS wants to grow beyond GDP and and how they're
24:03
Speaker 6: going to do that is they've made some pretty significant
24:06
Speaker 6: uh not in size necessarily, but in terms of you know,
24:10
Speaker 6: capabilities acquisitions. You know, they bought a company Roady, which
24:15
Speaker 6: you know it's not a drink on the road, well,
24:17
Speaker 6: but it's it's it is. What they do is they
24:20
Speaker 6: deliver heavy stuff to people's doors, So think furniture, think
24:25
Speaker 6: uh uh, workout equipment, fitness equipment, and that is done
24:29
Speaker 6: through more or less an asset light model where you know,
24:32
Speaker 6: they're arranging the delivery. So that's that's a very good business.
24:37
Speaker 6: They're also invested or acquired a company that does returns
24:42
Speaker 6: without box, without having it to box it, so it's
24:44
Speaker 6: a lot easier for consumers to you know, either go
24:49
Speaker 6: to a UPS store or one of the other drop
24:51
Speaker 6: points that UPS provides, uh to to to return something.
24:54
Speaker 6: And that's good for UPS because that stuff goes into
24:56
Speaker 6: their system and it becomes a B two b uh
24:59
Speaker 6: deliver where when we say B to B business business
25:03
Speaker 6: and meaning that there's more density, so it's you know,
25:06
Speaker 6: they're they're shipping, you know, they're consolidating and shipping twenty
25:10
Speaker 6: boxes versus just one envelope, and that tends to be
25:13
Speaker 6: more profitable. Uh. And then their investments in the healthcare space,
25:19
Speaker 6: you know their goal is to be the largest healthcare
25:21
Speaker 6: logistics provider. Healthcare has above average margins for transportation companies
25:26
Speaker 6: given the high level of service that's involved there. I
25:30
Speaker 6: think temperature control, think you know, uh, the fact that
25:34
Speaker 6: it has to get get get somewhere at a very
25:37
Speaker 6: specific time. So you know, those are higher, higher margin
25:41
Speaker 6: business So you know, I think that those growth areas
25:44
Speaker 6: I just mentioned will help them grow their overall volumes
25:48
Speaker 6: beyond you know, just GDP numbers.
25:52
Speaker 2: All right, just real quickly, Lea, I'm looking at the stock,
25:56
Speaker 2: my god, Over the last five years, UPS and FedEx
26:00
Speaker 2: both grew at a compounded annuer rate of eight point
26:03
Speaker 2: eight percent, spot on below the S and P five
26:05
Speaker 2: hundred and thirteen percent. But why do investors own these stock?
26:09
Speaker 2: What's the call to own a fed X or UPS?
26:14
Speaker 6: Well, Paul, as you know, we don't do a recommendation
26:16
Speaker 6: to your bi but you know, it's a really it's
26:19
Speaker 6: a play on e commerce. It's a play on the
26:22
Speaker 6: global economy. And you know, it's more, it's more and
26:26
Speaker 6: more becoming a play on near shoring. You know, the
26:30
Speaker 6: ups is and the Fedexes and the dhls of the world,
26:32
Speaker 6: even the freight forwarders like a kuninaugl You know, they're
26:35
Speaker 6: all going to benefit from the changes and supply chains.
26:39
Speaker 6: At supply chains, you know, change and shifts and get
26:41
Speaker 6: more complicated. These companies really prove their worth during these times.
26:47
Speaker 6: And you know, I think that if if you believe
26:49
Speaker 6: in near shoring, if you believe in you know the
26:53
Speaker 6: fact that we're going to be buying more online, not less. Uh,
26:56
Speaker 6: these are places where you want to be. And it's
26:59
Speaker 6: really about the management teams that are in place, whether
27:02
Speaker 6: it's UPS or FedEx, can they change their organizations to
27:07
Speaker 6: the new normal. It's and it looks like they're both
27:09
Speaker 6: doing it. It's not going to be an overnight change.
27:13
Speaker 6: It's going to take time because these are very you know,
27:16
Speaker 6: huge networks and they and they're not as easy to
27:19
Speaker 6: change as it would, you know, changing a menu at
27:22
Speaker 6: a restaurant.
27:23
Speaker 2: Right right, All right, A league, thanks as always for
27:25
Speaker 2: joining us. Lee Lascal, senior transportation analysts of Bloomberg Intelligence,
27:28
Speaker 2: joining us from the Princeton offices of Bloomberg.
27:32
Speaker 1: Here you're listening to the Bloomberg Intelligence Podcast. Catch us
27:38
Speaker 1: live weekdays at ten am Eastern on applecar Play and
27:41
Speaker 1: Android Auto with the Bloomberg Business app. You can also
27:44
Speaker 1: listen live on Amazon Alexa from our flagship New York station,
27:48
Speaker 1: just say Alexa playing Bloomberg eleven thirty PM.
27:52
Speaker 2: My data came out here from SMP generally below consensus.
27:57
Speaker 2: I guess the composite came into fifty spot nine versus
28:00
Speaker 2: fifty two. That was a consensus of fifty two point
28:04
Speaker 2: one was for the last period as well. Chris Willimson
28:07
Speaker 2: joins us. He's a chief business economist at SMP Global
28:11
Speaker 2: Market Intelligence. Chris walk us through kind of what we
28:15
Speaker 2: saw here with the pmis for the month of April.
28:19
Speaker 7: Yeah, so there's two surveys really, one of manufacturing, one
28:22
Speaker 7: of services. So the latter is private sector services. So
28:27
Speaker 7: these are this ranges from consumer based services to business services.
28:32
Speaker 7: It excludes retail importantly, and it excludes government. Now, both
28:38
Speaker 7: of those surveys lost some momentum. Collectively over the first quarter,
28:42
Speaker 7: they'd signal fairly decent growth around two percent annualized, with
28:46
Speaker 7: that upturn becoming increasingly broad based services led, but manufacturing
28:51
Speaker 7: also starting to pick up some momentum. But in April
28:53
Speaker 7: we've seen both of those surveys lose some output. Growth pace.
28:58
Speaker 7: It's still in expansion territory as far as output's concerned,
29:01
Speaker 7: but with growth sort of slipping below the two percent
29:04
Speaker 7: annualized GDP rate, that's the signal from it. So looks
29:09
Speaker 7: like the second quarter could disappoint compared to the first
29:12
Speaker 7: quarter based on these these survey data, as your previous
29:17
Speaker 7: interview was referring to these these survey data have been
29:21
Speaker 7: a bit softer than recent GDP numbers, so you know
29:24
Speaker 7: that needs to be born in mind.
29:26
Speaker 2: So any sense of what's driving there, Like, I'm not
29:28
Speaker 2: sure how to think about this on a month a
29:30
Speaker 2: month basis. Is it just kind of noise month a
29:32
Speaker 2: month and I really want to look at it on
29:34
Speaker 2: a longer trend or does the slowdown in April does
29:37
Speaker 2: that kind of suggest something might be a foot?
29:41
Speaker 7: Yeah, it does look like there's been some adjustment to demand,
29:45
Speaker 7: so new order inflows, the amount of work flowing into
29:48
Speaker 7: manufacturers and service providers that fell for the first time
29:50
Speaker 7: in six months in April only. Just it is a
29:53
Speaker 7: small decline, but this contrasts with growth of demand that
29:56
Speaker 7: we've seen over prior periods, and it looks like you're
29:59
Speaker 7: getting some adjust meant here to the financial conditions that
30:02
Speaker 7: businesses are facing. So previously we've seen, you know, companies
30:08
Speaker 7: look forward to rate cuts and that stimulating demand those
30:11
Speaker 7: loosening of financial conditions out and over the course of
30:15
Speaker 7: the last few weeks, we've seen further signs that you're
30:20
Speaker 7: not going to get all those rate cuts that you hope,
30:22
Speaker 7: and indeed market starting to price in now more possibility
30:25
Speaker 7: of a rate hike. That's feeding through to markets. It's
30:29
Speaker 7: increasing borrowing costs and it looks like that's feeding through
30:33
Speaker 7: to the business environment. We've seen. We've seen this creep
30:37
Speaker 7: in before in terms of how those financial conditions really
30:40
Speaker 7: do seem to quickly affect the demand environment, and it
30:43
Speaker 7: looks like that's what we've got here in April, a
30:46
Speaker 7: bit of a sort of reality check. Whether this persists
30:49
Speaker 7: in coming months is going to be the key thing
30:51
Speaker 7: to look out for, but it does look like that,
30:53
Speaker 7: certainly going into the second quarter, you're seeing the demand
30:56
Speaker 7: environment soften compared to what we've seen previously.
31:00
Speaker 2: All right, Chris, thanks so much for joining us. Chris Williamson,
31:02
Speaker 2: chief Business Economists at SMP Global Markets, joining us from
31:05
Speaker 2: London via zoom and again the SMP Global manufacturing PMI
31:09
Speaker 2: for the month of April comme in at forty nine
31:11
Speaker 2: point nine. Consensus was fifty two. On the services side,
31:15
Speaker 2: it came in at fifty point nine, still expansionary, but
31:18
Speaker 2: below the consensus of fifty two, and both of those
31:21
Speaker 2: were down from last month, which we're both close to
31:24
Speaker 2: fifty two, so again at deceleration there. So when you
31:26
Speaker 2: put them all together, the services and manufacturing on a
31:28
Speaker 2: composite basis came into fifty point nine versus fifty two.
31:32
Speaker 2: So we'll keep an eye on out a slowdown in
31:35
Speaker 2: the SMP. It's a survey of manufacturing and service activity
31:39
Speaker 2: out there in economy. Economists kind of take a look
31:42
Speaker 2: at that to see about the outlook for services and
31:45
Speaker 2: for manufacturing.
31:48
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
31:52
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31:56
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31:59
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32:02
Speaker 1: Say Alexa playing Bloomberg eleven.
32:06
Speaker 2: Emily Rafe is sitting in for Alex Steele and Paul Sweeney.
32:08
Speaker 2: We're live here in our Bloomberg Interactive Broker studio. We're
32:11
Speaker 2: also streaming live on YouTube dot com, so head over
32:15
Speaker 2: there and search Bloomberg Podcast. I'm in the process thanks
32:17
Speaker 2: to Emily's tip. I'm in the process of logging into
32:23
Speaker 2: and loading clear Space onto my phone the app, and
32:26
Speaker 2: that is to limit self, limit my use of certain
32:30
Speaker 2: social media things that I feel like are wasting my time.
32:32
Speaker 4: Yes, it blocks your access to the apps, and it
32:36
Speaker 4: actually makes you do a breathing.
32:37
Speaker 7: Exercise, of course, and.
32:39
Speaker 4: It gives you a quote and an inspirational quote before
32:43
Speaker 4: you log on. So you really have to question, do
32:45
Speaker 4: I really want to open social media right now?
32:47
Speaker 1: Good? This is like the lock on the liquor cabinet.
32:50
Speaker 2: Yes, yes, that's the analogy that from our generation that
32:54
Speaker 2: brings us to TikTok, because that's a lot of what
32:58
Speaker 2: people are concerned about in TikTok. You know, it looks
33:02
Speaker 2: like they might be banned here or forced of a divesture.
33:05
Speaker 2: I don't know what's going on, since I'm not a TikToker,
33:07
Speaker 2: but I know it's huge because most people are on TikTok.
33:10
Speaker 2: Matt Schuttenhelm, I don't know if he's on TikTok. I'm
33:12
Speaker 2: gonna guess no, but I don't know. He's a media
33:15
Speaker 2: litigation analyst to Bloomberg Intelligence. Yeah, he's a lawyer, but
33:18
Speaker 2: we talked to him anyway because he's really really smart. Matt,
33:21
Speaker 2: can you tell us what's going on with our good
33:23
Speaker 2: friends at TikTok is what is Congress looking to do?
33:27
Speaker 8: Yeah, so this bill is really advancing in Congress faster
33:31
Speaker 8: than I think many of us expected.
33:33
Speaker 1: That.
33:34
Speaker 8: The aim of this bill is that to force a
33:38
Speaker 8: divestiture of TikTok from byte Edance, which is based in
33:43
Speaker 8: China and is the parent company here. And basically the
33:47
Speaker 8: bill operates by saying, if that divestiture doesn't happen within
33:52
Speaker 8: two hundred and seventy days or maybe there's a potential
33:56
Speaker 8: ninety day extension of that, if that divestiture doesn't happen,
34:00
Speaker 8: and then TikTok can't be hosted in app stores, or
34:04
Speaker 8: it can't be there can be no web hosting of
34:08
Speaker 8: the app. So it's effectively a ban if that divestiture
34:12
Speaker 8: doesn't happen. And so this has cleared the House of
34:14
Speaker 8: Representatives on Saturday. That was their second vote by an
34:18
Speaker 8: overwhelming bipartisan majority. Today it's tied up in the Senate,
34:23
Speaker 8: and this is tied to the Ukraine Foreign aid package,
34:27
Speaker 8: and so it's going to be very unlikely for the
34:29
Speaker 8: Senate to resist it, so very likely that this becomes law.
34:33
Speaker 8: President Biden has said he'll sign it, and so I
34:36
Speaker 8: think we're you know, we're off to the courts now
34:39
Speaker 8: on this question.
34:40
Speaker 4: What is Congress most concerned about when it comes to TikTok?
34:44
Speaker 4: Why have they introduced this legislation?
34:48
Speaker 8: Yeah, I think it's it's really motivated by by two concerns. One,
34:53
Speaker 8: it's a concern about access to all of this data.
34:57
Speaker 8: We have one hundred and fifty one hundred and seventy
34:59
Speaker 8: million Americans on this TikTok is collecting all of their
35:04
Speaker 8: data about what they're clicking on, and potentially China has
35:08
Speaker 8: access to that since byte Dance is located UH with
35:13
Speaker 8: within within China. And the other concern is a propaganda concern.
35:18
Speaker 8: How much can can China play a role in in
35:23
Speaker 8: in dictating the messages that that that TikTok prioritizes and
35:29
Speaker 8: and what the messages that it's that it's UH declaring
35:33
Speaker 8: to our youth you know that are that are using
35:35
Speaker 8: this so so often, so it's sort of those dual
35:38
Speaker 8: concerns that that have really driven this.
35:41
Speaker 2: And Matt, what have we heard from Bite Dance, if anything,
35:43
Speaker 2: what do they intend to do if Congress passes this?
35:46
Speaker 8: Yeah, I think I think they've signaled pretty clearly that
35:49
Speaker 8: there will be a lawsuit to challenge this, and so
35:53
Speaker 8: I think that's going to be the next stage. So
35:56
Speaker 8: we saw this when President Trump, before he was against
35:59
Speaker 8: a band hetally tried to ban TikTok in twenty twenty,
36:04
Speaker 8: and there was litigation about this, brought both by TikTok
36:08
Speaker 8: and by TikTok's users. And here the bill itself tells
36:12
Speaker 8: us what court that's going to go to. It's the
36:14
Speaker 8: d C Circuit here here in Washington. And so I
36:18
Speaker 8: think Byte Dance and TikTok are very likely to very
36:23
Speaker 8: soon bring this lawsuit challenging Congress's action.
36:28
Speaker 4: I think everyone who's on TikTok wants to know, is
36:33
Speaker 4: TikTok going to be banned? What is the likelihood right
36:38
Speaker 4: now that in a couple months people in the US
36:41
Speaker 4: won't be able to use.
36:43
Speaker 1: The app YEP.
36:45
Speaker 8: So right now there's three moving pieces here. So one
36:49
Speaker 8: will Congress pass this, and I think there. The answer
36:52
Speaker 8: is very likely yes, and that's likely to happen today
36:55
Speaker 8: or tomorrow. President Biden will sign it. Then there are
36:58
Speaker 8: two other moving parts. One can TikTok win in the
37:01
Speaker 8: courts and stop this with the First Amendment challenge. I
37:06
Speaker 8: don't give them very good odds to do that. I
37:08
Speaker 8: give them only about a thirty percent chance to succeed
37:11
Speaker 8: with the court challenge. Then the last moving pieces can
37:15
Speaker 8: there be a divestiture of the app. And that one's
37:19
Speaker 8: sort of the big wild card, because what we don't
37:23
Speaker 8: know is whether China will permit a divestiture or not.
37:29
Speaker 8: It has signaled that it won't approve something like that.
37:31
Speaker 8: So even if you put that at a toss up
37:34
Speaker 8: fifty percent and you say it's you know, TikTok has
37:37
Speaker 8: a thirty percent chance in the courts, you know, there's
37:41
Speaker 8: a fairly good chance that the app does disappear in
37:46
Speaker 8: the next year.
37:48
Speaker 3: How do you ban an app?
37:51
Speaker 8: How do you ban technically? Yeah, so, technically the approach
37:55
Speaker 8: here is to prevent it from being carried in app stores.
38:00
Speaker 8: It can't be updated and made accessible to users in
38:06
Speaker 8: the United States, both in the app stores, and then
38:08
Speaker 8: it can't be hosted. So this app has to sit
38:11
Speaker 8: on a server somewhere that in a way that makes
38:14
Speaker 8: it accessible. And the the approach in this legislation is
38:17
Speaker 8: that if any company makes it accessible through web hosting
38:21
Speaker 8: or through app store access, that they are subject to
38:25
Speaker 8: significant penalties and fines in a case brought by the FTC.
38:30
Speaker 8: So that's the enforcement mechanism here. It's not directly against
38:33
Speaker 8: bytenance or TikTok, it's against those that would would make
38:37
Speaker 8: the app available.
38:38
Speaker 2: Well, can I just have some server in China or
38:41
Speaker 2: somewhere else, you know, overseas do it?
38:45
Speaker 8: That might be the workaround. Maybe they'll they'll try to
38:48
Speaker 8: do something like that, and then then you have a
38:50
Speaker 8: question of how how how well the US could it
38:53
Speaker 8: could enforce enforce that. But I guess that that would
38:58
Speaker 8: be maybe the next move if if everything else is
39:03
Speaker 8: failing for TikTok.
39:04
Speaker 2: All right, So, but the bottom line is for you
39:06
Speaker 2: lawyer types, you think this is going to go to
39:08
Speaker 2: the Supreme Court.
39:10
Speaker 8: Well, the d C Circuit gets it first, and I
39:13
Speaker 8: think there's a decent chance that the DC Circuit is
39:17
Speaker 8: the final word. I think if the d C Circuit
39:21
Speaker 8: were to rule for TikTok. And to say that there
39:23
Speaker 8: is a First Amendment challenge that's really going to interest
39:26
Speaker 8: the Supreme Court. I think that would motivate the Supreme
39:28
Speaker 8: Court to take take a look at it. If the
39:31
Speaker 8: d C Circuit issues a definitive ruling upholding Congress's law here,
39:36
Speaker 8: maybe the Supreme Court says, you know, look, the d
39:38
Speaker 8: C Circuit got it right, we don't need to take
39:40
Speaker 8: that up.
39:40
Speaker 2: Okay, all right, good stuff. That's what we like talking
39:42
Speaker 2: to you. We get it straight, the straight poop and
39:44
Speaker 2: all the legal stuff. He gives you, like percentages of
39:46
Speaker 2: what can actually happen.
39:47
Speaker 6: We love.
39:47
Speaker 2: That's why we love talking to Matt schelling Helme. He's
39:50
Speaker 2: one of those people that doesn't carry cash. That's the big,
39:53
Speaker 2: big mark against met schell helm Otherwise he's a great
39:55
Speaker 2: attorney and a great litigation analyst for Bloomberg Intelligence. But
39:58
Speaker 2: he's like the kids, they don't carry cash.
40:01
Speaker 4: You know, we don't need How do you buy how
40:02
Speaker 4: do you buy a truck outside the office. They took
40:05
Speaker 4: Apple pay.
40:06
Speaker 2: They took applepay.
40:07
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40:11
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40:15
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