China’s protests made ‘enough of impact on party apparatus’: Analyst

Constellation Research Principal Analyst and Founder R “Ray” Wang joins Yahoo Finance Live to assess the impact China's protests had on the country's COVID-19 policy and companies like Tesla and Apple, while also talking about the tech sector and supply chains.

Video transcript

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SEANA SMITH: Let's take a look at Tesla because it is a huge mover to the downside. New reports today saying that Tesla is planning to cut production at its Shanghai facility by about 20%. We're looking at losses of nearly 7% right now. Now, Tesla has been pushing back on those reports, saying that that is simply untrue. Here to discuss it is Ray Wang, Constellation Research Principal Analyst and Founder. Ray, it's great to have you in studio. Certainly judging by the Street's reaction, a huge concern here if Tesla is, in fact, cutting production. They're denying it. What's your take?

RAY WANG: Well, I look at it this way. The market is growing. China reopen is actually happening. And if you look at their ability to actually crank out more than 100,000 units per month, they're set to go 1.2 to 1.5 million out of that gigafactory. If you look at the economic conditions, I think they're not going to be cutting back, right? And so even if there's a report that they're cutting back, it may have been before when they thought the lockdowns were going to be extended further out. All signs look like they're opening up. And I think that's why Tesla will probably-- may have doubled back and said, we're not going to be cutting back.

DAVE BRIGGS: Want to circle back to Tesla. But broadly speaking, are we to believe that Xi Jinping is listening to the people of China and reopening as a result? I'm skeptical.

RAY WANG: No, it's a great question. And I think that the protests made enough of an impact on the party apparatus. You noticed in every single province, they pretty much lessened their restrictions. They started to create some openings. Meanwhile, they're jailing all the protesters, right? So that's still going on. But I think the message was sent that, hey, we do need to open up. My concern there is, China does not have the infrastructure, right? They don't have the beds. They don't have the hospitals and health care network.

DAVE BRIGGS: They don't have the vaccine either.

RAY WANG: So if they do open-- and they haven't figured out how to copy the vaccine yet.

SEANA SMITH: Right. When you take a look at Tesla, where it's trading today after this drop, right around 181 a share. You have a price target on them right around 200 bucks a share. What's it going to take to get us there? And do you-- are you confident Tesla's going to have that momentum? Because we're only talking about Tesla, but of course, the distraction with Twitter has some Tesla investors a little bit concerned.

RAY WANG: I'm not worried about Elon. That guy can multitask. He's got massive ADD. He's on the spectrum, and he's going after everything at the same time.

SEANA SMITH: But you don't think he has too much on his plate right now?

RAY WANG: Not at all. He's got great lieutenants that back him up at SpaceX, back him up at Tesla, Boring, and Neuralink. You don't have to worry about that. The real issue is the subsidies that China provides for the EVs expire at the end of the year, and that could be the pullback reason. But if you see that race between BYD and Tesla, it is a huge race, right? They're cranking neck and neck on one and two in China. And China right now is something like 35% plug-in and 23% pure electric-- I mean, hybrid, right? And that number is only growing. So almost 60% of their marketplace is electric or hybrid.

DAVE BRIGGS: And that stock is down 54% year-to-date. It has been a long slide. Check out that price. Moving to another company as related to their production in China is Apple, said to be moving some of its production out of China to India and to Vietnam. Why? And what obstacles remain in doing so?

RAY WANG: Oh, that is a hard process. To get the China scale manufacturing is, like, impossible. They're talking 200, 300 million units, right, of iPhones that are being cranked out in that supply chain. So that's at least eight years before they can do anything. But that is 18% of their--

DAVE BRIGGS: So eight years before they can do anything?

RAY WANG: Well, eight years before they can move the production off, right? And even if they do, it might be 10% or 20% of their production to be able to get that supply chain out. But there'll be China production for the China market and non-China production for everybody else. And that's where you're seeing Vietnam, India, and Thailand come in for both Macs and iPhones as potential areas.

SEANA SMITH: Ray, does it make sense to you to diversify the supply chain, not to be so reliant on China for its manufacturing of its iPhone?

RAY WANG: It definitely does. What we're actually seeing is massive deglobalization of supply chains, friend-foe kind of scenarios. The globalization benefits that we've gotten over the last 20 years are probably going to be erased in the next 10. Whether it's Teslas, whether it's Apple, whether it's pharmaceuticals, you're going to see all those kind of things pop back. High-tech, pharmaceuticals, and space and aerospace are the areas we're going to see a lot of the pullback in supply chains.

DAVE BRIGGS: Foxconn said revenue down 11% in November year over year. What is the investor story if, in fact, they are able to move these supply chains?

RAY WANG: Well, it's going to have to be more expensive, right? To be able to get those labor and supply chains, it's like doubling down on effort. China scale is really cost-effective. But labor costs in China are going up, right, and there's an aging population in China. So in the long run, it is better to put something in India, Vietnam, where the populations are much younger in age.

SEANA SMITH: And, Ray, you don't just track Tesla and Apple, you really take a look at the entire sector. Specifically what we're seeing in tech, we have certainly seen a number of these larger companies under a tremendous amount of pressure throughout all of 2022. Do you think that tide is going to turn at all in 2023 in terms of what you are hearing from insights of some of those executive suites?

RAY WANG: The problem is the macro perspective. With interest rates so high, I mean, look, the IPO market sucked this year. It was so bad, right? If you look at the tech IPOs, that was in bad shape. If you look at revenues and revenue forecasts, they're down a little bit. They're still growing for the most part. But half the tech companies reported lower guidance, and the other half held guidance. And you're starting to see that pressure happen, especially in cloud stocks, right?

Just came back from Amazon Reinvent, and you can see the tension there. People are trying to figure out how to consolidate cloud spend. They're trying to figure out how to get the most out of their AI and automation investments. But there's a lot of investment going in analytics, automation, and AI.

DAVE BRIGGS: You surveyed chief digital officers in regard to spending, hiring, and of course, asked them at the end their outlook for next year. What'd you find?

RAY WANG: Oh, my god, this is crazy. We surveyed this Constellation Research CXO business confidence survey. We asked, how's spending going to look? Going up. How does hiring look? It's going up. Where do you think revenues are going to happen? It's going up. This was majority. Like, 55% to 60% all said that. And I said, where are you investing? Analytics, automation, AI, and cloud. And then we asked that last question, just like and NPS. Do you think 2023 will be better than 2022? And the answer, a resounding no. Two out of three said no. So we'll see what happens.

SEANA SMITH: So then why would they be hiring? Because, I mean, certainly, we contrast that to what we've been hearing in recent months. A number of the larger tech companies have been laying off workers, others suspending most of their hiring right now. It's interesting to compare that to what you're hearing.

RAY WANG: Well, the bottom line is this. We used to have three jobs for every applicant. We're down to two. So the hiring ranks have actually come down. And now we're actually doing real cuts, and that's what's happening. But why are they optimistic? Because in order to get there, they don't have enough people. They don't have enough capability. So they're betting on automation and AI. They're betting on tech spend in order to get there. And they still have the same mandates as they did before.

DAVE BRIGGS: Well, to button up one thing you said, the IPO market, in your words, sucked. It was down 93% from the prior year. Will it bounce back in '23?

RAY WANG: Yes, there's a lot of IPOs on the horizon that are coming that you're going to see. I think people are waiting for the interest rates to stabilize. If the Fed can get to 50%, then to 25% increase in January, I think we're going to actually have some-- 50% in December and 25% in January, I think we might have some hope.

SEANA SMITH: So, Ray, give investors out there, our viewers-- they're looking for ways to invest right now-- your top name or maybe a couple of names in this space heading into the new year.

RAY WANG: I'm still big on the cybersecurity stocks, right? So things like Crowdstrike, Palo Alto Networks, those are still probably going to be good. The area that I actually think-- I think there's a lot of upside in Amazon in the long run, but not now. But I'm still bullish on Apple, and I'm still bullish on Google as well.