Next-Generation Xbox Unveiled as China Production Cuts Loom


Jul. 27 2019, Updated 8:31 a.m. ET

Microsoft (MSFT) has unveiled its next-generation video game console in the midst of contemplating Xbox production cuts in China. The next-generation Xbox console is slated to hit the shelves during the 2020 holiday season. The console will be four times more powerful thanks to an Advanced Micro Devices (AMD) processor, according to Forbes. The unveiling of the new console comes at a time when Sony (SNE) is also preparing to launch a PlayStation 5 console.

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The company is also planning to launch the latest version of the Halo videogame. The launch should strengthen the company’s push for revenues in the gaming industry. Data by Newzoo indicates that consumer spending on games will grow to $180.1 billion by 2021. The increase represents growth of 10.3% between 2017 and 2021.

Next-generation Xbox competition

The unveiling of the next-generation Xbox should help Microsoft counter Google’s (GOOGL) threat even as it considers China production. The search giant has launched a $9.9 a month video game streaming service. Stadia is the new streaming service that Google intends to use to counter video game consoles.

NVIDIA (NVDA) is another company that continues to pile pressure on Microsoft, having launched a cloud video game streaming service. The service allows gamers to stream thousands of games via the NVIDIA Shield TV without a gaming console.

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Electronic Arts (EA) also boasts a cloud-gaming platform poised to pose some competition to the next-generation Xbox. Likewise, the platform allows players to stream video games to any mobile device or computer. The only requirement is an Internet connection. Cloud gaming is becoming the new trend as it allows the streaming of video games to any device of choice.

Players turning to video game streaming services pose a significant danger to the likes of Microsoft, Nintendo (NTDOF), and Sony. The gaming giants have over the years relied on console sales to drive the bottom line. Nintendo had sold 34.7 million units of Nintendo Switch since inception. Sony has sold 91.6 million units of PS4s worldwide as of the end of 2018.

Looming China production cut

Microsoft could shift a substantial amount of its next-generation Xbox production out of China. Likewise, HP (HPQ) and Dell Technologies (DELL) are also planning to reallocate as much as 30% of their Notebooks production. Nikkei Asia Review reports that a trade dispute between the US and China is the trigger behind China production cuts.

The threat of a tariff on China could force Microsoft to move Xbox production to Thailand or Indonesia. Sony, which has sold the most video game console units, is also considering dialing back on Chinese manufacturing. Nintendo, another big player in video game console sales, is looking at Vietnam as a potential production hub.

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Sony Microsoft Nintendo submit joint letter

Sony, Microsoft, and Nintendo have already submitted a joint letter calling for the removal of a certain tariff proposal. According to the companies, the clause, if left unchanged, could trigger a spike in production costs. Consequently, the firms warn video game consoles prices could surge to offset the additional charges.

The companies warn that a 25% tariff hike could result in consumers in the US paying $840 million more on gaming consoles. The companies have also warned of potential ramifications in dialing up production in China.

“The video game console supply chain has developed in China over many years of investment by our companies and our partners. It would cause significant supply chain disruption to shift sourcing entirely to the United States or a third country, and it would increase costs,” the companies wrote.

In addition to punitive tariffs, rising production costs in China are also forcing tech giants to look elsewhere. Dell has already reallocated some of its notebook production to Taiwan, the Philippines, and Vietnam. Amazon (AMZN) is considering moving production of its Kindle e-reader and Echo smart speaker to Vietnam. Google has shifted much of the production of its Nest thermostats and server hardware to Taiwan, according to Bloomberg.

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Surface tablet sales at risk over tariffs

Microsoft, Dell Technologies (DELL), and Hewlett Packard (HPQ) are standing firm against inclusion of laptops on China tariffs. The companies warn that a 25% tariff could trigger up to a 19% increase in prices. The trio accounts for 52% of all notebooks and tablets sold in the US.

Microsoft has been on a tear on the sale of its flagship Surface tablets even as it continues to work on the next-generation Xbox. The impressive run would be at risk on the inclusion of tablets as one of the goods affected by Chinese tariffs. A $120 price increase would put laptop and tablet devices beyond the reach of most consumers.

“These price increases will hit during peak holiday and back-to-school demand seasons, and will directly affect ordinary consumers such as families, students, school systems, and the U.S. Government,” the companies wrote.

China production cut picks up speed

Moving production out of China is slowly becoming a reality. The likes of Microsoft continue to explore ways of limiting the impact of tariffs on laptop and tablet sales. The Surface tablet maker may have to shift production out of China to shield consumers from the impact of tariffs. Its peers in the video game consoles space, Sony and Nintendo, have also hinted at the possibility of dialing back on Chinese production.

Microsoft will not be the first company to reallocate production out of China. GoPro has already commenced production of cameras bound for the US market in Mexico.

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Microsoft targets life science sector to strengthen cloud revenues

Microsoft is one of the most valuable companies with a market cap of more than $1 trillion. Investments in areas of high growth have helped broaden the company’s business empire and in the process, generated significant returns. The company is fresh from seeing the value of its investment in Adaptive Biotechnologies (ADPT) more than triple.

A stake in Adaptive Biotechnologies has opened the door for Microsoft to start testing its cloud infrastructure in the life sciences sector. The opportunity comes at a time when the company is facing stiff competition from Google and Amazon.

Adaptive Biotechnologies is to spend a minimum of $12 million on Microsoft’s Azure over the next seven years. Consequently, the company looks set to be a key driver of the tech giant’s cloud revenues according to CNBC.

“We believe deeply in the potential for this partnership with Adaptive and have made a substantial financial investment in the company,” Peter Lee, Microsoft’s corporate vice president of AI and research, wrote in a blog post.

Tech giants’ strategic investments

Microsoft has made life sciences a focal point of its growth and diversification drive. The company has already confirmed the appointment of Gregory Moore as the vice president of its health technology and alliances. However, it is not the only company looking to provide cloud-computing solutions to the healthcare sector.

Amazon has already made inroads into the healthcare sector with its cloud offerings. The e-commerce giant has begun offering tools that researchers and biotech companies can use to enhance genomics research.

Google has invested in multiple venture groups through early and late-stage deals. Microsoft needs to be more active when it comes to investment in start-ups, especially in the life science sector. This is the only way it will be able to safeguard its edge as the most valuable company in the world.


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