Apple shares are down 3.34% just this morning and the company is worth almost $200 billion less than earlier this week after two body blows from China. Yesterday China banned iPhones in government offices, and today news broke that China is planning to expand that ban to government-backed agencies and state companies.
When superpowers collide, there’s collateral damage.
In part this move is an attempt to rid sensitive Chinese government and companies of foreign technology, just like the U.S. and Europe have limited Huawei’s involvement in telecommunication networks. Another piece of the puzzle is U.S. restrictions on high-tech computer chip sales to China as well as chip-making equipment from the Dutch global leader ASML, whose photolithography machines are used to produce sophisticated computer chips.
Yet another concern for the Chinese government is that Apple is outcompeting local smartphone vendors in grabbing an outsized chunk of the value of China’s domestic market. The other vendors sell more units, but thanks to its big-ticket device prices, Apple makes more money.
The big problem for Apple with regard to a deteriorating relationship with China is that it sold $74 billion worth of iPhones, mostly, to what it calls “Greater China” in fiscal year 2022. ( Greater China includes mainland China, Hong Kong, Macau, Taiwan and Tibet.) That number was $68 billion in 2021, and could be much higher in 2023.
Those results make China Apple’s third most lucrative territory, after the Americas ($170 billion in fiscal 2022) and Europe ($95 billion in 2022). China, in effect, accounts for nearly 20% of Apple’s global revenue.
Now all of that is at risk.
The lack of sales to people in government and government-related jobs is one thing, but Apple’s brand in China could as a result be shifting to be one that is in ill favor with the ruling elite, or even perhaps a tool of western enemies. And that could result in much greater sales drops to the wider population.
Slumping sales is one thing, but China is a significantly bigger problem for Apple. Despite recent attempts to diversify manufacturing away from China, including moving some production to India, and urging chief supplier Foxconn to invest in production in the U.S., Vietnam, and Mexico, experts say decoupling from China could take years if it’s even possible at all. Just one plant in Zhengzhou reportedly makes 85% of all iPhone Pro models—the most expensive and most profitable smartphones Apple sells—making Apple almost as much a Chinese company as an American company, Cornell University professor Eli Friedman told CNN.
In a sense, China also needs Apple. Hundreds of thousands of workers are employed building products for the global markets with Apple’s brand on them, bringing billions of dollars of value to the Chinese economy.
The Chinese government, however, is often prepared to take temporary tactical losses in hope of larger strategic gains.
Ultimately, as long as the simmering economic war between the U.S. and China continues—with Europe to some extent on the U.S. side—Apple and China will exist in a complex and challenging relationship. And that means Apple revenue could suffer long-term negative impact.
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