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Apple’s China dependency spooks investors after ban


For years, Apple has navigated myriad crises in China, including wage disputes, trade tensions and strident Covid-19 lockdowns, often emerging unscathed after a relatively brief period of uncertainty.

China’s move to ban the use of iPhones by central government employees has spooked some investors, because Beijing’s prioritization of national security over economic concerns appears to be reaching Apple.

While analysts don’t expect the government’s order to significantly curtail Apple’s sales, the episode serves as another marker of the risk that looms as the company tries to manage a delicate relationship with the world’s second-largest economy.

“It is something to be concerned about,” said Dan Morgan, a senior portfolio manager at Apple investor Synovus Trust. “China has been a growth story for Apple.”

Morgan said it would be worrisome if a similar dynamic emerged for Apple that exists in the chip industry, which has suffered a geopolitical tit-for-tat with trade sanctions being imposed by both countries.

Apple’s stock is trading down more than 6% since markets opened on Wednesday, wiping out around $190 billion in market value since the ban was reported Wednesday by The Wall Street Journal. The Nasdaq Composite Index was down only 2% in the same period.

China’s move to limit iPhone use comes at a time of great economic uncertainty in the country. Manufacturing activity has contracted, exports have declined and recent data showed an unusual drop in consumer prices.

The unifying constant in Apple’s previous China-related challenges was a belief among analysts, political leaders, economists and others that the company could ultimately weather the storm because China needs Apple just as much as Apple needs China.

The work of assembling iPhones and other Apple gadgets employs millions of people around the country, and company investors have long taken assurance that the most drastic risks would be unlikely. China’s ban is yet another test of that assumption.

Beijing’s move also comes amid rising nationalism among Chinese consumers that is driving them toward domestic brands. Apple has dominated the premium smartphone market in China recently since China’s Huawei had to pull back following Western sanctions on critical chip technology. But last week, Huawei made a surprising return to fast cellular wireless speeds using homegrown technology, and on Friday started selling two more high-end models that could potentially target the iPhone15 series, which is expected to be released next week.

Close followers of Apple don’t see the government restriction as indicative of an imminent consumer-wide ban on Apple products or a ban on Apple-related manufacturing activity, which would be cataclysmic events for the iPhone maker.

“This is a symptom of a bigger problem with the trade and ideological war going on between China and the U.S.,” said Trip Miller, managing partner at Apple investor Gullane Capital Partners.

Investors and analysts pointed to Tesla as a case study. In 2021, China restricted the use of Tesla vehicles by military staff and employees of certain state-owned companies. Following the restriction for government employees, Tesla’s China business remained steady.

Apple’s decline in the market follows a year of blistering stock growth that made it the world’s first corporation to close with a market value above $3 trillion. Its stock had jumped almost 50% this year before news of the China ban broke, even though the company’s sales have declined for all of its first three fiscal quarters of the year.

China is Apple’s third-largest market, delivering 19% of the company’s total 2022 revenue of $394 billion. The country has also served as its greatest engine of growth. In 2021, Apple’s China business expanded nearly 70%, far faster than its two largest reported regions, the Americas and Europe.

Apple hasn’t commented on the ban, which was communicated to government staff in recent weeks by superiors in workplace chat groups or meetings. It has since been sent to a swath of employees at state-owned companies, including workers in the space and energy industries, who have been told not to bring their iPhones into work or use them for business purposes, according to people familiar with the matter. Chinese officials haven’t made any public comments on the issue.

Voices inside Apple have warned of the risks of dependency on China. As early as 2015, some operations executives suggested that the company relocate assembly of one product to Vietnam to begin a multiyear process of creating a new supply chain outside China, the Journal previously reported. Senior managers at the company rebuffed the idea, seeing it as too difficult an undertaking to seriously move manufacturing out of China.

Since supply-chain disruptions during the pandemic, however, Apple has sought to diversify more manufacturing into nearby countries such as Vietnam and India, the Journal has reported.

Late last year, after riots broke out in a massive iPhone production facility in Zhengzhou as the country imposed harsh Covid-19 restrictions, Apple issued a rare mid-quarter warning that shipments of its then-latest iPhone 14 Pro models would be affected.

But Apple’s roots in China—laid down by Chief Executive Tim Cook himself after he joined the company in 1998—would take years to even begin to disentangle.

Before the pandemic, Cook traveled to China regularly to meet with top officials. When he visited in March, he met Chinese Premier Li Qiang alongside a handful of other foreign business executives, and spoke with Commerce Minister Wang Wentao about stabilizing supply chains, according to a ministry statement.

Apple has worked to appease the Chinese government on security. In 2018, the company began shifting the iCloud accounts of its China users to servers located in the country. It also stored the encryption key of those accounts in China, a step that alarmed security experts at the time.

Apple is likely to try to communicate behind the scenes with the Chinese government to understand the government’s concerns and see how those could be addressed, said Xiaomeng Lu, a director at risk consulting firm Eurasia Group focusing on geopolitics and technology.

“They are very good at this game and Tim Cook is very proactive on this type of thing,” she said.

Dave Sebastian and Yang Jie contributed to this article. 

Write to Aaron Tilley at [email protected] and Yoko Kubota at [email protected]

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.