Key Questions: How Big of a Bite Into Apple Will China Take?

Introduction

In early September, the Chinese government announced that employees in certain government agencies and state-owned companies would no longer be permitted to use foreign mobile devices for work or at the office. The directive from Beijing comes as the government looks to increase the cybersecurity measures within the country by limiting the number of extraneous products from outside the country.

This development has put foreign companies on alert, as it has the potential to significantly impact many businesses. One of the companies most impacted by this event is Apple, which has done business in China for many years. China’s recent decision to ban foreign mobile devices directly affects Apple’s flagship product, the iPhone. This news had an immediate negative effect on Apple’s market value, but was the reaction in the stock price overdone?

What Does It Mean for Apple?

While the timing, implementation, and enforcement measures of the reported ban have yet to be established, the government ban has the ability to become a headwind to Apple’s revenue. However, the extent of this headwind to revenue is important to quantify. According to the National Bureau of Statistics of China, employees of state-owned companies represent 7.5% of the employed population. Further, China accounted for almost 20% of total iPhone unit sales in 2022. Put together, this would imply a potential 1% revenue impact to Apple, which is significantly less than some investors might conclude from just reading the headlines.

We would also highlight that a similar ban on foreign-branded laptop use, publicized in 2022, permitted two years to comply. If this same timeline were utilized with the ban on mobile devices, Apple would likely have time to adjust and potentially mitigate some potential revenue headwinds.

Notably, there is the possibility that the imposed restriction could spill over into conventional consumer demand, specifically to the family members of the government employees, which could augment the revenue impact to Apple. However, previous restrictions of a similar nature have shown limited evidence of changing consumer buying behavior. Given this, we would not expect the revenue impact to be much greater than the 1% but would note there is some margin of error surrounding this number. Still, the imposed restriction should not have a meaningful impact on Apple’s sales volume and revenue expectations over the near-term. 

Competition on the Rise?

Over the longer-term, a bigger threat to Apple could be increased competition from Apple’s major rival in China: Huawei. The market share battle between Apple and Huawei has been raging since 2015, with market share gains and losses between these two rivals ensuing over the past 8 years. Should the Chinese government’s ban on foreign devices take hold, it could benefit Huawei and pose a new threat to Apple. Additionally, Huawei recently announced the launch of several new, more competitive, high-end smartphones in China. These new launches could lead to increased smartphone competition in China for Apple, slowly hampering demand for Apple products over the long term. While Apple remains a leading player in China’s smartphone market now, the ban does have the potential to grant an edge to Huawei as their products become more competitive.

How Is Apple Impacted by the Complicated US/China Relationship?

Finally, the Chinese ban on iPhones is possibly another step in an escalating trade war with China. In May 2019, the US announced sanctions on Huawei, banning American firms from selling software and equipment to the Chinese company. These sanctions resulted in a decrease in Huawei smartphone sales and allowed Apple to gain share. Thus, the actions taken in China earlier this month could be viewed as retaliation to these earlier actions from the US and representative of the broadening trade war and the increase in geopolitical tensions disturbing global trade.

Apple, the largest company in the S&P 500 Index (and a stock that most investors own either directly or indirectly), will need to continue to adapt to such geopolitical issues. While Apple has a robust and truly global supply chain, the company remains reliant on China as most of the final assembly for many of its products takes place in China.

Positively, Apple employs a significant number of people in China, which could cause China to limit the ban to government employees. According to Apple in 2019, the company provides more than 5 million jobs in China (directly and indirectly). This supports the argument that it would be difficult for the Chinese government to take a more aggressive action against Apple in the future without affecting the Chinese labor market, something it would seemingly be loath to do. Therefore, while the US/China relationship continues to see increased strain, both remain an important part of each other’s economies as well as the global economy as a whole.

Conclusion

While the near-term effects to Apple appear to be minimal, some of the longer-term threats may be significant. Overall, we view the near-term revenue impact on Apple from the recently announced ban of foreign devices by the Chinese government as relatively immaterial, and we do not expect consumer demand to erode substantially. However, Apple will need to carefully navigate increased competition from Huawei, along with ongoing US/Chinese war tensions. While Apple has effectively managed through such difficulties before, investors should continue to monitor the threats and the opportunities to its business caused by an evercomplicated US/China relationship.

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