Apple Stumbles as China Rolls Out Broadened iPhone Bans
The Lede: Apple and its suppliers took a hit on Thursday following reports that China would be expanding its newly announced ban on iPhones in the workplace for central government workers to include those employed in local government as well as state-owned enterprises as tensions between the U.S. and China rise.
What We Know:
- The Chinese government has reportedly expanded its ban on iPhones to local government workers and state-owned companies, a day after it announced that central government employees were forbidden from bringing the devices to work. The notices also apply to the Apple Watch and AirPod wireless earphones as well as some other foreign-branded devices.
- Apple has lost around $200 billion in market capitalization over the past several days. The company’s shares fell 3% Thursday and are down more than 5% for the week.
- This comes after China's Huawei released its latest flagship smartphone model, the Mate 60 Pro, which features an advanced chip that defied foreign expectations due to recent trade restrictions on chip technology. It also comes on the heels of a visit to China by U.S. Commerce Secretary Gina Raimondo.
The Background: Greater China, which includes Taiwan and Hong Kong, accounted for about 19% of total sales in the April-June period this year. In the second quarter of 2023, China surpassed the U.S. for the first time as the largest single market for iPhone. Meanwhile, 90% of Apple’s products are made in China. The Taiwan-based supplier Foxconn runs mega factories in China, which employ more than 1.2 million people. Apple has recently accelerated its plans to move some production to other countries due to political risks and pandemic-era supply chain issues. The company has been looking to neighboring countries including Vietnam, Thailand, and India. Production of the iPhone 14 was moved to India.
Likely Outcomes:
- The U.S. has imposed comparable restrictions on Chinese technology products such as those from Huawei and Tiktok. From this perspective, there may not be a significant blow to Apple’s overall sales and the sell-off in shares is overdone. However, although some Chinese workers use iPhones, often as a secondary device for use outside of the workplace, the same cannot be said for U.S. workers who generally do not use smartphones from Chinese brands. This dynamic may yet produce unforeseen divergences in outcomes.
- Until now, Apple iPhones have remained hugely popular in China, making up about 65% of the market share for premium phones over $600 in the country. The Chinese government could decide at some point to impose stricter bans on iPhones under protectionist measures or for security purposes. This would create a truly bifurcated global smartphone infrastructure where the U.S. and Western countries stick with non-Chinese brands made in alternative countries while Chinese consumers carry only domestic brands.
- The arena of competition would shift exclusively to third countries, especially in the Global South, where consumers may choose smartphones from brands of either side depending on the price-point and specifications. This competition would likely perpetuate the chip rivalry that has already heated up in recent years.
- Apple’s push to diversify away from China will likely accelerate as the market response to this news spooks the company.
Quotables:
“China is critical to Apple‘s success, but Apple is also critical to the Chinese economy. While the potential for a broad decoupling between Apple and China in this multipolar world clearly exists, we don’t believe recent headlines are necessarily foreshadowing this ‘worst case’ scenario.” – Erik Woodring, analyst at Morgan Stanley
"We believe Huawei's activity this time was well prepared and not sudden. It can manage the psychological expectations of the target consumer group before Apple's press conference." – Ivan Lam, analyst at Counterpoint
Good Reads:
Apple suppliers slide on China anxiety, threat from Huawei (Reuters)
Apple’s Market Value Falls By Billions On Worries About China Crackdown (NYT)
China Bans iPhone Use for Government Officials at Work (WSJ)
China reportedly extends iPhone ban to more workers as tensions with US rise (The Guardian)
China Seeks to Broaden iPhone Ban to State Firms, Agencies (Bloomberg)
China expands iPhone ban to local governments, state-owned firms (Nikkei)