Apple has a big China problem that's 22 years in the making
- Apple is celebrating the release of its iPhone 15, but trouble is growing for the company.
- It has become dependent on China, and that's starting to cause problems.
This week, Apple is publicly celebrating the release of the iPhone 15, but behind the scenes, the company has a growing problem in China that could cost it billions.
As Apple and its flagship iPhone have grown to global dominance over the past two decades, much of that has come with the help of China. Consider the following:
Despite recent efforts to diversify, over 95% of iPhones, AirPods, Macs, and iPads are still made in China.
In the second quarter of this year, more iPhones were sold in China (24%) than in any other country, including the US (21%).
Last year, about 19% of Apple's total revenue came from China ($74 billion).
But as tensions rise between the US and China, Apple may be stuck in the middle.
Recently, The Wall Street Journal reported that China had barred government employees from using iPhones at work or even bringing them to the office. While the ban's direct impact on sales will likely be minimal, workers fear other employers will follow suit. Some have already said their companies are cracking down on iPhones. While we don't know what the extent of the ban will be, it's just one of the problems Apple is facing in China.
Apple's dependency on China goes back 2 decades
China was admitted to the World Trade Organization in 2001. Trade between the US and China has exploded in the 22 years since, thanks in large part to China's critical place in global supply chains.
And Apple enjoyed the ride.
The same year China joined the WTO, Apple began manufacturing in China. Since then, China has spent billions on roads, factories, power plants, employee recruitment, and housing, all to help create Apple's supply chain.
While adding China to the WTO did help make the country a bigger economic power, the problem for Apple is now the rest of the intentions of that move have backfired, the investment strategist Luke Lloyd of Strategic Wealth Partners said on Fox Business' "Varney & Co."
"We wanted to make China more Western, so we opened up trade and tried to push our democratic and capitalistic ideals on them," Lloyd told the host Stuart Varney. "Instead, all we did was create massive amounts of wealth for them, and they used that wealth to propagate their socialistic ideas instead of adopting capitalism and democracy for themselves."
In other words, instead of empowering the Chinese people as hoped, increased global investment, especially from the US, has empowered the country's Communist Party.
The Chinese economy is putting Apple in a tough spot
While many had been predicting that China would surpass the US as the top global economic superpower, the country has recently hit some bumps in the road, putting that ascension into doubt.
Chinese stocks have fallen this year, and investors are pulling billions out.
The yuan has plunged 5% this year over economic concerns.
Youth unemployment has reached a record high of over 20%.
China's real-estate market is in shambles.
Things are so bad some are wondering if the Chinese economy is heading toward a financial crash. At the very least, the country is not catching the US anytime soon.
China is taking out its economic frustration on Apple
While some of China's economic woes are of its own doing, such as its troubled real-estate market and overspending on infrastructure that's not being used, the US has tried to reel China in.
In 2009, President Barack Obama got tough and slapped tariffs on China. President Donald Trump was even tougher, which led to a trade war. President Joe Biden has continued playing hardball with various sanctions, hoping, in part, to restrict Chinese access to semiconductor tech.
China has taken several steps that appear to be in retaliation to the latest US moves, including the iPhone ban.
While there are unfounded fears among the Chinese that the US government can use iPhones to spy on the country, the more-logical motive is that China is once again trying to reduce its dependency on foreign products, pushing more of its citizens to purchase Chinese phones and further boosting its economy.
Apple turns its flirtatious eye to India
As problems continue to mount in China, Apple is making a — perhaps long-overdue — shift to become less dependent on China.
India caught Apple CEO Tim Cook's eye, in part because of the country's booming potential. A recent Goldman Sachs report projected India's economy would surpass the US by 2075.
"I see a lot of similarities to where China was several years ago," Cook told investors in 2017. "And so I'm very, very bullish and very, very optimistic about India."
This came three years after Apple was warned by its own people that China would take a nationalist and authoritarian turn under its leader, Xi Jinping.
And while Cook was eyeing India in 2017, it was only earlier this year that Apple opened its first two stores in India. Apple is also increasing its production of iPhones in India but is still miles behind China in terms of both volume and speed.
While it is impossible to predict how much damage the ban on iPhones in China's government offices will cause, it's just one problem. There's also the fear that the ban could grow into something similar to what happened to Micron, which forecast half of its revenue in China was at stake.
Apple can't get a bigger foot in India soon enough.