To The Moon

Relations between the USA and China have grown increasingly more tense. China’s economy is in trouble. The Chinese communist party is cracking down on private businesses there. And Apple is in their sights. We have long been concerned about what happens to Apple when China decides to punish the company as part of their economic and strategic fight against the US. The most recent chapter in this story is that China is not letting government workers bring their iPhones to work much like the US has banned Tic Toc from the phones of US government workers. Apple’s stock took a big hit. Has Apple’s day of reckoning arrived?

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Apple in China

Over a twenty year span Apple built a best of class manufacturing and assembly operation in “greater China” which includes mainland China, Hong Kong, and Taiwan. Their operation there includes thousands of business partners. At the same time it has opened forty Apple stores on the mainland. It gets a fifth of its global business from the “greater China” region. As China cranks up pressure on tech companies, Apple included, Apple’s CEO Tim Cook went to China to try to smooth over relations with the government. In the meantime, Apple is working to beef up operations in Vietnam and India.

Trump Trade War and Apple in China

First with the Trump trade war China threatened to make life difficult for Apple. What likely kept them from following through and shutting down Apple’s operations was the number of jobs that China would lose with Apple directly and throughout its supply chain. Then if China banned iPhones and the rest of Apple products in the country it would put a bit dent in Apple’s profits.

Covid Pandemic and Apple in China

The next problem for Apple in China was the Covid-19 pandemic and the unending shutdowns. That likely speeded up Apple’s efforts to move more production out of China. However, Apple is nowhere near where it needs to be if China shuts them down totally. Over the long term Apple appears to be hedging its China risks by moving more production capacity out of the country but it took twenty years to get their operations in China to the point where they are today. It could well take them twenty more years to replicate this outside of China.

The Market Cares When it Cares

This realization that Apple has serious issues in China hit the market recently with China’s ban in iPhones for government workers. Apple’s stock fell on successive days and is now 8.6% down from just over a month ago. What rattled the market was news of an expansion of the iPhone ban in China from use in sensitive government agencies to state companies and government-backed agencies. Not only did Apple take a hit but the entire tech sector suffered as investors worried about China extending its control measures across more tech businesses.

Downside for China of Punishing Apple

China is having problems with its economy and employment. Something like 20% of people under age 25 are unemployed. While 14,000 people in China are Apple employees, there are a million and a half in its supply chain throughout the country. This is probably why China has not totally shut Apple down before. However, what matters to the Chinese Communist Party is control. To the extent that they can maintain economic health it makes the job of governing easier. However, nothing will get in the way of control by the current strongman Xi. It could mean shutting down Apple if it came to that.

If it comes to down to a disaster for Apple in China, you heard it first here at Top Gun Options. We pay attention to events far and wide which can come around and affect the markets and options trading. Then we can potentially print money in our trading as the market wakes up to problems that have been brewing for years.

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Originally published at https://topgunoptions.com on September 8, 2023.