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Apple’s (NASDAQ:AAPL) over-reliance on cheap Chinese labor has served it well in the last couple of decades since thanks to it the Cupertino tech giant managed to become one of the most valuable companies on Earth. However, the Covid-19 pandemic, the current energy crisis, and the war in Europe signal the end of a globalized era that will lead to further fragmentation of supply chains across the world. Major western companies are already in the process of bringing their supply chains closer to home in order to protect themselves against future geopolitical shocks.
This is not the case with Apple, which except for some minor efforts to outsource some of its production to third countries, continues to be too dependent on China. As a result, there’s a risk that Apple won’t be able to show the same outstanding performance as it did in the past due to the internal and external challenges that China as a whole is already facing or is about to face in the future. This article highlights three main Chinese-related risks that investors can no longer ignore when deciding whether to invest in the company.
The Importance of China to Apple
China is an important country for Apple. If we go through the company’s Q2 results, which were released in April, we’ll see that revenues from the Greater China region accounted for ~19% of the overall revenues, while the operating income in the region accounts for ~27% of the overall operating income during the period. This makes Apple more exposed to the Chinese market than a great number of other western tech companies that also operate in the region.
On top of that, over the last few decades, Apple has also outsourced a large portion of production to the region. While the company manufactures its devices in 30 countries, 42% of all production is in China, and only 16% and 9% are in Japan and the United States, respectively. Thanks to the abundance of cheap labor, established assembly hubs, and governmental support, Apple has greatly benefited from close relationships with China in the past. However, such an over-exposure to one country also has its downsides that have already started to materialize.