Apple is a Chinese company

Jay Newman was a senior portfolio manager at Elliott Management.

With Apple stock near an all-time high, it’s worth asking how it got there — and how long that can last. The world’s most valuable company makes great products, but it may turn out that the biggest driver of its share price has been the close relationship CEO Tim Cook has cultivated with China.

Entente cordiale with the Chinese Communist party affords Apple a charmed existence when it comes to manufacturing and selling products in China. But scary data points keep popping up.

Just in recent weeks, China has sanctioned Lockheed Martin and Raytheon; begun a probe of Micron; raided the due diligence firm Mintz Group and arrested some of its staff; detained 17 Japanese businessmen including a senior member of Astellas Pharma; levied a record fine against Deloitte, and amended its espionage law to cover ordinary business activities.

Notwithstanding all that, during a recent visit to The Middle Kingdom, Tim Cook praised Apple’s “symbiotic” relationship.

“We could not be more excited,” Cook said at the China Development Forum in Beijing, the country’s version of Davos, which Beijing is holding offline for the first time since the pandemic began. “Apple and China . . . grew together and so this has been a symbiotic kind of relationship.”

Chinese hosts repaid him by staging a standing ovation at Apple’s Beijing flagship store — one of 54. But, to remind him who’s boss, Weibo, China’s state-controlled version of Twitter, juxtaposed his warm welcome with videos of Shou Zi Chew, head of TikTok, being mauled by American lawmakers.

Even Hua Chunying, China’s assistant foreign minister, got in on it:

Which country is more open toward foreign businesses? pic.twitter.com/EnqJVmx87m

— Hua Chunying 华春莹 (@SpokespersonCHN) March 27, 2023

As Patrick McGee over at mainFT has reported, Cook has embedded Apple ever deeper in China over the past 20 years. After inking a secretive 2016 agreement to invest $275bn in China’s economy, workforce, and technological capabilities, the iPhone became a best-seller. In reality, Apple is now as much a Chinese company as it is American.

Almost a fifth of its revenue comes from sales in China, and operating profits in greater China — Hong Kong, Macau, Taiwan, and the mainland — topped $31.2bn in 2022. That’s a hefty chunk of Apple’s earnings (though given the near impossibility of getting large sums out of China, those profits may not even be money good).

Apple provides more than cash and intellectual property. Relations are enhanced by the credibility Apple’s brand bestows on a repressive, autocratic state, and the (cough) flexibility it demonstrates in supporting CCP objectives. When it comes right down to it, Apple just can’t say no.

Consider:

Cook talks about civil liberties and privacy: laudable sentiments irrelevant in China, where Apple has no choice but to deliver the data of its Chinese customers to the government. Unwillingly, perhaps, Apple has become a facilitator of surveillance and government censorship.

These complexities aren’t lost on management. Apple is tiptoeing — frantically — towards the exit: moving production of iPhones to India, AirPods to Vietnam, Macs to Malaysia and Ireland — and assembling hundreds of employees into “tiger teams” to shift its supply chain.

But these efforts seem futile: Apple likely will never be able to completely exit China. Even small shifts risk retaliation by Chinese overlords who might retaliate by turning Chinese consumers against Apple products. Will China — which has contributed hugely to Apple’s success — allow it to slink away? Why would they? These are problems Apple made: for the foreseeable, Apple has no choice but to do what China wants.

Which raises obvious questions: Is the SEC paying attention? What about its auditors? Why are investors sanguine? They’ve all been warned by Doug Guthrie and others. Proposal No. 6 on Apple’s 2023 Proxy Ballot describes the problems:

1. Doing business with Communist China presents a unique, substantial, pressing risk that warrants dedicated reporting.

2. The potential damage from Apple’s reliance on Communist China affects every aspect of its business. These China-specific risks should be assessed and reported more comprehensively.

3. Existing disclosures are fragmented, incomplete, and vague. As a result, these disclosures are inadequate to assess business risks related to Communist China.

Instead of warning investors about risky investment in America’s most valuable company, the SEC warns investors about weak disclosures by Chinese companies. If the SEC paid attention, it might conclude that Apple is a Chinese company in all but domicile. And, while Apple may present the most obvious problem, dozens of other “American” companies face similar questions.

Like it or not, investment in Apple is a geopolitical bet, the contemporary, corporate, Great Powers version of Greek tragedy: Apple as a toy of the gods, squeezed between the CCP and American interests.

As Colonels Qiao Liang and Wang Xiangsui, PLA strategists and authors of Unrestricted Warfare, observe, wars shouldn’t be fought kinetically when economic leverage exerts more power over an opponent. The colonels noted that every asset is a weapon. The CCP controls the factories and workforce that make Apple products, it controls access to China’s market, and dominates Apple’s global supply chain. For the CCP, an asset as valuable as Apple is a potent weapon indeed.

In the race against time, Apple’s scramble to reduce dependence on China won’t beat the CCP’s power to erase most of its value with the stroke of a pen. Investors, take note.

Further listening:

– Why Apple can’t leave China