Apple -  Perfect Storm

Apple - Perfect Storm

by Pininvest Analysis

Apple providers on

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Ask Siri, Apple's 'digital assistant' about its origin and the answer will be '“Like it says on the box... I was designed by Apple in California

But looking another way, Apple iPhone 7 series contributed approx. 4.4%  to the US deficit with China in 2017 ($15.7 billion) and 22% of all imported cell phones and household goods, according to Reuters

Indeed, the sizable trade imbalance between China and the US is related in large parts to electronics and tech imports put together in China, even though the components may originate all over the world

As for Apple, it is hard to determine what parts are actually produced in China (most international suppliers do rely on Chinese manufacturing facilities), but the assembly of the phones in China is estimated at only 3 to 6% of manufacturing costs

Flag bearer of globalisation, proud of jobs created in China (and across the world) while delivering value to its international customer base, Apple finds itself wholly unprepared in the cross-hairs of a political backlash

With headwinds hardly expected to abate, a new course will be hard to set, and certainly costly




A perfect storm is hitting Apple 

Battening down the hatches, tacking the sails and just praying to get through unscathed is hardly easy for a nimble craft heading through heavy weather

On the bridge of a super tanker or, more appropriatetely to drive home the complexity of Apple's challenge, on the bridge of the USS Gerald Ford, the world's largest aircraft carrier, decisions - and the potential harm they may cause unwittingly - mutate by an order of magnitude

USS Gerald Ford - credit US Navy video

Side-stepping deftly the trade tensions brewing between China and the US until now, Apple has, since January '19, activated a damage-control mode to protect its market share in China

Apple started off the year by warning of a severe slowdown in Chinese iPhone sales, promoted only a year ago as the shining light in an otherwise maturing market (still 18% of total sales)

As we reported in 'a Cultural Revolution', global smartphone grew by 1.2% in 2018 with 1.6 billion units sold, but Apple lost 0.6% for the full year (and Samsung fared worse with a 1.9% decline)

That same year, the Chinese phone makers (Huawei, Xiaomi and Oppo) all increased their market share

In the last quarter of 2018 (vs Q4-2017), Apple suffered most with a loss of 9 million phones, while Huawei sold 16.4 million more phones, increasing its global market share from 10% to 15%


Thinking ahead from the bridge

The adversarial trade 'engagement' between the US and China rumbles on (as 'of June '19)

Not yet a full-blown 'war', but certainly the testing ground of each other's determination, the conflict has seen the fundamental stakes of each country growing apart

While the US and China may still find some overlap in their national interests to claim victory, this small patch of commonality is bound to be tested sooner or later

All of which makes the speeches of Tim Cook, Apple's CEO, made in China in 2017 and in  2018, vaunting 'globalization as one of the greatest human achievements', and stating forcefully 'countries that embrace openness, that embrace trade, that embrace diversity are the countries that do exceptionall', still true but slightly uncomfortabe reading and, with hindsight, rather disingeneous

Taking the long view, the outcome is hardly the stable ground on which to lay out Apple's strategies, 3 to 5 years ahead (and further)


What geopolitics put under unforgiving glare for all to see, what could have been obvious but was not, is the singularity of Apple's supply chain

More often than not referred to as a unique model of corporate efficiency,

  • ruthless when Apple is bearing down on suppliers who have not paced their technological advance with Apple, or who are simply disposable
  • imposing its will on providers who become 'price-takers' as their sales come to depend on a single client, Apple
  • demanding exclusivities and supply guarantees on the dot, while letting the supplier assume the risk of poor sales

the company has been wearing as a badge of honor that value creation was - and still is - concentrated in one place only, Cupertino


Clockwork stalling ?

Trade tensions have laid bare the weakness of this supply chain success story, willingly overlooked in the light of the company's undisputable growth story and profitability

credit Thomas Vogle - Unsplash
  • running like clockwork on the tightest schedules possible, the discipline up and down the supply chain had to be on a par with a degree of imperviousness to the unforeseeable 
  • in our view, and this comment remains a personal observation, a degree of flexibility has to be built in the best conceived supply chain - a delicate balance precisely because it is a matter of shades and nuance

Relying on Foxconn, listed as Hon Hai   production facilities in China for - as far as is known - the entirety of its product range, the assemby lines are the crowning achievement of the supply chain, a success shared by Apple, its Chinese contractor and, perhaps most significantly, by the Pearl River Delta complex of hi-tech electronics sub-contractors

  • It is fair to assume that the industrial concept devised by Apple and by its main architect, Mr Cook himself, was so tightly bound, and so effective, as to exclude options of source diversification, which would have entailed still more complexity (and cost)
  • Until very recently, diversification has not been on the table (at least publicly) but, according to company communications, Apple has mandated its Chinese partner in January '19 to explore alternative factory locations, in India (paywall) and Vietnam among others

Justifying its reliance on Foxconn by the complexity of the supply chain, Apple probably acknowledges the relative weakness of the company's negotiating position

  • Its sizable contribution to the Chinese economy, with jobs created or supported running into the millions (4.8 million jobs according to a 2017 press release), of which 1.2 million people at Foxconn's factories, will secure breathing space and leverage for the company in the short term
  • By adding two new R&D centers in in Shanghai and in Suzhou, on top of the existing research facility of Beijing, a total commitment of $500 million,  an announcement made in March '17 (paywall), the company has been intent to emphasize ts contribution on the Chinese tech scene

However, the medium term, for which decisions have to be taken today, remains very much clouded in uncertainty and Apple's lack of strategic alternatives will not have gone unnoticed in China

credit Edi Libedinsky Unsplash

In so many words, caught in the whirlwind of geopolitics, Apple has been dealt a fairly weak hand, shielded by its large contribution to the Chinese economy in the short term, but with a keen awareness that prudence dictates diversification

And it is not legal challenges in the US and in Europe make uncertain times a bit more uncertain, as we will show  in 'Home spun legalese'