Apple faces big risks over its heavy reliance on communist China

Bank of America indicated Tuesday that Apple is facing significant risk over its heavy reliance on China. This risk appears to be compounded by devolving relations between the communist nation and both the U.S. and Taiwan.

Wamsi Mohan and other Bank of America analysts noted that Apple's risks center around policy, production, and domestic demand in China, reported Seeking Alpha.

"Although assembly is moving to other regions, the supplier base remains largely in China, which makes it hard to move all elements out of China," said the BoA analysts. "Over time we expect Apple to incorporate more vertical integration and system on chip designs to enable higher automation in assembly."

The Financial Times reported that notwithstanding Apple's recent efforts to develop a presence in other Asian nations such as Vietnam and India, China still accounts for roughly 20% of the California-headquartered company's revenue and is where over 95% of Apple's iPhones, AirPods, Macs, and iPads are manufactured.

"China could create many headwinds including around production, demand, competition, etc," continued the analysts. "While competitive risk is easier to quantify, the other risks can be very fluid and would need to continue to be managed well."

Last month, such headwinds — orders from the Chinese regime for workers to stop using iPhones for work — drove down Apple's market value by $200 billion. This week, Apple was once again reminded of the downside of being reliant upon America's temperamental adversary.

Foxconn is one of Apple's biggest suppliers, assembling roughly 70% of the company's phones. The Chinese communist regime reportedly launched investigations into the company concerning tax and land-used investigations across China, reported the Wall Street Journal.

Communist tax authorities are looking into the company's facilities in Guangdong province and eastern Jiangsu. Natural resource authorities are investigating Foxconn's land use in Henan and Hubei provinces.

The company, officially registered as Hon Hai Precision Industry Co. Ltd., said in a statement Sunday, "Legal compliance everywhere we operate around the world is a fundamental principle of Hon Hai Technology Group (Foxconn). We will actively cooperate with the relevant units on the related work and operations," reported CNBC.

These investigations come just months after multibillionaire Foxconn founder Terry Gou announced he would run in Taiwan's 2024 presidential elections. Gou resigned from Foxconn's board in September.

Even though Gou supports the the communist regime and its preferred one-China framework, there has been some speculation that China is trying to pressure him out of the election, as his candidacy might drain votes from pro-Beijing candidates and benefit Taiwanese Vice President Lai Ching-te — who has reportedly been called a "secessionist" by the Chinese regime.

A spokesman for Gou's campaign told Voice of America, "The tax probe Foxconn faces in China has nothing to do with us."

Lai, however, intimated that China is putting pressure on Taiwanese companies during an election.

Axios indicated the investigations might instead constitute a warning to America.

Chris Miller, associate professor of international history at Tufts University, said, "This is a shot across the bow — a message to Foxconn but also to Foxconn's customers, alerting them that if relations between China and the U.S. get worse, these companies could incur costs."

"Any investigation of a major foreign investor or foreign company in China would at least have to have political approval to move forward," continued Miller. "And we've seen a trend over the past few months of investigations that are linked to political disputes."

Apple is cognizant of the risk to profit of worsening Sino-American relations.

"If disputes and conflicts further escalate in the future, actions by governments in response could be significantly more severe and restrictive and could materially adversely affect the Company’s business," the company wrote in its 2022 annual report. "Political uncertainty surrounding trade and other international disputes could also have a negative effect on consumer confidence and spending, which could adversely affect the Company’s business."

Regardless of whom Beijing intends to pressure, Apple finds itself caught in the middle, heavily reliant upon a political bargaining chip.

"Foxconn is a key part of Apple’s supply chain in China," Kenneth Jarrett, senior adviser for the corporate advisory firm Albright Stonebridge, told the Wall Street Journal. "Anything that jeopardizes Foxconn's standing in China, even if it has nothing to do with Apple, becomes a headache."

It's presently unclear whether Apple CEO Tim Cook's trip to China last week and apparent appeasement efforts of late will have been enough to smooth things over with the regime. Even if continued concessions to Beijing help Apple in the short run, American efforts to decouple from the communist nation will likely complicate things for the company.

"We are somehow or other barreling down a road of trying to disengage with China economically, which is not easy to do, and Apple will be the one most hurt," Walter Isaacson, the biographer of Apple cofounder Seve Jobs, told CNBC's "Squawk Box" Tuesday. "Most companies are trying to decrease their dependence on China, but it'll be the hardest for Apple to do that."

"We're going to have to try to strike some equilibrium between total disengagement, which in my mind is not going to work, and total dependence, which we've been a little bit too dependent on them," added Isaacson.

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