Gene Munster: Biggest risk to Apple is a Chinese consumer boycott

From “Clear Headed Thinking Amidst Tariff Confusion,” a note to Loup Ventures subscribers that landed on my desktop Wednesday:

In the case of Apple… we do have 3 indications that the company is at little risk. First, US policymakers aim to protect US companies, and Apple is the most successful US company in China. Second, Apple has historically avoided tariffs. Third, it is unlikely that China would impose import tariffs on US goods manufactured in China as that would discourage US companies from manufacturing there. Keep in mind, Apple indirectly employs about 1m Chinese workers to assemble its products.

That said, we view Apple’s biggest risk coming from Chinese consumers boycotting Apple products to damage what is a symbol of US success in China. In the Dec-18 quarter, there were calls on China social media to boycott Apple products due to growing trade disputes with the US along with the arrest of Huawei CFO Sabrina Man in Canada (which triggered a boycott of Canada Goose Holdings). This may have played a role in China iPhone units declining 40% y/y in Dec-18 after being up nearly 20% yy in Sep-18 (Loup estimates).

My take: Ay, that’s the rub!

6 Comments

  1. Jerry W Doyle said:

    I disagree respectfully with Gene Munster. The CCP historically has been and remains remarkably risk-averse and guided by its narrow national interest.

    Gene M says Apple indirectly employs about 1m Chinese workers to assemble products. Apple, though, announced in a Chinese press release back in March 2017 that it supports 4.8 million jobs in China. That number is about 2.5 times the number of Apple jobs the company supports in the US. I do not know specifically from where Gene M is getting his figure of 1m and how he is defining that figure, other than employs “indirectly.”

    I also disagree respectfully with Gene Muster that the biggest risk to Apple is a Chinese consumer boycott of Apple products. The CCP is holding a “double-edge” sword if it starts messing with global companies’ supply chains. Some companies already are involved in plans to relocate their supply chains.

    Apple’s supply chain is extremely complex. It will require a lengthy period, but start messing around with Tim Cook’s supply chain and boycotting Apple products then the CCP runs a very high risk of saying goodby to millions of Chinese jobs and saying goodbye to the largest market capitalized company in the world.

    Product fabrication is easy. Supply chaining is “difficult.” Tim Cook understands fully that building a process that delivers products efficiently across the globe involves dozens of suppliers, distributors, port operators, custom brokers, forwarders and carriers in a finely tuned chain operating concert. This not only is difficult, it is extremely hard to duplicate.

    Apple would need time to repatriate or move its supply chain to another geographic area; but, Apple would do it to avoid ever being squeezed again similarly.

    Also, in this global flattening world of outsourcing and offshoring China no longer is setting the global floor for lowest wages that enable global companies to exploit global competitive flattening.

    2
    May 15, 2019
    • David Drinkwater said:

      “Product fabrication is easy.”

      Oh really? Coulda fooled me.

      1
      May 16, 2019
      • Jerry W Doyle said:

        @David Drinkwater: “Product fabrication is easy.”

        Dr. Yossi Sheffi is considered an expert on supply-chain management. Dr. Sheffi is Professor of Engineering Systems at MIT. The following are his words: “…Making stuff — that’s easy. Supply chain, now that is really hard.”

        What Dr. Sheffi is referencing David, or what he is attempting to elucidate for folk who do not understand fully his statement above (and Tim Cook does understand) is that with today’s technology it is difficult to retain intellectual property secrets resulting in easy to reverse-engineering any product and fabricate that product in a short span of days.

        Conversely, building a process such as an efficient supply chain delivering products across the globe involving dozens of suppliers, dozens of distributors, many port operators and customs brokers, forwarders and a multiplicity of components in a finely tuned chain operating supply system is extremely hard to duplicate. No reverse engineering exists here!

        Tim Cook is considered one of the best in establishing an efficient supply chain. As we all know, even Apple has problems delivering Apple products when needed, such as what confronted Angela Ahrendts immediately after assuming her position with Apple where Apple stores lacked sufficient supply of Watches for the Holiday Season with customers standing in line ready to purchase Apple Watches.

        0
        May 16, 2019
  2. John Konopka said:

    This is an odd claim to make. Boycotts are hard to organize and hard to maintain. People get interested in other things. It’s hard to maintain the focus of an entire country the size of China.

    0
    May 16, 2019
  3. David Emery said:

    I think Munster may be right. Let me give you an analogy: What if you showed up carrying a Huawei phone with an obvious Hamer & Sickle on it. Imagine the looks you would get when you whipped that out at a company meeting, particularly if you worked for a defense contractor.

    CCP can definitely make carrying an iPhone ‘unpatriotic’. As others here pointed out, that carries some substantial risks for China. But it could well be that China decides that it is better to keep all that money inside the country and starts encouraging “good patriotic Chinese’ to carry a Huawei phone, while still trying to provide the manufacturing for making iPhones in China. That’s an approach that retains the optimal amount of $ in the country.

    Again, I’ll ask, “How can we measure Chinese population sentiment”? I’m hoping Apple is doing that kind of consumer research. -Serious- Apple analysts (if there are any) should also be figuring out how to do that research.

    0
    May 16, 2019

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