Will China Exposure Risk Take A Bite Out Of Apple?

Apple, Inc. APPL investors shouldn't be bothered much about the tech giant's China exposure, according to an analyst at Loup Funds.

How Apple Is Navigating China Dynamics: Apple has done a "masterful job" navigating China dynamics over the past 20 years, Loup Funds Managing Partner and cofounder Gene Munster said in a note.

The company has done everything from "ramping production to winning Chinese consumers, all whilst maintaining neutrality in the midst of tense US/China trade relations," the analyst said.

The global supply chain dynamics will change rapidly toward a shift away from China over the next decade, he noted. Apple saw this coming in 2018, he added.

Munster emphasized that the company will be aggressively investing a projected $430 billion in U.S. tech infrastructure over the next five years.
The diversification efforts over the past three years have been led by Sabih Khan, who is in charge of Apple's global supply chain, along with chief operating officer Jeff Williams, the analyst noted.

That team, the analyst said, will continue to shift production investments away from China.

Taiwan Poses Risk: Taiwan, which faces the prospect of being eventually integrated into China, manufactures about 90% of the world's advanced chips, Munster noted.

"If, and when, China makes its move, it will further stress relations with the U.S. along with companies doing business in China," the analyst said.

Apple's China Exposure: Apple derived about 18% of its 2021 revenues from Greater China, which includes mainland China, Taiwan and Hong Kong, Munster said. About 25% of the company's production will come from China in 2022, he added.

In comparison, Tesla, Inc. TESLA derived 25% of its revenues from China in 2021 and 25% of its production is likely to come from the country in 2022, he added.

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Apple's China Production & Sales: In 2021, 68% of Apple's revenues were assembled in China, Munster said. The company assembles Mac Pro in the U.S., Mac mini in Malaysia, AirPods in Vietnam and some iPhones in India, he added.

Apple derived $68.3 billion of its revenues from Greater China in 2021, equaling revenues from its Services segment, the analyst noted.

Sentiment Toward Apple Neutral In China: A search through Weibo, a Chinese social media platform owned by Tencent Holdings LimitedTCEHY, with the key word "Apple product," showed that out of the top 50 hot posts, 61% were neutral, 23% were negative, and 16% were positive, Munster said.

"Putting these together, we see the tone on China social media toward Apple as neutral," the analyst said.

Apple Revs Up U.S. Investment: Apple has been investing heavily in the U.S., with the company outlining in 2018 a five-year goal of investing $350 billion in the U.S., including next-generation silicon development and 5G innovation across nine US states, Munster noted. This investment target was increased by 20% to $430 billion in April 2021, he added.

Apple, according to Munster, is allocating enough capital to build 20 fabs in the US, the analyst said. In the years to come, the analyst expects more investment will be committed to the initiative.

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Photo: Courtesy of Charis Tsevis on Flickr