Risk Rises in Cupertino
It works until it doesn’t, doesn’t it?
That was ex-German Chancellor Angela Merkel who brought Russian energy closely into the orbit of the German economy and made excuses for them time and time again as they deployed an army to pillage in the East.
Then when Russia showed up at the European Union’s doorstep triggering a massive refugee crisis, the sushi hit the fan and the world went bonkers.
The same thing could be happening with Apple’s (AAPL) CEO Tim Cook in China as its Chinese factories were shut down in Shenzhen, the Chinese Silicon Valley, because of a Covid outbreak.
Foxconn is the name of the factory that is responsible for Apple’s outsourced work.
The growing clusters spawned by the highly infectious omicron variant have turned China upside down.
The policy, which kept China virtually virus-free for long periods, is increasingly isolating the country as others open up.
The country still hasn’t seen a virus fatality since January 2021.
This is an ominous sign for the Middle Kingdom because of their abundance of aging citizens who are highly susceptible to succumbing if they do contract the virus.
Then any prudent investors would ask what’s next for Apple?
It’s safe to say that China has done a much better job protecting its citizens against the worst of Covid with their zero Covid policies.
These hard lockdowns prioritize saving lives at all costs and that is extremely hard for businesses to swallow.
Foxconn didn’t specify the length of the suspension. The measures from the Chinese government call for non-essential businesses in Shenzhen to halt until March 20.
As usual, the Chinese communist party has been extremely tight-lipped about when this could end, and even if March 20th is the goal, it could easily spin out of control if zero Covid backfires and cases spread like wildfire.
Foxconn will stop operations at the two Shenzhen campuses and has reallocated production to other sites to reduce impact of the disruption.
Hon Hai, the primary assembler for iPhones, says it expects no “major” impact for now to its finances and business from the temporary shutdown.
Hon Hai’s suspension of iPhone production in Shenzhen due to lockdowns may not affect Apple’s smartphone supply chain.
Its main production hub in Zhengzhou which makes iPhones hasn’t yet been affected by China’s latest virus resurgence and could help offset lost capacity.
Zhengzhou is also geographically distant from Shenzhen, so cases won’t easily spread to that area of the country.
However, Zhengzhou is part of the Henan province which has the largest population in all of China.
Henan being the poorest province in all of China means migrants at the lowest rung of society enter and leave the province more than others mostly looking for work.
Shenzhen is one of the richest cities in China and it appears as if Apple dodged a bullet.
But what if the highly contagious omicron spreads to Zhengzhou and there is a national zero Covid lockdown for months?
Apple would easily become collateral damage and the stock would sell off by 10%.
Also, unfortunately for Apple, there is a real risk that China is dragged into the Russian – Ukraine conflict.
This could set the grounds for the Chinese government to freeze the Apple supply chain in China.
As the business world has completely fractured into democratic versus totalitarian regimes, it could turn out to be a massive liability to extend oneself on enemy grounds.
Apple might find this out the hard way.
Wait for the volatility to calm down before getting back into Apple shares.
