The Sushi Hits the Fan in Cupertino
When it rains – it pours. Let’s talk about China (MCHI) and Apple (AAPL) CEO Tim Cook.
I admit that I was quite harsh on Tim Cook 7 years ago when writing this Mad Hedge Technology letter.
I routinely delivered scathing critiques of him and perpetuated the narrative that he was only an operations guy.
Then I lightened up as he drove the company to higher highs even though the company didn’t foray too far from its bread and butter the iPhone.
My fierce criticism revolved around Cook betting the ranch on an Eastern adversary at a time when deglobalization started to pick up pace.
After knocking out the $2 trillion market cap and vaulting past $3 trillion, I gave Cook a pass for the time being.
Fast forward 7 years and the sushi has hit the fan and Cook has an absolute fiasco on his hands.
The trouble brewing in China is not necessarily entirely his fault, but sleep with the enemy, and it is hard to whine about the consequences.
In one fell swoop, 60 million hardcore Apple customers are dropping Apple products.
It’s a swift kick in the nuts for Cook.
Funnily enough, just a few months ago, Tim Cook was one of the few U.S. CEOs to venture to China after its reopening with his usual kowtowing to the communist party.
In March, he declared that Apple and China had a “symbiotic kind of relationship.”
It is bizarre to hear such an important figure in the American technology apparatus so infatuated with the Chinese.
Beijing is ordering officials in all departments to stop using iPhones.
Then Beijing extended the ban to state-owned enterprises.
How important is China to Apple?
China is key to Apple’s supply chain and to its sales.
About half of Apple’s smartphones are made in a giant factory complex in Zhengzhou, nicknamed “iPhone City”, operated by electronics manufacturer Foxconn.
China is also a significant consumer market for Apple, as it is the largest market outside the U.S. The company generated $15.8 billion in sales from China alone last quarter, 20% of its total.
Chinese consumers gravitate to the iPhone too: Apple has 65% market share for premium phones over $600.
There is a big element here in getting Chinese people to use their own smartphones.
I know many people who use Chinese smartphones because they are flagship quality but 40% cheaper than iPhones.
The only piece lacking is usually the Apple quality high-end camera, but most people don’t use their phone for a high-definition YouTube channel.
My sense is that the 60 million white-collar Chinese people will grumble about the brand downgrade to Huawei or Xiaomi, but the drop-off in performance isn’t so crazy that they are willing to go rogue and find a roundabout way to use an iPhone.
This sets the stage for all Apple products to get banned full-stop in China which is 20% of Apple’s revenue.
That includes Apple watches, earbuds, computers, and the whole shebang even the services part of the equation.
Deglobalization is rearing its ugly head again and this event could be a catalyst to take Apple shares back down to more affordable levels.
I would look at buying the dip once this negative news works itself through the system.
However, this event is akin to the tech sector getting stunned with a left hook to its face, and it will take time to recover don’t expect any American corporations to do business in China anytime soon under these souring conditions.
