China just took a $300b bite out of Apple. It could be a sign of things to come

China’s ban on state employees and those employed by state-owned enterprises using Apple smartphones at work or for business has caused Apple’s sharemarket value to tumble by more than $US190 billion ($297 billion) last week. That may only be a foretaste of what’s to come.

The ban, first reported by the Wall Street Journal, came almost simultaneously with the surprise launch of a new smartphone by China’s Huawei, its first high-end processor since it was targeted for sanctions by the US in 2019, and one with features comparable to the latest generation of Apple’s devices.

An Apple store in Shanghai. China is now Apple’s largest market for iPhones.Credit: AP

The launch, made without much fanfare and ahead of its expected schedule, coincided with a visit to China by US Commerce Department secretary Gina Raimondo, which appeared to be deliberate.

It also, however, came ahead of this week’s launch of Apple’s latest phone, the iPhone 15. That also may not be a coincidence.

Between the unveiling of Huawei’s new product and the ban on use of iPhones by state-controlled or influenced organisations, China sends a potent message to the US that it does have the ability to retaliate for the sanctions on its tech sector.

It also sends a message to China’s consumers and an appeal to their patriotism. There is now, once again, a China-developed smartphone with equivalent capabilities to Apple’s products.

The ban is thought to be likely to directly impact only about 5 million to 10 million of the 50 million or so devices Apple sells within China, which earlier this year became Apple’s largest market for iPhones, overtaking the US. It accounted for about 24 per cent of all iPhone shipments in the June quarter. The US absorbed about 21 per cent of shipments.

If, however, China’s consumers switch to Huawei’s devices in large numbers it would represent a far bigger threat to Apple’s $US400 billion or so of annual revenues, more than half of which are generated by the iPhone.

Apple was a major beneficiary of the US sanctions on Huawei. Before the sanctions were imposed, Apple had a global market share of about 15 per cent.

Today that share is almost 20 per cent, with most of the increase attributable to its sales in China, where the lack of access to advanced semiconductors caused Huawei’s smartphones business, once the global market leader, to shrivel.

Revenues from Huawei’s consumer businesses halved and its domestic market share slumped to less than 10 per cent as it was cut out of the market for high-end devices.

The Biden administration and its allies are trying to throttle China’s access to technology.Credit: AP

The excitement within China ignited by last week’s launch of the Huawei Mate 60 Pro (and hints at a Mate 60 Pro+ with even more features) would almost inevitably have led to Huawei recapturing domestic market share from Apple even without the central government’s bans.

That’s a double threat to Apple. Not only does it risk losing volumes in its biggest and fastest-growing market, its China sales are also its highest margin. It has a dominant and completely disproportionate share of the profit pool for smartphones in the Chinese market, with margins significantly larger than those it enjoys elsewhere.

Apple does have some offsetting leverage that will presumably deter Beijing from actively advocating consumers switching to Huawei’s products. It employs millions of urban Chinese workers in its iPhone supply chain, with China the core manufacturing platform for its global business.

At a time of high urban unemployment, particularly for younger workers, and dwindling export revenues, the authorities probably don’t want Apple’s presence within China to shrink too quickly.

Given the so-far limited production volumes of Huawei’s device – its first run sold out almost immediately – it is unclear whether Huawei has the capacity (or the advanced chips in sufficient volumes) to ramp up production and displace Apple’s consumer sales in the near term.

Nevertheless, confronted by the ever-tightening US-led sanctions on its access to advanced technologies and semiconductors in particular, the launch of the Huawei device and the ban do signal to the US and its allies that China does have the ability to retaliate.

For Apple, the developments underscore the risks it has created for itself in this post-pandemic environment of concern about the resilience of supply chains and heightened geopolitical tensions.

The “de-risking” of the supply chains between China and the West started pre-pandemic with Donald Trump’s trade wars but has accelerated since the pandemic revealed the vulnerabilities associated with overdependence on one major supplier of critical goods.

At a time of high urban unemployment, particularly for younger workers, and dwindling export revenues, the authorities probably don’t want Apple’s presence within China to shrink too quickly.

The Biden administration has added to layers to the sanctions on China’s access to technology and enlisted the support of its allies to reinforce their effectiveness.

Apple, which probably thought its deep relationships with the Chinese authorities and the sheer scale of its business in China would insulate it from the intensifying tensions between the two geopolitical and economic giants, may be forced to expand its efforts to diversify its own supply chains, although its Chinese production base is too vast to do that quickly.

In the past couple of years it has been investing in Vietnam and India and expanding its domestic production base, and has announced plans to spend $US430 billion in the US over the next five years. It may have to do more.

The so-far limited ban on Apple’s phones has come amid a series of actions by Beijing that demonstrate increased sensitivity to perceived national security issues, including shutting down foreigners’ access to data, the crackdowns on its biggest digital businesses, and the strengthening and more aggressive enforcement of its espionage laws, including raids on foreign business consultancies.

Chinese giant Huawei released its new smartphone ahead of schedule last week. Credit: Bloomberg

It has previously directed its agencies and state-owned corporations not to use foreign-manufactured personal computers and foreign-developed software and operating systems for work, so the action against Apple isn’t unprecedented, and indeed, is analogous to the actions the US has taken against Huawei and other Chinese companies, albeit so far more limited.

In the US, an official investigation into how Huawei was able to develop the advanced 7 nanometre chip that powers the Mate 60 pro in the face of the US sanctions is underway as the Commerce Department seeks to understand how Huawei was able to circumvent sanctions that were supposed to thwart its ability to do what it has done.

There is talk of further tightening and broadening the sanctions on access to the technology developed by the US and other Western countries amid concern that the sanctions might have been counterproductive by forcing China to fast-track development of its own technologies, undermining the sanctions and costing Western companies and economies sales and economic growth in the process.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.