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Chinese Government bans on Apple iPhones and New Huawei Chip

The geopolitical landscape is becoming a significant concern for both Apple and Huawei. The ongoing trade war between the U.S. and China is a primary source of this risk. Apple, an American company, and Huawei, a Chinese firm, are caught in the crossfire. This situation has led to Huawei being blacklisted by the U.S., affecting its global supply chain. Meanwhile, Apple’s sales in China could be impacted due to potential retaliatory measures by the Chinese government. Apple is further exposed since almost all its manufacturing capacity is located in China. In fact, Apple has 20% of global sales eminating from China. The current Chinese iPhone ban and prior bans on Huawei by the US The latest smartphone is fueled by a chip that seems to be the most advanced version of China’s indigenous technology so far – an achievement that the United States has been attempting to hinder China from achieving.
The release timing of the phone might not have been a coincidence. The Department of Commerce has been leading American efforts to limit Beijing’s ability to acquire cutting-edge chips, and during her visit, Commerce Secretary Gina M. Raimondo spent a significant amount of time defending the US crackdown to Chinese officials who urged her to soften some of the regulations.
Both Ms. Raimondo’s influential position and China’s animosity towards the US restrictions were reflected online. Numerous vendors emerged on Chinese e-commerce platforms to sell phone cases for the new model, featuring imprints of Ms. Raimondo’s face on the back. Edited images depicted Ms. Raimondo holding the new phone, alongside phrases such as “I am Raimondo, this time I endorse Huawei” and “Huawei mobile phone ambassador Raimondo.” is causing concerns for both companies in the changing political landscape. The ongoing trade dispute between the United States and China is the main factor contributing to this risk. Apple, an American corporation, and Huawei, a Chinese company, are caught in the middle. This situation has resulted in the U.S. placing Huawei on a blacklist, affecting its worldwide supply chain. In the meantime, Apple’s sales in China may suffer due to current and potential retaliatory actions by the Chinese government. Apple is particularly vulnerable as the majority of its manufacturing capacity is located in China. It is worth noting that China accounts for 20% of Apple’s global sales.

The decision to locate almost all its manufacturing in China by current CEO Tim Cook does not look good. Trade wars, tariffs, and political tensions can disrupt supply chains and affect its bottom line. The ongoing US-China trade dispute, which puts Apple in a precarious position due to its reliance on Chinese manufacturing and the significant market share it holds in China.

The rise in geopolitical risk has led to national security concerns surrounding these two tech behemoths. The U.S. and China, home to Apple and Huawei respectively, have expressed concerns about potential threats to national security due to the vast amount of data these companies handle.

As a result, both governments have taken actions and imposed restrictions. The U.S. government has placed Huawei on an export blacklist, while China has increased scrutiny on Apple. These actions underscore the growing tension between national security and global technology companies.

Result: Trade restrictions and bans on specific products

Specifically, Apple’s iPhones and Huawei’s 5G network equipment are facing current and potential bans and restrictions. These measures could significantly disrupt their respective market shares and profitability. The situation underscores the importance of understanding geopolitical risks in today’s interconnected global economy.

Here’s a quick look at how these two companies are affected:

 

Company

 

Impact

 

Apple

 

Potential bans on iPhones could disrupt sales and profitability. If this escalates, China could impose random regulations and rules on the manufacturing side.

 

Huawei

 

Restrictions on 5G network equipment has impacted market position. The US and allies have entirely or mostly banned 5G network equipment in their countries and have actively pursued policies to convince other countries to do the same based on security concerns.

 

The Huawei 7nm Chip – What does it Mean?

Interestly, the government ban on Apple iPhones was announced right after Huawei rolled out the P60 phone with a 7nm chip. As the New York Times article on September 6th 2023 correcly points out in its title, this is the latest shot fired in the US-China Tech War.

The new phone is powered by a chip that appears to be the most advanced version of China’s homegrown technology to date — a kind of achievement that the United States has been trying to prevent China from reaching.

It is possible that the release timing was intentional. The Commerce Department has been spearheading American endeavors to restrict Beijing from obtaining advanced chips. During her visit, Gina M. Raimondo, the commerce secretary, faced Chinese officials who urged her to relax certain regulations, as she defended the U.S. crackdown.

Online, numerous vendors emerged on Chinese e-commerce platforms to offer phone cases featuring the image of Ms. Raimondo on the back, highlighting her influential position and China’s disdain for the restrictions imposed by the United States. Altered pictures portrayed Ms. Raimondo holding the new phone, accompanied by statements such as “I am Raimondo, expressing my support for Huawei this time” and “Raimondo, the appointed ambassador for Huawei mobile phones.”

Instead of a technological breakthrough, it seems that China was able to use stockpiled equipment before the sanctions took hold and loopholes. According to Copenhagen Business School’s associate professor, Douglas Fuller, it seems that SMIC has utilized equipment that was accumulated before restrictions were implemented, equipment that was granted to them specifically for producing chips for firms other than Huawei, and spare parts obtained from third-party suppliers to assemble their production. In fact, the Korean semiconductor firm SG Hynix is investigating how its parts got onto the new Huawei P60 phone. The US is also conducting its own investigation.

Therefore, the two events do not seem to be a message to the US and its allies that China can defeat the sanctions on high-tech and it can also inflict pain on foreign companies. In addition, with a faltering economy, President Xi can hold the Huawei P60 phone up as an accomplishment for domestic audiences.

Risks to iPhone and Apple are Underestimated in our Opinion

We think the market is complacent to the risks faced by Apple. There is a mistaken belief that neither side, meaning the US and China, want this to escalate. This is based on rational expectations theory and economic logic. However, this does not take into account political goals both short and long-term. The fact that China bans government officials from the use of iphones for work is just the start. This ban could escalate into arbitrary regulations specifically targeting Apple. Thus, Apple is not immune to geopolitical risk no matter how often its CEO Tim Cook visits China.

Just a thought, what would happen to the US stock market should China go further? Just take a look at the chart of Apple below and how quickly it dropped yesterday. We expect the stock to fall further. Just for disclosure, we increased our bearish bet on Apple prior to this event.

Apple Stock Price