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Apple to face continued pressure to curb reliance on China under Biden – experts

Though 2021 brings a new U.S. president with a fresh agenda, analysts and industry experts expect companies like Apple Inc. to still face pressure to diversify production out of China.

In recent years, President Donald Trump has used heavy tariffs as a negotiating tool in an on-again, off-again trade war with China. He also urged Apple and other U.S.-based firms with sizable presences in the region to shift production back to the U.S. and to other parts of the world. President-elect Joe Biden has said he plans to take a slightly more measured approach toward U.S.-China relations, vowing to uphold the trade agreements each side has made while maintaining a tough stance on issues like intellectual property and human rights.

Sources largely consider a Biden presidency to be a positive for Apple, but they say it remains crucial for the tech company to diversify its global supply chain to protect itself from future geopolitical risks.

From red to blue

Wedbush Securities analyst Daniel Ives expects a leadership change in the White House to reduce tensions between the U.S. and China, which he considers a "major bullish sign" for Apple and other tech companies that have been caught in the crosshairs of the trade war.

Throughout 2019 and 2020, various Apple products — including the Apple Watch, AirPods headphones, iMac computers and HomePod speakers, among others — were on the U.S. Trade Representative's tariff lists, and were thus set to face tariffs ranging from 7.5% to 25%, depending on the status of negotiations. But Apple was ultimately granted tariff waiver requests, sparing the company from the financial impact of the tariffs but not the continuing uncertainty around trade policy.

"Based on policy platforms, the Street's view appears to be that a Biden Presidency will take a much more friendly tone on China technology and policy issues which could significantly ratchet down tensions and rhetoric between the US/China across the enterprise and consumer technology ecosystem," Ives wrote in a recent report.

In a December 2020 interview with The New York Times, Biden said he will not immediately roll back the "phase one" trade deal the U.S. and China reached in January 2020, adding that he first aims to consult with global allies to develop a "coherent strategy" on how to approach trade negotiations and to prioritize investing in U.S. businesses.

Under the "phase one" deal, China committed to ramp up purchases of U.S. goods by more than $200 billion over two years, and the U.S. agreed to slash tariffs on certain Chinese products.

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Apple in China

Greater China remains a key production hub for many of Apple's most popular products and is the company's third-largest market, behind the Americas and Europe. For the September 2020 quarter, Apple's net sales in China totaled $7.95 billion, down from $11.13 billion in the same quarter of 2019. The sales drop was due in part to pandemic-driven hurdles Apple has faced, including supply shortages and weakened demand for its products and services around the globe.

The escalating U.S.-China trade war has resulted in many news outlets speculating that Apple is mulling moving production away from China and to parts of Southern Asia, including India and Vietnam. For instance, in 2020, Apple reportedly held talks to shift roughly a fifth of its iPhone production capacity to India from China as part of India's production-linked incentive program.

Similarly, three of Apple's key suppliers — Hon Hai Precision Industry Co. Ltd., Pegatron Corp. and Wistron Corp. reportedly plan to invest about $900 million in total in India over the next five years, with a majority of the investment focused on expanding iPhone manufacturing in the country.

However, Apple CEO Tim Cook has largely urged analysts and investors against placing significant weight in such reports, noting on a July 2019 earnings call that the company is "always looking" at ways to strengthen its supply chain and that the "vast majority of our products are kind of made everywhere."

"We have some final assembly in the United States. We have final assembly in China, as well," Cook said, adding that the company's supply chain is "durable and resilient."

Cook has also been an outspoken critic of many of the Trump administration's tariffs on China. He noted on an earnings call in 2018 that tariffs can sometimes "bring about significant risk and unintended consequence," including slowed economic growth. He added that there is an "inescapable mutuality between the U.S. and China" and that "each country can only prosper if the other does."

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'Tricky balancing act'

Rather than directly pressing Apple to trim its reliance on China, Robert Atkinson, president of the nonpartisan public policy think tank Information Technology & Innovation Foundation, anticipates Biden will place a greater emphasis on advancing social policy goals, such as working more closely with China to tackle global climate change and promoting economic opportunities for disadvantaged groups in the region, including ethnic minorities.

Perhaps a bigger for concern for Apple, Atkinson noted, is the possibility that a Republican who holds a tougher stance toward China will gain control of the White House in 2024.

"I think there's certainly a good chance that whoever's the Republican nominee in '24 will be a China hawk," Atkinson said. "So, I think that's probably in Apple's mind, that yeah, maybe we've got a little bit of a reprieve for four years but after that, we could face [someone] just as tough or even worse."

For his part, Avi Greengart, founder and lead analyst at market research and advisory firm Techsponential, expects Biden to be "slightly more predictable" in his negotiations with China compared to Trump, but said the pressure Apple faces to spread out its manufacturing and production should remain.

Greengart also said Apple faces a "very tricky balancing act" in spreading out its global supply chain, noting it will be difficult to find a country outside of China with the combination of skilled workers and infrastructure needed to remain competitive. That said, he added that such reliance on one region "comes at a steep cost to flexibility" and poses additional risk.

"Apple, I would think, is looking at this with a long-term horizon of, how can it regain some flexibility so it doesn't get stuck if one market gets shut down — whether if that's because of COVID or a future pandemic, whether it's because of a geopolitical event, whether it's because of a geoeconomics event, like tariffs," he said. "Any of those things, where if almost everything from Apple comes out of China, that leaves Apple vulnerable to China."

Pressure from within

Though Apple should face less direct pressure to shift production out of China with Biden in the White House, the issue will likely remain top of mind for shareholders, said Rick Pendergraft, founder of investment advisory firm Pendergraft Research.

"[Apple will] probably see less political pressure, but I think internally and from an investor standpoint, that is where the pressure will remain ... to get diversified suppliers and not have one potential link in the chain that could break things down completely. As long as it's working it works great. But if something happens in that link, it breaks the whole chain. I don't think Apple wants that," he said.

Aside from simmering trade tensions, 2020 was a big year for Apple. The company debuted its first-ever slate of 5G-capable iPhones and became the first publicly traded U.S. company to surpass $2 trillion in market valuation, roughly two years after reaching the $1 trillion mark.