Apple gauges China supply risks

As Apple reassesses supply chain risks in China and diversifies more production to countries such as India and Vietnam, so too are Chinese firms and investors rethinking the cost-benefit analysis of being overly reliant on the US tech giant for business, according to corporate filings and analysts.

A case in point was news this month that Goertek, an AirPods maker based in northeastern Shandong province, had lost orders from “a major overseas client”. Investors knew that could only be one firm and promptly dumped the stock, instantly wiping out billions of dollars in market value.

In 2021, Oflim – once one of the largest suppliers of camera modules for Apple – saw its revenue dive 53 per cent year-on-year in 2021 and another 37 per cent in the first three quarters of this year, after it was kicked off Apple’s supplier list.

But despite these concentration risks, Steve Peters, a Hong Kong-based management consultant at EmperorFBA.com, said China contractors often have little choice but to jostle for business from the maker of iconic iPhones and iPads.

“There are only so many big players in the electronics space. It’s really an inner circle and everyone is jockeying for position [with Apple],” said Peters.

While mainland China remains Apple’s primary production base, with about half of its top 190 disclosed suppliers based in the country as of September 2021, the risks for contractors overly-reliant on Apple are stark and China’s stock exchanges are taking note.

Shenzhen Tongtaiying Technology Co Ltd, a supplier of insulators for smartphones and computers, is currently waiting for approval to list in Shenzhen. According to its prospectus, a major risk is its reliance on Apple as the ultimate user of its products, with the US tech giant accounting for 88 per cent of its revenue in 2021, up from 84 per cent in 2020.

In a 272-page statement answering questions from the Shenzhen stock exchange, it mentions Apple’s name over 900 times.

Meanwhile, Dongguan Sixpure Intelligent Technology Co, a supplier of electronics components in Apple’s supply chain through firms like Foxconn, says in its prospectus that Apple ultimately accounts for 77 per cent of its revenue. This prompted the Shenzhen stock exchange to question whether its reliance on Apple is a significant risk and whether the orders are “sustainable”.

The exchange has also asked the company to assess the risk of potential Apple supply chain relocation and an escalation of US-China trade tensions. Any change in US government policy and restrictions on China-sourced tech will have an immediate impact on Apple, which then affects its suppliers.

In reply, Huaxi Securities – underwriter of Dongguan Sixpure’s planned IPO – said that India and Vietnam cannot replace China’s role in Apple supply chain due to gaps in “supporting industries, infrastructure and worker qualifications”. They also said that China maintains advantages over the US, Japan and South Korea in terms of human cost, logistics speed and supportive government policies.

For now, it remains to be seen whether Dongguan Sixpure will secure the exchange’s approval to list.

For Shenzhen Sinvo Automation, an Apple supplier which filed an IPO application in 2021, the answer is already ‘No’. Its application to list on ChiNext – a Nasdaq-style subsidiary of the Shenzhen Stock Exchange – was rejected in March under revamped listing rules, partly due to its excessive reliance on the Cupertino, California-based tech giant.

Goertek’s stock slump has spurred fresh debate on Chinese social media about whether being an Apple supplier is a curse or a blessing. Do those on the inside want to break out, or do those on the outside still want to break in?

Apple is known to have exacting standards and tends to punish suppliers who fail to match its demands. For example, the tech giant routinely adjusts product and service prices based on the level of demand and competition at the end of each quarter. This frequently results in suppliers having to lower prices to remain in favour with Apple.

According to a research note by TF Securities, in the ten years between 2008 and 2018, Apple’s nine key Chinese suppliers grew revenue in total from 625 million yuan (US$87.8 million) to 19.6 billion yuan. But the gross margin dropped 10 per cent to 20 per cent in the same ten years, and analysts ascribed the drop to intensified competition. South China Morning Post