USA vs. China – Head scratcher

Taiwanese politics and Apple.

• Long-term collaborator and colleague Alastair Newton from Alavan Independent joins Radio Free Mobile in authoring today’s commentary concerning China, Foxconn, Taiwan and Apple.
• China has launched an investigation into Foxconn which employs over 1m people in China which we think is either another warning shot at Apple or a message regarding the Taiwanese election next year.
• The investigation amounts to a tax audit as well as a review of land use by Foxconn in China and, as is customary in China, the regulators conducting the investigation have not publicly explained the reasons or the expected outcomes of their action.
• Foxconn is the foreign trading name of Taiwanese giant Hon Hai and is notable because it manufactures the vast majority of iPhones and employs over 1m people in China.
• This is why at first glance, this investigation is a surprise as China is really struggling with its stagnant economy where youth unemployment is a particular problem meaning that the last thing it should want is to hinder the activities of a major employer.
• However, as we have opined many times, loyalty and subservience to the party from both individuals and companies are more important than economic recovery and this investigation fits directly into that view.
• We see two potential reasons for this investigation (outside of the possibility that Foxconn has actually done something wrong).
  • First and foremost, Taiwanese politics: where the founder of Hon Hai, Mr Terry Gou, is running as a candidate for the Taiwanese presidency in 2024.
  • Somewhat strangely, Although Mr Gou is running as an independent, he is keen on stronger business ties with China and so would appear to be a better choice for Beijing than a pro-independence candidate.
  • He has made comments about “not complying with Beijing’s orders” but he is so far behind in the polls, that he is extremely unlikely to win.
  • However, what he might do is split the pro-Beijing vote making it easier for a pro-independence candidate to win the presidency against Beijing’s preferred Kuomintang party.
  • A soft takeover of Taiwan through a pro-Beijing government has to be the preferred route for reunification as we see substantial difficulties with military action.
  • Second, Apple: where Tim Cook was in China last week and met with many of the relevant officials from the Chinese state.
  • If China really wants to hurt the USA, it could do so by banning all Apple products into China which would take Apple’s revenues down by over 20% from which there would be no recovery.
  • Banning Qualcomm would also have a substantial impact but it would also cause real problems for many Chinese smartphone and vehicle makers and Qualcomm would recover although it would take a long time.
  • An action of this kind would have consequences for China where almost all Apple products are made and it would also greatly annoy the upper segment of Chinese consumers.
  • One thing we have seen in the last few years is that large numbers of angry Chinese citizens on the streets is one of the few things that can force an abrupt policy shift by the Chinese state.
  • It would seem unlikely that an Apple ban would trigger social unrest but this is one of the few things that can really make the Chinese state nervous.
  • This is another warning to the USA following on from the banning of iPhones in Chinese state buildings which may be used as negotiating leverage when it comes to semiconductor import restrictions.
• The net result is that tensions continue to rise, and we see an increasing risk of proper being action taken against Apple should the current warnings have no real impact on trade restrictions into China.
• This same risk also applies to Qualcomm although the impact on the Chinese economy could be larger should Beijing go down this route.
• Overall, the outlook remains unchanged which is that we expect China to develop its own technology standards wherever it can meaning that global standards will become a thing of the past.
• As we have opined many times, this means lower growth for everyone in the technology sector over the next 10 to 20 years.