There's a great two-part series in the Financial Times this week by Patrick McGee about how Apple's entire supply chain is enmeshed with China and how it will be nearly impossible for it to extricate itself.
McGee highlights that 95% of all Apple products are manufactured in China and that Tim Cook was the architect behind it all. The company, Foxcon, China's central government and dozens of suppliers all made massive (winning) bets on the iPhone more than a decade ago. It means there's an entire ecosystem around the production of Apple products and when problems come up, the only solutions are in China.
The story notes that China has been trying since 2014 to diversify away from China but has made little progress, with one former Apple engineer warning that China will continue to dominate tech production for another 20 years.
In some ways, covid helped China become stronger. The engineers that once traveled from California to China were stuck at home for more than 2 years and Chinese workers took the lead, gaining high-level expertise.
The reports offer remarkable insight into just how beholden the United States' biggest company is to China, making a decoupling so onerous that it would be nearly impossible.
My take from all this is simple: That a decoupling won't happen. The US and China need each other and even a war in Taiwan wouldn't change that. It add to the reasons that China's depressed equity markets are the place to be in 2023 with the tailwind from the post-covid reopening.
To further that point, Morgan Stanley writes today:
"The market is still under-appreciating the far-reaching ramifications of [China’s] reopening. .. the current situation is on par with that in late 2008 / early 2009, with many investors insufficiently exposed to what is likely a key alpha driver.”
The bounce in China's stocks might be due for a near-term pullback but the case for betting on China is strong.
