apple China problems

Apple (NYSE: AAPL) is the best-performing FAANG stock of the year. While the company has fared well so far despite the economic turmoil, it faces several issues in China, which is its production hub as well as a major market.

There are reports of clashes between workers and police at Foxconn’s Zhengzhou facility which employs around 200,000 people and assembles most of the iPhones. Foxconn has confirmed the clashes but said that it was related to some of the new hires who had some doubts about their compensation.

Notably, the plant was hit by a COVID outbreak which impacted production. Apple also warned of a hit to iPhone production amid the troubles at the plant.

It said, “COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity.”

The supply disruption comes ahead of the holiday season and highlights the chinks in Apple’s supply chain as the company relies heavily on one country for production.

Apple iPhone Production Gets Hit amid Rising COVID Cases in China

While China was looking to relax some of the COVID restrictions, daily new cases have soared in the country. It has also reported the first deaths since May. China has been prioritizing the safety of people over the economy and has imposed strict lockdown measures.

For the long term, Apple is trying to diversify its sourcing away from China. Reuters reported that Foxconn which is the largest Apple supplier is looking to increase its workforce in India four-fold.

India is offering incentives to electronics manufacturers as the country seeks to capitalize on the “China plus one” sourcing strategy that many US companies are contemplating. Indian stocks are also outperforming global markets this year amid a strong domestic economy. We have a guide on how beginners can buy stocks in India with a regulated broker.

Meanwhile, Apple wouldn’t find it easy to diversify from China given the country’s impeccable manufacturing ecosystem, which is tough for other countries to emulate. Counterpoint Research believes that Apple would take years to diversify its production away from China.

A Slowing Chinese Economy is Another Trouble for Apple

The slowdown in the Chinese economy is another challenge for Apple as the country is among its major markets. While China is still officially targeting a GDP growth of 5.5% for 2022, it looks unlikely to reach anywhere near that level considering the growth in the first nine months of 2022.

The growing tensions between the US and China is another challenge for Apple. In the past, the company has said that the impact of boycott calls has been minimal on its sales. However, with the rivalry between the world’s two biggest economies showing no signs of abating, companies like Apple and Nike, which count Apple as a key market as well as a sourcing hub, could face the heat.

Warren Buffett Added More AAPL Shares in the First Half of 2022

In the first half of 2022, Berkshire Hathaway, which is led by Warren Buffett, added more Apple shares. The conglomerate is the second largest stockholder of Apple as Buffett has gradually built the position.

So far, Apple has managed to dodge the severe selling pressure that other FAANG peers have witnessed. While AAPL stock is in the red only this year, it is outperforming the wider markets. Most Wall Street analysts also find Apple stock as a buy.

That said, the company faces several challenges in China which would not go away anytime soon.

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