Chinese iPhone Sales Crash – What It Means For The Multinational “Model”
by David Reavill
American consumers are among the most resilient in the world, able to switch from one product to another based on price or quality. When Toyota automobiles outstripped Ford and General Motors products, Americans switched, making Toyota the dominant global automaker. When Sony and Toshiba produced a better television, they put American companies Hoffman and RCA Victor out of business.
Often, there are competitive advantages that foreign companies have that American companies cannot match.
We see a similar pattern each time these transitions from American to Foreign Products occur. Initially, the American public proclaimed that they would always “buy American.” US companies produce the highest quality, and we’ll always purchase homegrown products.
Unfortunately, the opposite occurs when it comes time to pull out the wallet at the local Walmart or Big Box store and consummate the purchase. The offshore product, produced by cheaper labor, lower environmental standards, and often non-existent benefits for their workers, wins the day. It’s the low cost that drives the sale.
For instance, the memory of those transitions from the US to Asia that hung over Wall Street this week, Apple Computer, the most expensive stock on the market and a premier company in our economy, announced that iPhone sales in China had declined by nearly one-quarter in 2024. For years, Apple has been the leading stock on the exchange, driving prices higher and higher to progressive records. If you like the current Bull Market, you have to credit Apple.
Even the doyen of value investing, Warren Buffett, has invested heavily in Apple, giving his blessing that a “tech stock” can also be a “value stock.” Buffett declares that Apple has such a “competitive advantage” and impenetrable “moat” around its product that no other company can challenge it.
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What’s more, Buffett is putting your money where his mouth is by investing $174 million in Apple stock, making Apple one of the core investments for Buffett’s Berkshire Hathaway Portfolio.
Now, few would argue with Buffett’s investment acumen. Indeed, he has built a legendary reputation on Wall Street. He’s one of the best when estimating cash flow or future earnings.
But what if we’ve reached a point where more than mere investment prowess is required? Where forces greater than “the financial” come into play.
The New Multinational “Model”
In 1973, President Richard Nixon opened the door to China. Historically, China was a closed society, so it became available to trade with the United States. It was the beginning of an unparalleled interchange between the two countries: on the one hand, the world’s most significant consumer, America, and on the other hand, what would become the world’s most significant producer, China.
Bill Bowerman and Phil Knight at Nike were The first companies to recognize the tremendous opportunity that Chinese production represented. Located in Beaverton, Oregon, just a stone’s throw across the narrowest part of the Pacific, it was only natural that Nike would look to an Asian producer to make their running shoes. In 1971, they used a Japanese shoe company but quickly realized that China could accomplish the same task at an even lower cost.
Today, most business historians credit Knight as the first to open Chinese factories to American Brands. It’s easy to see why Knight and all the major American multinational corporations choose China. First is the low cost of labor, unlike the American system, which loads on benefits, insurance, social security, space requirements, and other regulations for employee compensation.
There is none of that in China. In China, most laborers, especially 20 or 30 years ago, received a day’s wage, and that was it. Consequently, Chinese labor costs were a mere fraction of the American. Combine that with lower energy costs, due in considerable measure to virtually non-existent environmental regulation and low-cost factory space, and you have an almost unbeatable price advantage for Chinese production.
Phil Knight had built what most of his compatriots considered a winning business model. Design and marketing could remain in the United States, but China’s price advantage was too attractive to miss. For 50 years, American Multinational Companies have constantly moved production to China and other Asian nations.
The most ludicrous of these strategies was reported that a group of US poultry farmers now ship their live chickens to China, where they are slaughtered, dressed, packaged, and returned to America. So great is the US cost of labor; it’s cheaper to bear the additional transportation costs than to dress and package the chickens locally.
Phil Knights’s business plan was similar to many American businesses operating at the time. After all, most American retail electronics (radios and televisions) had long ago moved to Japan and other Asian countries. What made Nike’s move unique was the use of China’s labor and facilities.
However, this is not to say there was no controversy surrounding these multinational moves to Asia, especially China. American labor was extremely upset over the loss of American jobs.”Buy American” campaigns popped up around the country. While those campaigns might have some impact on the American populace, it’s safe to say that they did not affect the “corner office.” The Chief Executives, who were responsible for the bottom line, could have cared less. They were looking for one thing only: reduced manufacturing expenses.
There have been repeated reports of horrible working conditions throughout China, especially. Factories that are little more than sweatshops force workers to labor for hours at a time, far beyond the standard eight-hour shift at home. They are also forced to live in substandard housing and risk injury or worse while operating dangerous equipment.
Several years ago, there were unconfirmed reports that Apple had hung nets below the upper floors of one of its factories to prevent workers from jumping to their deaths. Such conditions may be the conditions under which those shiny new tech gadgets are made.
In addition to reports of unsafe and unhealthy working conditions, there have been lingering accusations of American multinationals providing China with access to proprietary US technology. The most critical scandals for America’s strategic interests involve technology transfer from the US to China.
At the turn of the century, the Press was full of articles exposing various US technology firms accused of giving plans and procedures to their Chinese counterparts. Much of this information was considered vital to America’s national defense. By 1998, the United States Justice Department launched a full investigation of Hughes Electronics Corporation and Loral Space and Communications, Ltd. Both companies are involved in rocket technology, which is the basis for the Intercontinental Ballistic Missiles that are the core of America’s strategic deterrent.
Hughes was accused of providing state-secret rocket technology, while Loral was accused of providing the Chinese with “MIRV” (multiple independent reentry vehicles) technology. MIRV technology allows a single ballistic missile to carry ten or more warheads, multiplying the lethality of an already dangerous weapon.
Given the stakes involved and the public outrage at the time, relatively little came of the Justice Department’s investigation. Yes, fines were handed out, and some low-level employees were jailed. But overall, these companies continued to operate with hardly a hick-up.
However, what this episode indicated was the commitment of the US Multinational Companies to the “Model.” The business plan was perfected by Phil Knight years before—that combination of cheap Chinese labor and plants, combined with US product development and marketing.
Apple Follows the Model
Around the same time scandals broke for aerospace and defense companies, Tim Cooke at Apple Computer was busy pursuing the “Model.” In 2001, Cooke closed the last Apple assembly plant in California, laying off American workers and transferring those jobs overseas. It was the final step in making Apple a foreign manufacturing company.
For over twenty years, the “Model” has been the winning combination that has placed Apple at the top of the corporate heap. Today, Apple Computer is the second most valuable company in the world, with outstanding stock performance driving Apple’s market capitalization to more than $2 ½ trillion.
Wall Street is never one to argue with success. The Nike/Apple Model of offshore production, onshore development, and marketing has intoxicated US Companies. For the last half-century, US Companies have looked for ways to move their manufacturing anywhere but America, from consumer products to pharmaceutical medicines to heavy machinery. Today, our consumers purchase the “not made in America” label.
The “Model” Under Fire
It is essential to recognize that several conditions must exist for the “Model” to work: the US dollar must remain strong, providing a favorable exchange rate compared to the Chinese yuan (or other currencies). Relations between the US and China must remain amicable. Chinese regulations for labor and the environment must remain lax. US regulations must continue to allow offshore manufacturing. Finally, China must continue allowing US Multinational companies to access their domestic consumer markets.
As you can see, many of these conditions are now fading. Sino-U.S. relations are at a razor’s edge. President Biden’s latest request for spending has earmarked $10 billion in indirect military aid to Taiwan, thereby increasing tensions with China. The US Dollar has performed poorly recently, calling into question its status as the Global Reserve Currency. Presidents
Trump and Biden have advocated for multinational offshore production to return to American shores.
However, the most important recent development affecting the “Model” was the announcement earlier this week that iPhone sales in China dropped an astounding one-quarter for the first part of 2024. The reason? Increased competition from, of all places, the Chinese homegrown company Huawei. It was stunning.
Americans presumed it would be years before Huawei developed a smartphone capable of competing with the signature Apple iPhone. Apple and others thought it would be years before Huawei made a 5G phone. Consequently, Apple would enjoy a significant competitive advantage, which Buffett calls a “moat,” in protecting iPhone sales.
Unfortunately for Apple, that’s no longer the case. At the same time that Apple announced that iPhone sales declined by a quarter, Huawei let the world know that their smartphone sales increased by a mind-numbing 65%. Not only had Huawei caught up with Apple in producing a 5G phone, but they also showed that they could outsell the iPhone by gaining market share.
All this will no doubt put Apple’s management back on their heels. Huawei’s ascendancy is a concern that Apple will have to address at its next Shareholder Meeting.
But what this has done to the “Model” is even more substantial. Global conditions have been dissolving recently, for the first time since Nixon established diplomatic ties with China. Global tensions seem to rise daily as President Biden calls out the Chinese as our number one threat. Stable foreign exchange rates remain questionable as the nations of the South choose to abandon the US Dollar.
However, the most concerning threat to the “Model” has been the rise of Chinese manufacturing capability and the fickle nature of the consumer. I mentioned earlier that the “Hoffman television” and the Packard automobile were two of my family’s prize possessions in the 1950s and ’60s. We considered them the very best that money could buy. We thought they were on the leading edge of electronics and automotive development. However, I suspect many of my readers have never heard of them. You see, although we enjoyed that each product was made in America. But we happily switched when better and cheaper offshore products like the Sony television or the Toyota automobile came along.
Today, Apple enjoys the same reputation as Hoffman and Packard. However, should Huawei or some other Chinese company develop a better, lower-cost smartphone (probably not Huawei, which is, after all, facing particular trade restraints in the US), we can expect that consumers, even here in the US, will gladly make the switch.
In the end, this would mean that Americans would continue our maniacal trade with China; it’s just that the new products would be under the “made-and-developed-in-China” label. And the American Multinationals would be the latest in a long line of brands to vanish.
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