By Gautam Chikermane
Not innovation. Not utility. Not even liquidity. These are supplementary factors. The three biggest drivers of Apple’s dizzying $2 trillion valuation have been led by a four-letter word — germ — and its economic vaccine, the global decoupling from China. Evidence? Two years ago, in August 2018, the Cupertino (California, US) based company hit a valuation of $1 trillion, 42 years after incorporation. Although the next two years has not been a linear ride for this stock, the big jump in Apple’s valuations has come after the western world faced the onslaught of Covid-19, since February 2020. In the past six months, the valuation of Apple has doubled — what it delivered over four decades has been replicated in six months. Even as countries began to look for economic vaccines, essentially the geoeconomic isolation of China and its powerful supply chains, in the past 26 days alone the stock has blazed ahead by 25%, without pausing for breath. There are three reasons for this, all underwritten by China.
Flight to safety
First, as communications tools, digital gadgets can be seen as a luxury. So, an iPhone is as much a status symbol as a utility, it comes with the snobbish iOS attached to it over an Android system. It is like driving a BMW or a Mercedes over a Hyundai or a Maruti. Using it is as much about flashing it, particularly because even the cheapest smartphones today carry as much, and sometimes more, power than an iPhone. But at a time when the Made in China Coronavirus has become a global malaise, has turned the home into the office, and a gadget into an income stream, dependability and trust become important pillars on which citizens stand. The risk of a Chinese intrusion into this flow of income is too high. As a result, there is a flight to safety towards a more secure ecosystem that a more expensive non-Chinese gadget offers. Here, Apple and Samsung stand strong.
Gadget the sole conspicuous consumption good
Second, given that citizens are largely confined to homes and away from markets and malls, the urge to spend is finding expression in two areas — inelastic groceries and highly elastic gadgets. Unable to eat out, unwilling to buy cars, spending power is seeking new pipelines to run through. The surplus left over is giving households the ability to reach out to top-of-the-line gadgets. From computers and phones to lighting and sound, all underlined by investments into WiFi that power them as well as entertainment spots such as Netflix, consumer spends are headed towards the digital world. In fact, that world is expanding like never before, as the quarterly results over the next few weeks will show. Apple and its products, from Macbooks to iPhones to iWatches to Apple TV, has a wide and robust array of products for consumers to choose from.
Correlation or causality?
Third, techno-nationalism is rising across the world. One country after another is discarding China tech and is moving towards alternatives. China’s barbaric approach to international relations and territorial intrusions around itself during the health crisis has pushed the civilised world to the tipping point of patience with “Emperor Xi’s” medievalism and expansionism. Bullying smaller countries in the South China Sea has been going on for years now. This has created security issues in the region, right under the nose of the United Nations Security Council. China’s actions ensure rejection of Made in China.
As far as India goes, the big change finally came from two sides. First, when China tested the limits of India’s strategic patience at Ladakh, leading to India banning Chinese apps and companies from building its roads; the ban on Huawei is inevitable, as is the end of Chinese firms in its critical infrastructure. And second, through the tough stand taken by US President Donald Trump against China tech. The threat of sanctions is getting companies from across the world to pull back.
Apple as a causal beneficiary
Some of the biggest beneficiaries of this changed strategic stance includes Apple. As one country after another shuts its doors to China tech, even if it is a symbolic ban on Huawei as in the case of the UK, the vacuum being created will benefit others in the game, notably Samsung, Ericcson, Nokia and Cisco, in the 5G space. In the app world, amid falling valuations (from $20-$50 billion, TikTok is being valued at $10-$20 billion), China tech that has benefited from China’s protectionist policies for the past several years is now looking to offload a strategic burden called Xi Jinping and the Chinese Communist Party from their balance sheets. On the other side, cash rich firms are willing to invest in value. Microsoft, for instance, is looking to buy TikTok. In the digital gadgets consumer space, there are two beneficiaries, Samsung and Apple.
Statistically, the valuation of Apple has hit $2 trillion — that’s more than the GDP of all but seven countries (US, China, Japan, Germany, India, UK and France) — in tune with Trump’s sharp policies against China; hence, this can be seen as a correlation. But dig deeper and what analysts are seeing is a market expansion as Chinese smartphones get replaced by Apple’s. On its part, Apple has reduced the prices of its phones to get price competitive. Thus, a low pricing that had begun earlier, the anti-China sentiment across the world’s consumers such as in the large market of India, and a global policy pushback against a country that has overshot its hegemonic ambitions is on display today, the most high-profile of which is Apple’s $2 trillion number. These are causalities.
The opportunity in decoupling from China
Minus Xi, Apple’s stock price should have fallen. If financial performance has any meaning anymore, investors would have seen the 2% fall in its 2019 revenues to $260 billion and 7% fall in income to $55 billion. They would have factored in the low-end consumers in markets such as India that have been buying Chinese brands such as Huawei and Xiaomi, all of which offer cutting edge technologies and top-of-the-line consumer experiences. They would have also examined the threat Apple faces as it shifts its manufacturing facilities from China to Vietnam and India, a move that will have exit costs and time disruptions as the company creates new suppliers riding nations reframing new supply chains.
For instance, India, Japan and Australia have begun discussions on launching a trilateral Supply Chain Resilience Initiative to reduce dependency on China, necessitated by Beijing’s aggressive political and military behaviour. This is not a reflex action but a thought through strategy. A month ago, Japan announced that it would pay $536 million to Japanese companies if they left China and either returned home or shifted bases elsewhere. China’s relations with Australia have hit new lows as the Chinese state media calls the country “a dog of the US”; it later called Israel “a US poodle.” Forget actions, Xi’s China has done away with even basic courtesies. Clearly, this is not a country the world wants to engage with anymore.
The future beyond China
What Apple’s investors are valuing, therefore, is not the local present but a global future. And the pivot of this future is no longer a smug and hostile China but a larger and more harmonious world, slowly but surely uniting against China. As Apple shifts its focus outside China, it will embrace new opportunities, including better protections for its patents and technologies. It is not the next quarter but the next decade that is playing on the ticker screens of investors. As India becomes the world’s third-largest economy during this decade, its low-end consumers will become mid to high-range buyers.
In investment parlance, the flip side of returns is risk. For big tech, China has become the biggest risk today. It has entered boardrooms and is hijacking every conversation, overriding board agendas and forcing companies to de-risk themselves against real and present danger from China tech dominance and Chinese products. Strategic affairs, so far the domain of political leaders, diplomats and think tanks, now has a looming presence in corporate boardrooms.
As sovereigns raise national security barriers against China, and work from home becomes the new normal for a substantial chunk of their citizens, reliability and trust will become currencies of discourse. And companies such as Apple will benefit. But Apple is only the beginning. Other tech giants, all from the US, including Amazon (market capitalisation: $1.7 trillion), Microsoft ($1.6 trillion) and Alphabet ($1 trillion) will finetune their strategies to derisk themselves and see their valuations expand in tune with Chinese aggression the world over.