Several years ago, Chinese leadership began limiting the use of iPhones amongst higher-level PRC employees. This ban roughly began at the same time the US restricted the use of Huawei 5G equipment in the US back in May of 2019. The restrictions began over concern the US could force Apple to put a backdoor into China’s iPhones that could be used for surveillance. At the time, investors worried the limitations would slow iPhone growth in China which, in the end, proved to be overblown.

Recently evidence has emerged that China is expanding its restriction on iPhones to more segments of government employees as well as companies that work closely with the government. In our view, this constitutes a measurable escalation of the iPhone ban in China. It is unclear what triggered Beijing’s recent policy change, but it is in line with the expectations given the growing tensions between the superpowers.

We’ll start with what we know about Apple’s business in China:

• Greater China accounts for 20% of Apple’s revenue. Not all of Greater China revenue is from Mainland China because Hong Kong and Taiwan are included and serve as distribution points to other regions in the Pacific Rim. Factoring in that dynamic, we estimate 17% of Apple’s revenue comes from PRC.
• We believe iPhone accounts for 60% of Greater China revenue. As a point of reference iPhone accounts for just over half of Apple’s sales globally.
• Putting these numbers together we estimate Apple will sell about 40m iPhones in Greater China in 2024.

Second, we look at the size of China’s government workforce:

• There are about 1.4 billion people living in China. Based on data from China’s National Bureau of Statistics there are 56 million people employed by the state.
• We estimate iPhone’s share of total phones in China is 15%. That means that about 8.5m government employees are using an iPhone.
• We estimate the average life of an iPhone in China is 4 years. This means Apple sells about 2.1m phones to government employees per year.
• Overall, we’re modeling for 225m iPhones to be sold in 2024, which implies the loss of 2.1m phones will reduce annual global iPhone sales by about 1%.
• This would reduce Apple’s overall revenue by about 0.5%.

Third, Apple’s exposure to companies that work closely with the government:

• The iPhone ban goes beyond government workers and includes employees at companies that work with the government.
• This is the unknown that is concerning for Apple investors.
• The reason is the PRC works closely with many Chinese companies which makes it difficult to estimate how many employees fall into this group.
• We see the worst case is that companies with government exposure are equal to the size of Chinese government employees.
• Factoring in this dynamic, this would further reduce Apple’s revenue by 0.5% in 2024.

This is where it gets tricky. My belief is that this move by Beijing is mostly driven by a desire for more national security. We believe China is still supportive of Apple’s brand based on social media posts in the country that are influenced by the government.

On top of that the average Apple device owner in China loves their Apple products just like Apple customers around the world love their products. Most of these consumers don’t care if there is a government ban, they just want a great phone.

China is slowly going back to its old communist ways.  The expanded iPhone bans are the latest chapter in the growing divide between the US and China. What’s clear is the two countries want greater separation and at the same time want to maintain economic stability.  Navigating that transition means that the decoupling could take a decade to unfold. Tim Cook is already preparing for this new reality, and it includes a greater focus on India.

India is an important part of the Apple growth story and it’s just getting started.  When it comes to the Apple growth story, the company needs new big markets to go after to sustain a 5-10% revenue growth over the next 7 years (until 2030).