Cook knows when to swing into action. The last time he visited China was March of 2019, when tensions were building between the Trump administration and Chinese leadership over tariffs. Apple appeared to be caught in the middle, with the potential that the tariffs would increase the price of most of Apple’s products in the US by 25%. Tim Cook launched into diplomacy mode, both in reassuring Chinese leadership of Apple’s commitment to China and separately announcing plans to increase the company’s investment in the US. In fact, about a month after Cook’s 2019 visit to China, Apple announced a $430B US investment plan. In the end, the strategy worked, and Apple was spared from a tariff war.

Now four years later the geopolitical concerns have grown, and I believe China is what keeps Cook up at night. Today, there is the potential of the unthinkable, direct conflict between China and the US over Taiwan. In a rare sign of bipartisanship, Congress’ 52-member Energy and Commerce committee scolded TikTok CEO over the company’s ties with the CCP thereby escalating tensions between the superpowers.

A day after the TikTok hearing, in what must have felt like the weight of the world on his shoulders, Cook spoke at the China Development Forum 2023 (CDF), in Beijing. His comments were upbeat, mentioning he was “thrilled to be back in China” and making it clear that Apple appreciates what China has done for their business over the past twenty years. That thirty-meeting interview was a win from Chinese leadership, an endorsement from debatably the world’s most influential CEO that it’s safe to do business in China. That endorsement helps keep the business side of US-China relations in good standing which is a benefit to China’s overall economy.

Cook was welcomed at the CDF with applause – a sharp contrast to the TikTok CEO’s cold welcoming on Capital Hill the previous day, and a sign that Apple’s brand is in good standing in China. Part of Cook’s time in China was to build on that consumer goodwill with positive language about the partnership between Apple and China. He also took time to visit an Apple retail store and was surrounded by fans.

Building PR in China is time well spent for Apple given annual sales in greater China are nearly $80B, the most of any US-based company. While Apple does not break out sales in Mainland China, I believe it accounts for about 15% of total revenue or about $60B annually. This compares to North America which accounts for just over 40% of revenue.

Toward the end of Cook’s visit, he met with China’s Minister of Commerce to talk about the health of the supply chain. I suspect there were assurances from the commerce minister to keep factories open, a shift from the zero covid approach implemented over the past several years. All of this would have been expected but good news for Cook.

At the same time, Apple is moving as fast as it can to reduce its manufacturing exposure in China. It’s worth noting, moving fast on something so engrained as the supply chain is measured in single-digit percentage shifts in where products are being produced. That said, the progress has been notable. Every year Apple publishes its Supplier List, which captures 98% of spend on materials, manufacturing, and assembly. The most recent report came out in October of 2022 for fiscal year 2021, which means it takes a year for Apple to update investors on the topic.

Based on those reports, I estimate the percentage of Apple sales that were made in China decreased from around 60% in 2020 to 55% in 2021. Notably, of the 150 new manufacturing locations added in 2021, 79% are based outside of mainland China. For fiscal year 2022, I expect that number to decline to 45-50%. I estimate that in 2026, the percentage of Apple’s revenue that is made in China will decline to 25% and likely hover around that level for the next decade.

While Apple is diversifying manufacturing across many countries, I expect India and Vietnam will be two of the biggest beneficiaries of Apple’s manufacturing shift.

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