For the last two decades, China has been the center of international industry and commerce. For more than a decade, the critical advantages of China as a manufacturing platform for businesses have been currency stability, solid material base, and the availability and cheapness of the labor force, which allowed large-scale operations to take place (Grossman & Livingstone, 2009). Currency stability played an important factor, as it allowed converting dollars into RBM and back without suffering from potential currency risks. However, the economic landscape in China is changing. As of 2015, China has adopted a floating currency policy, which eliminated the stability and the guaranteed cheapness of the undervalued Yuan (Nishi & Priya, 2015). The purpose of this paper is to evaluate the economic, political, social, and capital risks of operating in China for Apple, a long-time investor in the Chinese economy.
Apple Inc.’s Industrial Situation in China
Apple has begun its operations in China since 2010, contracting Foxconn, one of the major producers in the region, in order to assemble iPhones, iPods, Macs, and other related hardware. The economic conditions in China allowed the company to produce items at the cost of 8 dollars per piece, which would later be sold for 200 dollars or more in the US and European markets (Khan, Alam, & Shabbir, 2015). Such a powerful ROI was enough for companies to undertake any risks associated with Chinese political systems, protectionist policies, and rising competition from the local producers. Foxconn has more than 300,000 employees working on the latest iPhone models (Khan et al., 2015). In addition, Apple chose to purchase all the required components for its products domestically in order to save money on transportation and logistics. To summarize, the majority of Apple’s production chains are now located in China.
Chinese Floating Currency Rates and Latest Events
Chinese floating currency rate took a nosedive since 2015 and into 2016, as the Chinese government used its currency as an instrument to attract investments and businesses into its economy. As a result, people were losing jobs, local businesses were closing, unable to compete with cheap and available Chinese products, and multinationals were moving their production values to China. However, under political pressure exerted by the USA in 2017, China was forced to revaluate the Yuan, decreasing its exchange rate to the dollar (Giannellis & Koukouritakis, 2018).
Social, Political, Economic, and Capital Implications of Chinese Floating Currency for Apple
In the long-term perspective, a stronger Yuan would help reform the Chinese economy to be more consumer-centric, as it would bolster the buying capabilities of the population. The immediate effects of Yuan revaluation is the decrease of Chinese competitive strength, a decrease in overall sales, and an increase in production costs. As a result, unemployment is expected to rise, which would create social tensions within the Chinese community. Here are some of the risks that Apple is going to be exposed to if it continues to maintain its large-scale operations in China (Khan et al., 2015):
- Political Risks. The Chinese government has a history of imposing political sanctions on foreign companies as means of promoting domestic businesses. Complete nationalization of foreign property is also not unheard of; such an event occurred in 1949. With the added pressure from the US government, China is likely to retaliate by hurting American companies operating in the country (Khan et al., 2015).
- Social Risks. With the increases in production costs, Apple is likely to administer layoffs in order to optimize its production and reduce losses. With layoffs comes a poor reputation among both the employees and the customers alike. In extreme cases, a wave of layoffs may start worker riots.
- Economic Risks. One major risk that Apple has been facing and continues to face since it began operating in China is the risk of competition and corporate espionage. Chinese regulations tend to be lax and open to interpretation, while their copyright and intellectual property laws are malleable at best (Khan et al., 2015). With Apple operating in China, the potential for espionage and employees switching companies is greatly increased.
- Capital risks. Capital risks for Apple in China are exchange risks and liquidity risks. The Chinese government regulates the amount of currency that can be imported and exported from the country, making liquidity a lengthier process. At the same time, a floating currency rate introduces exchange risks into the equation, as Apple will suffer consequences should the exchange rates go too high or too low (Atanasov & Nitschka, 2015). These are some of the most prominent risks, which cannot be controlled by the company or the government. Exchange exposure is now prominent in Chinese markets.
Potential Solutions to the Problem
China has always been a high risk – high reward market for foreign businesses operating in it. The change to a floating currency removed one of its strengths out of the equation while introducing more risks. One of the potential solutions for Apple is to relocate its major production values to other low-cost countries, such as India or Vietnam (Dyer, Godfrey, Jensen, & Bryce, 2016). However, this decision is associated with many drawbacks, as Apple is too invested in China. The company should withhold from committing layoffs, as it would help keep the situation stable, and the profits gained from production would still outweigh the extra costs. In order to protect itself from volatile currency exchange rates, Apple should consider loaning RMB domestically and operating with the Chinese currency without the need of converting money back and forth. It should protect the company from exchange and liquidity risks (Dyer et al., 2016).
References
Atanasov, V., & Nitschka, T. (2015). Foreign currency returns and systematic risks. Journal of Financial and Quantitative Analysis, 50(1), 231-250.
Dyer, J., Godfrey, P., Jensen, R., & Bryce, D. (2016). Strategic management: Concepts and tools for creating real world strategy. Hoboken, NJ: John Wiley & Sons.
Giannellis, N., & Koukouritakis, M. (2018). Currency misalignments in the BRIICS countries: Fixed Vs. floating exchange rates. Open Economies Review, 1(1), 1-29.
Grossman, T., & Livingstone, J. L (Eds.). (2009). The portable MBA in finance and accounting (4th ed.). Hoboken, NJ: Wiley.
Khan, U. A., Alam, M. N., & Shabbir, A. (2015). A critical analysis of internal and external environment of Apple Inc. International Journal of Economics, Commerce, and Management, 3(6), 955-967.
Nishi, M., & Priya, M. (2015). Devaluation of Yuan – Chinese currency. International Journal of Management and Commerce Innovations, 3(1), 607-609.