BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Icahn's Apple Dump Illustrates Risk Of Chinese Government Meddling

This article is more than 7 years old.

Carl Icahn's decision to dispose of his remaining stake in Apple --and to disclose it on CNBC--sent both AAPL shares and the broader stock market into a tailspin Thursday. While praising the company and CEO Tim Cook, Icahn noted the disposition related to his worries about China.

Greater China was Apple's worst-performing geographic region in the March quarter, posting a 32% decline in revenues sequentially and 26% year-on-year. I've noted my bearishness on Apple in several columns, and I have always believed it would be difficult for Apple to sell the iPhone in a country where the average annual income in its most prosperous city (Beijing) is only $16,475 and where income figures are much lower in outlying areas than in the capital.

Icahn wasn't talking about sluggish iPhone sales, though, he was actually referencing a much larger, more pervasive problem: interference by the Chinese government.  It's always there in the background for companies that do business in China, and is a sometimes-hidden externality for stocks that are valued assuming massive growth from Chinese future economic expansion.

Apple is certainly one of those stocks, as the company's March quarter results painted a picture of a company whose products are selling into very mature markets in the developed world.  But Apple has been touting its "ecosystem" since the launch of the iPhone in 2007, and it was that ecosystem that came under attack last week by Chinese authorities.  Icahn's quotes show his concerns pertain to government interference in China, not Apple's brand strength or Cook's leadership

"They’re basically in some senses i would say, perhaps benevolent but a benevolent dictatorship. For instance, they will come in and make it very difficult for apple to sell there. The real thing i worry about…is the relationship. And i really don’t know much about that relationship so it makes it more difficult for me."

The genesis of Mr. Icahn's fears would seem to be widely-reported actions by the Chinese government to shut down Apple's iTunes and iBooks services last week.  Apple's Services division only contributed 12% of revenues in the March quarter, but, again, Apple has been an "ecosystem" play and actions by a less-than-transparent government to cut off parts of that ecosystem are truly disturbing.

If Apple's handset sales were strong in the quarter, I don't think anyone would have noticed the services shutdown in China, but iPhone sales were poor in the quarter and the outlook for the June quarter is for even greater declines. I've been to China and can personally attest to the fact that Google and Facebook are not accessible via mainland internet connections.  Yet those two companies seem to be doing pretty well without access to China's 1.3 billion consumers.

Apple is in a far different situation than its web-based peers, however.  As Mr. Cook acknowledged on Apple's Tuesday conference call, the cellphone market is not growing, and industry statistics show the markets for its other two core products--PCs and tablets--are actually shrinking.

So, Apple needs China.  Does China need Apple?

Because Apple outsources all of its phone manufacturing to companies such as Foxconn, the company can be seen as major indirect employer in China, but companies like Xiaomi and Huawei generate their profits in China as well as supporting manufacturing jobs.  Also, Apple's decision to fight the FBI on the unlocking of jihadist terrorist Syed Faroook's iPhone 5 could not be seen favorably by Chinese officials given their penchant for state control.

So, if you are interested in owning  Apple for the company's world-leading brand, bulletproof balance sheet and installed base of customers, you may want to take a fresh look with the shares plummeting to $94.  If your investment thesis is based on Apple's continued growth as Chinese consumers embrace the iPhone and adopt the Apple ecosystem like some Brooklyn hipster, though, you should be careful.

I don't think that adoption will ever happen, and as Icahn's trade shows us, some savvy investors believe that government might stop it from happening, anyway.