As Apple’s Stock Climbs, Working Conditions at Suppliers in Question

by Trefis Team
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Apple (NASDAQ:AAPL) couldn’t have started 2012 on a better note. First came the announcement of a blowout December quarter earnings that sent its shares flying as Apple set new quarterly records for its iPhone, iPad and Mac sales. In the weeks that have followed, rumors about the impending launch of the iPad 3 have gained ground, sending the stock up and above the psychologically important $500 mark. Apple’s shares have risen more than 25%, or over $100, in 2012 alone.

While we acknowledge this surge has been long coming considering Apple’s phenomenal success over the last few years, it is important to acknowledge some of the risks that are shaping up on the horizon even as the euphoria reaches fever-pitch. We have a $550 price estimate for Apple.

See our complete analysis of Apple here

Risks to Apple’s Meteoric Rise

China poses a significant risk to Apple. Ironically, CEO Tim Cook has identified China as having huge untapped opportunity for Apple on numerous occasions. The risks, however, do not come from any market disruptive technology emerging from the land of the sleeping giant, but from the fact that most of Apple’s products are manufactured there.

Taiwanese firm Foxconn Technology, one of Apple’s biggest suppliers, is facing allegations of inhuman working conditions at its Shenzhen and Chengdu plants in China. While tales of unsafe working conditions, long hours and frugal wages resulting in a spate of suicides and accidental deaths have long made the rounds, the news has grabbed headlines only recently.

As a response to the growing criticism, Apple has asked an independent group, the Fair Labor Association (FLA), to conduct audits of several of its factories in China, including Foxconn’s. [1] A negative review could lead to the shutdown of some of these plants affecting Apple’s supply chain adversely. However, that is an extreme scenario.

A more potent risk is Chinese custom officials moving to block import and export of Apple iPads in and out of China. A Chinese firm, Proview International, that claims to be the exclusive owner of the ‘iPad’ trademark name is aggressively seeking to impose the ban. [2] However, considering the huge market that it would impact and the immense popularity of the iPad, imposing such a ban looks difficult. But if an export ban does happen, it could impact Apple’s iPad sales worldwide as the majority of the iPads are assembled in China.

Finally, there is a risk that the competitive mobile device landscape will catch up with Apple, forcing the company to decrease the prices of its iDevices, especially the iPhone. Apple’s significant margin advantage over rivals has allowed it to generate huge profits and a nearly $100 billion cash balance, and losing this could be the most significant risk for Apple.

While these risks exist, we do not see them as a serious cause for concern presently. What do you think?

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Notes:
  1. Apple Says Fair Labor Association Began Foxconn Inspection, Bloomberg, February 14th, 2012 []
  2. Proview Asks China Customs to Stop IPad Imports, Exports, Bloomberg, February 14th, 2012 []
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