China prohibits government officials and SOE employees from using iPhones and foreign-branded smartphones

CHINA: China has ordered officials at central government entities and employees of state-own-enterprises (SOE) not to bring iPhones and other foreign-branded smartphones into their place of work, a development that was first reported in the Wall Street Journal on 6 Sept 2023.

The Chinese government cited cybersecurity concerns amid increased geopolitical tensions with the US, raising investor concerns that the ban could affect iPhone sales in China.

CGS-CIMB Research (CGS-CIMB) expects the potential impact of the ban, would be less than one million units of iPhone sales in a year, as it estimates only 5% of the 38 million employees (based on Apple’s 17% market share in China in 2022) in government entities and SOEs use iPhones, which is 0.4% of annual iPhone shipments globally, according to research firm Counterpoint.

“We stay Neutral on the China smartphone sector due to weak consumer demand and slower-than-expected specification upgrades on the back of global inflationary pressures, a strong US dollar, and an uncertain global economic outlook.

“We believe prohibiting government officials from using iPhones and other foreign branded smartphones not only enhances national cybersecurity by minimising the chances of sensitive information leaking abroad, but also increases the competitiveness of domestic mobile smartphones, allowing these handsets to gain higher market share in the high-end segment,” the research house said in its report on 11 Sept.

Two years ago in 2021, the United States government prohibited officials from using Huawei handsets, also for national cybersecurity reasons, while China banned Windows.

Meanwhile, this is the second time the Chinese government has expressed concerns about cybersecurity risks emanating from dependence on foreign software, particularly operating systems.

In September 2021, China discouraged government entities from adopting the Windows operating system in computers.

The potential impact on iPhone sales could be minimal

The research arm said the impact on iPhone sales in China would be small.

“We believe the potential impact on iPhone sales in China has been overstated by international media.

“Based on our observation, government officials, particularly males, typically carry Huawei or other Chinese brands, with relatively few owning an iPhone.

“The majority of iPhone users in China are women in the middle-to-upper-income groups,” it said.

Apple may sell less than one million iPhones a year in China

In 2021 and 2022, Apple sold approximately 49 million and 46 million iPhones in China, accounting for 21% and 20% of total global shipments, respectively, according to data from Counterpoint.

According to the National Bureau of Statistics of China, China has approximately eight million civil servants and 30 million employees in SOEs, accounting for 5% of China’s working population.

“We estimate only around 5% of iPhone users work in government entities and SOEs (based on Apple’s 17% market share in China in 2022, according to Counterpoint).

“This translates into approximately two million iPhones, or 800,000 unit demand a year (based on a 2.5-year replacement cycle), which is a very small portion of global iPhone sales of 230m units in 2022, according to data from Counterpoint,” it said.

Meanwhile, former investment banker and high-net-worth private investor Ian Yoong Kah Yin said it is unlikely for the Chinese government to escalate this restriction to its population as China is the dominant assembler of iPhones in the world.

In 2022, the best-selling smartphone in China was Apple’s iPhone.

While in the second quarter of 2023 (Q2’23), the best-selling smartphone in China 2Q23 was Huawei as its latest models are technologically on par with the iPhone and about 15%-20% lower price than the iPhone. The iPhone was the second best-selling smartphone in 2Q23.

“There are an estimated 7.1 million civil servants in China and about 50 million to 60 million government contractors. Apple reported a total of 225 million global iPhone shipments in 2022. The number was 240 million in 2021.”

“If we assume the iPhone penetration rate is 26% for civil servants and government contractors which is same as the population, the number of smartphones affected by the China government restriction is 17.4 million units.”

“The smartphone replacement cycle in China is 40 months. This works out to an insignificant 2% of global iPhone shipments in 2022.”

“Many analyses have yet to downgrade companies in Apple’s supply chain as the perceived impact of the China government’s restrictions is low,” he said.

Yoong said iPhone’s main assembler Foxconn/Hon Hai , Apple Inc and other companies in the iPhone supply chain will be adversely impacted by China government’s restrictions.