Apple and the Repatriated Expats
- By Brett Ashcroft-Green
The best ideas of 2016 are now in the books, and many stocks that were once considered good deals are starting to approach the outer limits of their various intrinsic values: the oil refiners, the financials and betting big on the recovery of mining and coal in the face of two candidates during this recent election that would have taken regulations in different directions.
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The intrinsic value of APPL
Now that we have a rough idea about where regulations may go in the future regarding tax policies and environmental controls, we should also take a look at negatives that may occur, especially those pertaining to the possible repatriation of entire manufacturing operations.
On that note, a lot of people probably don't realize the amount of flexibility that overseas corporations have when getting in and out of deals with Chinese manufacturing partners (we're mainly talking about Apple [AAPL] and others operating in China when we say, "Let's bring the jobs back"). American corporations are forced to form a joint venture with local companies in China, as per Chinese PRC regulations, before they can begin operations. This is unique to China and actually provides capacity flexibility on both sides.
Being that Apple and other manufacturers that have set up shop in China most likely have no ownership interest in the actual land or manufacturing facilities, the primary losses would be on lease buyouts and other JV operation negotiations. It's also possible that the manufacturing assets are jointly owned, but that capacity can be sold to domestic manufacturers that produce similar products, like Xiaomi or Lenovo (HKSE:00992). I'm sure that they would be salivating at the mouth to get a hold of proprietary Apple equipment.
I have been to the Foxconn Apple plant in DuJiangYan, China, and it is massive. That is only one of the plants that have proprietary Apple equipment; Dong Guan and other areas are on the list as well.
Therein lies the primary problem when it comes to exiting these positions in Chinese joint ventures; the existing capacity will need to be sold into the domestic Chinese market. This will inevitably lead to a quick leeching of U.S. trade secrets to Chinese buyers of capacity. But let's be frank; this already happens in one form or another. The brand is what really makes the product.
If anyone has ever played with a Xiaomi cell phone (one of China's leading domestic brands), the influence of reverse engineering of Apple products is readily apparent, but it's bound to get worse if there is a rapid exodus of manufacturing back to the U.S. - not just in terms of smartphones but other products as well.
If the repatriation of manufacturing is really going to happen, there needs to be some sort of subsidy for the removal of equipment or else it may not be feasible at all for many companies from several standpoints.
Additionally, there is no actual benefit from having distribution facilities in China. All foreign goods are hit with a tariff regardless. In most countries, having a local distribution center will reduce tariffs and make business more feasible. As a negotiating card with the PRC, it may be wise to renegotiate this portion to allow joint ventures to set up domestic Chinese distribution plants that are exempt from import tariffs. This is a point of contention that has also been unfair to in Sino-U.S. trade policy.
Disclosure: The author has no position in Apple or Lenovo.
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This article first appeared on GuruFocus.
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The intrinsic value of APPL
