Apple's Chinese suppliers could benefit from US trade tensions

After taking an in-depth look at developments in global trade, JPMorgan strategists concluded that some of Apple's Chinese suppliers could benefit from the trend toward supply chain diversification. The October 18 report examines 10 aspects of “the great supply chain reshoring and the rise of trading blocs.” The analysis ranged from China's dominance in the global supply chain and overcapacity concerns to U.S. policy. Tensions between the United States and China and talk of “decoupling” emerged during Donald Trump's first term as president. Calls for supply chain diversification have intensified during the Covid-19 pandemic. Republican candidate Trump has threatened to impose 60% tariffs on China if he is re-elected president next month. Democratic candidate Kamala Harris is expected to maintain the Biden administration's tough stance on Chinese technology and calls for the return of high-end manufacturing to the United States. “Tariff War 2.0 would also likely accelerate the pace of global supply chain offshoring,” JPMorgan analysts said. . “Our EM equity strategy team highlights some of the MSCI EM companies (from India, ASEAN and Mexico), which could be potential beneficiaries of supply chain relocation and growth in manufacturing sector in their respective markets,” the report said. “Additionally, they are highlighting names that could benefit from Apple's supply chain offshoring,” the report said. Apple plans to increase iPhone production in India, while some of its Chinese suppliers have invested in factories abroad. The analysts' list of beneficiaries of supply chain diversification included three names traded in mainland China: Wingtech Technology, Luxshare Precision Industry and GoerTek. JPMorgan rates Wingtech and Luxshare overweight, while it is neutral on GoerTek. All three companies already manufacture in many parts of the world outside of China, according to their websites. Apple's latest supplier list shows the company buying from GoerTek and Luxshare in Vietnam as well as China. A list of suppliers from the previous year showed Apple purchased products from Wingtech factories in Malaysia and the Philippines. The latest version only listed Wingtech's operations in China. Other Chinese suppliers have expanded their overseas operations with their customers. Shenzhen-based smartphone company Oppo said that by opening its factory in Indonesia, it also helped around 10 of its suppliers set up there. Chinese companies' overseas revenues have increased in recent years, and a portfolio of companies with heavy exposure to overseas sales generated an annualized alpha of 9.5% between 2019 and 2023, analysts said by Bernstein in their report this month on China's global manufacturing development. “We believe this will be a key source of returns for investors as Chinese companies globalize and leverage their low-cost, high-quality product strategy outside of China,” the analysts said. Apple provider Luxshare is also one of their top choices. Bernstein rates the stock as outperform with a price target of 50 yuan ($7.02), 15% above the stock's closing price on Friday. Luxshare “has a significant site in Vietnam involved in the assembly of Apple wearable products and non-Apple businesses. Overseas capacity represents approximately 25% of Luxshare's overall capacity,” Bernstein analysts said . On the other hand, for Apple's iPhone, Bernstein's analysts are less optimistic about India's ability to become a viable alternative to China. They expect Luxshare to take a share in smartphone assembly in China. Apple is expected to release its quarterly results on October 31. CNBC's Michael Bloom contributed to this report.

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