Apple is increasing its efforts to shift production outside of China, according to the Wall Street Journal.
Production at factories like Foxconn has taken a massive hit amid riots over zero-Covid policies.
Shifting production will likely be difficult in the current global economic climate, sources told WSJ.
Apple is pushing to expedite a pivot away from manufacturing in China, as protests swell over the country's strict zero-Covid policies and riots thwart production.
The technology giant is ramping up efforts to shift production to other Asian countries like India and Vietnam in order to distance itself from Foxconn, one of the company's top suppliers and operator of the world's largest iPhone factory in China, according to the Wall Street Journal.
While the move has been planned for months, after shifting COVID-19 policies enacted by the Chinese Communist Party first began to threaten production earlier this year, sources told the Journal that recent uprisings at the Zhengzhou plant are propelling Apple into action.
In November, the area known as "iPhone City" erupted into violent protests among employees over withheld pay and strict zero-Covid policies that prompted a lockdown in Zhengzhou. As demonstrations grew, Foxconn, which employs upwards of 300,000 factory workers, offered workers $1,400 to quit their jobs, and later, $1,800 bonuses to stay to retain its hemorrhaging workforce.
The turmoil's impact on Apple's bottom line has led to a sense of urgency to diversify production away from China, which has long dominated manufacturing for the company. However, the economic slump and slowed hiring is proving challenging to outsource production and forge partnerships with new suppliers, the Journal reported.
"Finding all the pieces to build at the scale Apple needs is not easy," Kate Whitehead, a former Apple operations manager and owner of a supply-chain consulting firm, told the WSJ.
According to the Journal, Apple plans to source up to 45% of iPhone production from factories in India, where it currently manufactures in just the single digits, and to ramp up manufacturing of products like computers, watches, and AirPods in Vietnam.
"This last month in China has been the straw that broke the camel's back for Apple in China with the head-scratching zero-Covid policy untenable with major strategic changes ahead for Cupertino in this key region," Ives Wedbush Securities analyst Daniel Ives wrote in a note to clients.
Chinese cities this week loosened COVID restrictions in the wake of mass protests, lifting Chinese stocks.
But market watchers are still preparing to see if China is ready to announce a full reopening of its economy.
Here are five things experts say they're watching in China after protests shook the market.
Chinese equities finished higher this week after cities throughout the country relaxed some strict COVID-19 restrictions, but questions remain whether the government will fully scrap the zero-COVID policy it put in place after the outbreak began in 2019.
Protests in at least 17 cities erupted last week after 10 people died in an apartment fire in the city of Urumqi, with local residents angered by the building being blocked off by lockdown measures. Protestors, in a rare display of dissent against China's authoritarian government, called for President Xi Jinping to resign.
China's top pandemic official this week appeared to signal a softening in the zero-COVID policy but the government has yet to pledge a comprehensive step-down. Hong Kong's Hang Seng Index climbed 6.3% and the Shanghai Composite gained 1.8% this week but each remained sharply lower for 2022, down 20% and 13%, respectively.
"Hopefully ... the Chinese government will start to unlock a little bit more. But knowing China, they have a habit of keeping a tight fist, "Darrell Martin, founder and CEO of Apex Trader Funding, a proprietary trading platform, told Insider.
Retail investors should be prepared to move defensively should Beijing's decisions on zero-COVID policy go against their respective positions, Martin said.
"I think you definitely need to learn how to trade short in this market. That's something that many retail traders are foreign to – where they can sell first and buy second," he said. "There are short ETFs … and for more active investors, they can short the market in a regular trading account or investing account."
Here's what some market experts are looking at as global investors watch for developments surrounding the Chinese government's zero-COVID stance.
More crackdowns, more market losses.
Emerging markets investing legend Mark Mobius said this week that Chinese stocks may come under further pressure in the face of the government's response to dissent.
"It's clear to me that Xi cannot tolerate any protests, so there will be a very tough crackdown on any protesters," Mobius told Bloomberg TV. "More people will be arrested and they will probably go further in terms of population control in many areas."
"So if you have that kind of scenario, then you've got to consider that the market will probably not do that well in the short term," he added.
FOMO is back in China
The "recent pickup in China equity inflows … suggests the fear of missing out is back," Emmanuel Cau, European equity analyst at Barclays, wrote this week. "China mobility in 2022 is now lower than it was in 2020, when the pandemic started, while it is the opposite for Europe and US," he wrote.
"So while reopening may not be a smooth process, all else equal, it seems reasonable to expect a positive growth impulse, or less growth drag, from zero-Covid next year in China compared to this year, in our view."
Metals prices to get a lift
A China reopening would contribute upside potential for certain metals, Bank of America said, noting China accounts for 50% of global metals demand.
"A second leg higher in the Fed's tightening cycle in 2H23 remains a key downside risk to commodity prices, particularly gold. Yet we expect Chinese economic activity to pick up firmly as Zero Covid policies are gradually eased lending support to the commodity complex," wrote Francisco Blanch, head of global commodities at BofA.
The bank said it's increasingly constructive on transition metals like copper as Chinese spending on infrastructure and its electrical grid should combine with rising sales of electric vehicles. Copper could rise to $12,000 a ton next yea and aluminum may reach $2,738 a tonne.
Position for China's re-opening
Being bullish on energy stocks in the way to be positioned if China were to "truly" reopen its economy in the second quarter of 2023, Anastasia Amoroso, chief investment strategist at iCapital, wrote in a note.
The "country's traffic congestion, airline bookings and flights, and overall mobility should [recover] meaningfully, supporting more demand for oil in an otherwise constrained supply environment," she said.
Brent crude oil traded above $85 a barrel on Friday and has lost about 13% over the past month. The S&P 500 energy sector has risen modestly over the past month but it's zoomed up 64% during 2022.
China policy, after all, is "impossible to predict"
Activist short-seller Carson Block said this week on CNBC that China has not been outlining its economic policy goals and investors need to price in such risk.
The founder of Muddy Waters Research said projections from Wall Street investment banks about China's next COVID policy moves are viewed from the "prior lens" of a government that was open to foreign investment and raising its citizens' standards of living.
"You have to understand that nobody has an edge as to predicting China policy anymore. The guy you know who's got lots of 'guanxi' or relationships in China? No, that doesn't matter anymore," Block said. "So you have to price in to what you're willing to pay the understanding that you wake up one morning and [say], 'It's down 90%.' Because that's what China is now. It is impossible to predict on a macro level."
Since the 2008 housing crash, lenders have overcorrected, shutting out millions of worthy Americans from buying a home.
Rachel Mendelson/Insider
How many people should lose their homes to foreclosure?
In an ideal world, of course, there would be no foreclosures at all. Everyone who buys a home would get one that fits their income and needs, and people would have enough money to make their mortgage payments on time and in full. But in a housing market built on debt, foreclosures are a painful reality: People lose their job or fall behind on payments, and lenders are forced to repossess the home to recoup their losses.
Too many foreclosures is obviously a bad thing — losing a home is devastating both financially and emotionally — but it's also a problem to have too few foreclosures. Low levels of foreclosure activity signal that housing lenders aren't taking enough risk, locking out hopeful buyers who could have kept up with payments on their mortgage if only they'd been given the chance.
Most residential loans are backed by the government-sponsored enterprises Fannie Mae and Freddie Mac or the Federal Housing Administration. To try to find a happy medium of risk, the GSEs and FHA set a "credit box" to determine who gets a mortgage and who doesn't. These standards are based on factors including the borrower's financial stability and the state of the housing market and economy. When the credit box gets tighter, fewer people get mortgages, and foreclosures generally go down. When it opens up, banks take more risks on people with lower credit scores or worse financials, increasing the possibility of foreclosures.
Finding the right size for the credit box is much easier said than done. In the years leading up to the financial crisis of 2008, banks and private lenders handed out millions of risky loans to homebuyers who had no hope of repaying them. A tidal wave of foreclosures followed, plunging the US housing market — and the global economy — into chaos.
But some experts have argued that in the years since the crash, the GSEs, lenders, and regulators overcorrected, shutting loads of potentially reliable buyers out of the housing market. Laurie Goodman, the founder of the Housing Finance Policy Center at the Urban Institute, a nonpartisan think tank, told me there's room today to "open the credit box" and relax lending standards without pushing the housing market into crisis. More foreclosures might come as a result, she said, but that would be "a worthwhile trade-off" if it gave more people the opportunity to build wealth through homeownership.
Opening the credit box isn't a cure-all for housing, and given the weakening economy, more cautious experts argue that making it easier to get a mortgage is unnecessary or dangerous. But if it's done correctly, it could be a major step towards a healthier market. A more stable credit box over time could not only ensure future homebuyers aren't locked out of getting the home of their dreams, but also smooth out some of the market's chaotic nature.
The 'invisible victims' of the housing market
In the aftermath of the Great Recession, the victims of the housing free-for-all were clear. An estimated 3.8 million homeowners lost their homes to foreclosure from 2007 to 2010, and plenty more did in the ensuing years. But the overly strict lending standards and tighter regulations that followed created a new class of sufferers: people who were unable to join the ranks of homeowners. David Reiss, a professor at Brooklyn Law School, calls these would-be homebuyers "invisible victims" — people who probably could have stayed current on their payments if they'd been approved for a loan but who didn't get that opportunity.
While the total risk in the housing market grew considerably in the run-up to the foreclosure crisis in 2007, much of that increase was driven by risky loan products rather than a stark change in the quality of borrowers, the Urban Institute argues.
Jeff Greenberg/Getty Images
While it can be hard to know just how many people were locked out of homeownership because of a too tight credit box, a report from the Urban Institute found that in 2015 alone, lenders didn't make about 1.1 million mortgages that they would have made "if reasonable lending standards had been in place." Another way to get a sense of just how tight the credit box is right now is to look at the rate of foreclosures. From 2001 to 2003, a period that the Urban Institute considers a relatively "healthy" lending environment, about 0.45% of mortgages entered the foreclosure process each quarter, according to the Mortgage Bankers Association. In 2019, before pandemic foreclosure moratoriums skewed data, the percentage was about half that. Or take the percentage of mortgages at risk of default, where the borrower was likely to fall behind on their payments by 90 days or more: According to an index created by the Urban Institute, this hovered around 12% from 2001 to 2003 and jumped to 17% at the peak of the financial crisis. In the first quarter of 2022, the risk was closer to 5%. All these measures point to the same thing: incredibly high barriers to entry for a loan.
Being locked out of the credit box doesn't just mean you have to go on renting for a few more years — it also means you're missing out on the most popular way to build generational wealth in America: owning a home. "We have serious reasons to be concerned about access to credit in homeownership," Patricia McCoy, a law professor at Boston College who studies financial-services regulation, told me. "When you look at wealth formation in the United States, for most families, the single biggest engine of wealth is home equity."
A tighter credit box has an outsize impact on lower-income and minority homebuyers, who generally have higher debt-to-income ratios and lower or nonexistent credit scores. A report from Morgan Stanley found that when lenders tightened credit standards at the onset of the COVID-19 pandemic, for instance, mortgage-denial rates increased for minority borrowers with the lowest credit ratings and Black and Hispanic borrowers in the middle credit tier. In contrast, the percentage of white borrowers who were denied loans actually fell over the same period.
How to open the credit box
While lenders have to meet the GSEs' standards in order to sell them loans, there's no single definitive credit box — lenders make all kinds of judgment calls as they assess a borrower's ability to repay the loan, and can narrow the credit box beyond the guidelines at the federal level. They consider a person's credit score and debt-to-income ratio, as well as how much cash they have for a down payment. Opening the credit box could take different forms, but basically it would entail lenders taking on more risk while still ensuring they're not handing out reckless loans that set homeowners up for failure.
One of the clearest ways to make this happen would be to relax the standards around credit scores. Last year, according to the Federal Reserve Bank of New York, the median credit score for a mortgage borrower reached a record of 788, well above the national average FICO score of 714. For millennials and Generation X, this baseline for homeownership is even more out of reach — the average FICO scores in 2021 for those generations were 686 and 705. In 2001, more than 30% of mortgage borrowers had FICO scores below 660; in 2020, only 10% of borrowers had a credit score under that number.
Opening up mortgages to people with lower credit scores doesn't necessarily mean another 2008-style housing bubble will develop. The Urban Institute has argued that while the total risk in the housing market grew considerably in the lead-up to 2007, most of that frothy activity was driven by banks developing risky loan products rather than a stark change in the quality of the borrowers themselves. Goodman added that there are now more resources for homeowners to avoid foreclosure even if they fall behind on their loans. There are also other ways to make sure potentially reliable borrowers don't slip through the cracks — using alternative credit scores, for example, or considering their utility and rent payment history, which typically hasn't been reported to credit bureaus.
The benefits of a more stable credit box
Beyond giving millions of Americans the ability to take the first step on the housing-wealth ladder, opening the credit box could have some major benefits for the market more broadly. For one thing, it would reduce the number of people who are forced to rely on renting homes from large investors. As many hopeful buyers failed to qualify for mortgages after the financial crisis, companies that buy up single-family homes and operate them as rentals swooped in to fill the gap. In a white paper published last year, Amherst Residential, which today manages more than 33,000 single-family rental properties, estimated that 85% of its residents would not qualify for a mortgage under the tougher standards. "Although tightening credit boxes and more stringent underwriting standards are typical in post-recessionary mortgage markets, the extent to which credit has been restricted and the duration to which lack of access has persisted is vastly under-appreciated," it said.
Even just stabilizing the credit box over time could also help smooth out some of the boom-and-bust cycles that have come to define the housing market. In a 2017 paper, McCoy and Susan Wachter from the University of Pennsylvania argued that credit gets too loose in good times and too tight in bad times. A credit box that still adjusts to the market conditions, but does not overreact, would ensure borrowers get mortgages they can afford while also helping to eliminate the highs and lows from the lending cycle and the housing market at large.
"If we do not address this intrinsic cyclicality, the housing market will continue to experience boom-bust cycles, leaving destruction in their wake," the paper said. "This destruction includes widespread evictions, mass unemployment, severe contractions in credit, depressed homeownership rates, and heightened impediments to wealth formation for minority and lower-income households."
Not everyone is convinced that opening the credit box is wise, or even necessary
There are, of course, skeptics of credit-box expansion. Mark Calabria, who was the director of the Federal Housing Finance Agency during the Trump administration, told me that while there are plenty of things wrong with the mortgage system today, loosening underwriting standards shouldn't be on the list of priorities, especially given the slowing growth of — or outright decline in — home values and the weakening economy.
"At the end of the day, putting vulnerable households into a declining asset value right now, when the job market is probably going to weaken, is not simply irresponsible, it's immoral," Calabria said.
The real constraint for homeowners today, Calabria said, is finding a home in the first place. By some estimates, the US needs 3.8 million more homes to absorb all the demand for homebuying. He added that expanding credit access would only introduce more buyers who'd then bid up existing homes, worsening the supply shortage.
Mark Calabria, the former director of the Federal Housing Finance Agency, is among those arguing against expanding the credit box right now given the state of the economy. The supply shortage is the true barrier to entry for buyers today, he told Insider.
Phillip Spears/ Getty Images
McCoy, the Boston College law professor, said that the goal should be to make sure homebuyers are taking on responsible loans and are equipped with the education and resources to keep up with their payments. "We need to think about the back-end risks of homeownership and try to manage that risk and reduce it so that homeownership is a successful experience," McCoy said. "To me, that is very much intrinsic to opening the credit box — opening it in a way in which homeownership is successful."
Right now, as the economy is showing signs of weakness, standing pat and preserving the current credit box could help to prevent another extreme swing towards tightening lending standards in the future, McCoy said."I really push back against the idea that just knee-jerk relaxing credit standards is ultimately a solution," McCoy said. "When that happens, the danger is that it's going to saddle people with mortgages that they can't afford, and they'll eventually lose their homes. And that does nobody any good at all." Instead, we should be looking at ways to lower the cost of mortgages and ease zoning laws to build more housing, she said.
Cristian deRitis, the deputy chief economist at Moody's Analytics, was less wary of opening the credit box. "Improving the financing, making it easier, cheaper, more available — yeah, I'm all for it," deRitis told me. "There's certainly ways we can do that in a very controlled manner without going all the way back to where we were prior to the mortgage crisis." But deRitis also said he doesn't think expanding the box could move the needle significantly on homeownership or resolve the housing deficit. "That's basically a supply-side issue," deRitis said. "So it's the zoning, it's the regulations. We just don't have enough houses out there for people to bid on."
Goodman, of the Urban Institute, doesn't see it that way. A household will demand one unit of housing whether they're renting or buying, she said — just look at the growing market for single-family rental homes. A household's ability to qualify for a mortgage simply determines whether they're able to buy or rent, Goodman said. And because mortgages typically last 30 years, she added, risk evaluators should already be considering the possibility of the housing market going up and down during that period. In that sense, a conversation about opening the credit box is valid no matter where we are in the housing cycle.
It's clear that loosening credit standards won't be the silver bullet that solves all the housing market's problems. But ensuring healthy access to credit so that more homebuyers aren't left behind in the process can be a critical tool to help more Americans get into homes and potentially even ease the constant boom-bust cycle — even if it means taking some more risks along the way.
I visited two malls in Orange County, California on Black Friday and found plenty of foot traffic.
The Irvine Spectrum was filled with groups of teenagers and long lines to get into stores like Urban Outfitters.
Meanwhile, South Coast Plaza's Zara and Madewell had similar lines while luxury retail stores were nearly empty.
I visited two popular shopping malls in Orange County, California during the morning of Black Friday and was shocked to see both were full of shoppers.
Brittany Chang/Insider
It seems like in-person Black Friday shopping and malls aren't dead as long as teenagers and young adults are ready to spend.
Brittany Chang/Insider
The "retail apocalypse" was nowhere to be seen at the popular Irvine Spectrum Center the morning of Black Friday.
Brittany Chang/Insider
Despite the general downfall of malls, the 1.2 million-square-foot outdoor center has continued to be a go-to spot for after-school hang-outs, family dinners, and leisurely weekend shopping trips.
And Black Friday was no exception to this generally strong foot traffic.
Brittany Chang/Insider
When I arrived at the palm tree-lined Irvine Spectrum Center shortly before 8:30 a.m., I was greeted by a stream of cars scouring open parking spots.
Brittany Chang/Insider
And despite the relatively early hours, the mall was already bustling with people.
Brittany Chang/Insider
It wasn't as crowded as a typical Saturday afternoon. But for 8:30 a.m., the foot traffic was impressive.
Brittany Chang/Insider
But there weren't as many families or couples as I had expected.
Brittany Chang/Insider
Instead, it looked like over half of the consumers were groups of Gen Zers shopping with their friends.
Brittany Chang/Insider
And this young but powerful demographic seemed to dictate the number of customers inside each shop.
Brittany Chang/Insider
Stores like Nordstrom and Anthropologie were quiet with only a handful of shoppers.
Brittany Chang/Insider
But the same couldn't be said for Lululemon.
Brittany Chang/Insider
Inside, the popular athletic apparel store was packed with long checkout lines reminiscent of Black Friday before the rise of online shopping and COVID-19.
Brittany Chang/Insider
Similarly, the lines just to get into Urban Outfitters and Swish Studios — a sneaker and streetwear shop — were almost a dozen people long …
Brittany Chang/Insider
… and consisted mostly of young shoppers.
Brittany Chang/Insider
Stores like Garage and Levi's were also packed with these younger consumers.
Brittany Chang/Insider
But at this hour, some Gen Z-beloved brands like Brandy Melville, Tilly's …
Brittany Chang/Insider
… Pacsun, Vans, and H&M were relatively quiet with only a handful of people filing in and out.
Brittany Chang/Insider
None of these stores had lines out the door yet.
Brittany Chang/Insider
But they all had belt barriers set up in anticipation for larger crowds later in the day.
Brittany Chang/Insider
To my surprise, Old Navy had a robust crowd with a long checkout line, although the age of customers here looked more varied.
Brittany Chang/Insider
But in general, it seemed like fast fashion stores catered towards young consumers were winning big in the early hours of this year's Black Friday shopping fiasco at the Irvine Spectrum Center.
Brittany Chang/Insider
I had no doubt the outdoor mall would be significantly more packed later in the day, likely with a more varied demographic.
Brittany Chang/Insider
But in the morning, Gen Zers looked like they were dominating the mall.
Brittany Chang/Insider
At South Coast Plaza, the largest luxury mall on the West Coast, the scene was somewhat similar.
The 2.8 million-square-foot mall is filled with over 275 restaurants and stores …
Brittany Chang/Insider
… including high-end retailers like Versace, Yves Saint Laurent, Hermes, and Chanel.
Brittany Chang/Insider
But when I arrived a few minutes past 9:30 a.m., only a handful of people, if any, were milling around these luxury stores.
Brittany Chang/Insider
It was quiet at the likes of Celine, Rolex, and Burberry.
Brittany Chang/Insider
This should be no surprise: Many premium brands don't have Black Friday deals.
Brittany Chang/Insider
And high-income shoppers aren't as impacted by inflation, which means there's less urgency to hunt for discounts, Neil Saunders, GlobalData's retail analyst, told Insider.
Brittany Chang/Insider
Instead, like the Irvine Spectrum Center, most of the crowds were centered around a handful of brands that target younger consumers.
Brittany Chang/Insider
The long checkout lines …
Brittany Chang/Insider
… disheveled displays …
Brittany Chang/Insider
… and general bustle at the mall's Madewell and Zara looked busier than I've seen during normal retail hours.
Brittany Chang/Insider
Instead of teenagters, these stores were primarily filled with what looked to be late-Gen Zers and millennials, although the shoppers at South Coast Plaza often seem to skew older because of the number of luxury retailers.
Brittany Chang/Insider
Meanwhile, Aritzia was buzzing with customers waiting in a surprisingly long dressing room line.
Brittany Chang/Insider
And there were plenty of shoppers fluttering around Lacoste, Sephora …
Brittany Chang/Insider
… Bath and Body Works, Uniqlo, and Victoria's Secret.
Brittany Chang/Insider
The two-floor Forever 21, which historically failed to appeal to Gen Zers before its bankruptcy, was nearly empty.
But to my surprise, the Lego Store had one of the longest lines at the door. It looked like most of these shoppers were families or parents.
Brittany Chang/Insider
Overall, there seemed to be more families, late Gen Z,ers and millennials at South Coast Plaza.
Brittany Chang/Insider
But brands like Zara and Madewell, which generally appeal to younger demographics, looked like some of the shopping center's most popular stores.
Brittany Chang/Insider
Across both malls, it's evident the in-person Black Friday shopping extravaganza is not just an event of the past.
Brittany Chang/Insider
But this trend isn't specific to just Orange County, California.
Brittany Chang/Insider
According to Saunders, in-person Black Friday shopping is back, especially for young shoppers and brands that already see plenty of commercial success.
Brittany Chang/Insider
"Old habits seemed to have resumed after the disruption of COVID-19," Saunders said. "The younger consumer is really powering a lot of that. It's very noticeable in stores that cater to the younger demographic."
Brittany Chang/Insider
It's a social event for these shoppers, Saunders says. A time for young friends to see each after spending Thanksgiving Day with their families.
Brittany Chang/Insider
And for brands that already see strong sales throughout the year by targeting younger consumers, it's a time to "strengthen the success trend," Saunders said.
Brittany Chang/Insider
So as long as brands that target Gen Zers and millennials are offering deals, young shoppers will come flocking.