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January, 2018

Apple's China gambit

Original article: The Register

On February 28, Apple will turn over control of its Chinese customers' data to state-owned Guizhou-Cloud Big Data Industry. Apple is doing so to comply with a Chinese government directive that requires data on its citizens held by foreign companies is stored domestically. Apple maintains that it has robust data privacy protections in place for its Chinese data operations, and that no backdoors will be created in any of its systems.

Analysis:

Apple's eagerness to cooperate with the Chinese authorities is a sign of its vulnerability in the world's largest smartphone market, Indeed, China has become a reliable cash cow for Apple in recent years. Only the U.S. and Europe are bigger markets for the California-based company. In the fourth fiscal quarter of 2017, Apple's China revenue rose 12% annually to $9.8 billion, ending seven consecutive quarters of revenue decline. 


$9.8 billion in quarterly sales is an enviable figure, but it's down more than 40% from a high of $16.8 billion in the second quarter of 2015. Apple's response to falling sales has been to double down on its China business. In March 2017, the company announced it would invest $500 million in two new research and development centers. Meanwhile, CEO Tim Cook visits China frequently to meet with senior Chinese officials, suggesting more huge investments could lay ahead. 


The wisdom of Apple's decision to bet big on China won't be known for years to come. In the short term, the company appears to have made a smart move. Share prices are hovering at an all-time high of $177. In the fourth fiscal quarter of 2017, revenue and earnings-per-share hit record highs of $52.6 billion and $2.07, respectively. 


But in China, consumers are increasingly showing a preference for domestic brands, especially in the consumer electronics segment. CNBC recently interviewed a hotel executive who said she plans to buy a Huawei smartphone instead of an iPhone because she wants to support domestic brands. 


Without a game-changing new product, Apple is unlikely to be able to reverse its steady decline in the hyper-competitive China smartphone market, where local rivals like Huawei, Oppo and Vivo offer less expensive alternatives tailored for Chinese consumers.


Moreover, Apple's reliance on the China market is going to put the firm in a tough situation as the Trump administration and China square off on trade disputes. The Wall Street Journal recently reported that Chinese officials have warned executives of American firms with high China exposure that Beijing is prepared to retaliate if Washington rolls out trade sanctions. 


Is President Trump likely to sympathize with Tim Cook? In his public comments, Trump has shown little affinity for Apple. In early 2016, he criticized the company's stance on encryption. Overall, he has expressed opposition to Apple's reliance on overseas manufacturing and has pushed Tim Cook to bring production home. 

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