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August, 2018

The real risks Apple faces in China

Original article: The Wall Street Journal

As trade tensions between Beijing and Washington simmer, the Chinese state media is criticizing tech giant Apple for failing to contain the proliferation of illegal content: text and images of counterfeit goods, pornography and gambling. Apple has not directly responded to the criticism, but said that its iMessage service has filters to block unwanted content. 

Analysis:

Apple is one of the most successful U.S. firms in China, which accounts for about 20% of its $215 billion annual revenue. Strong China sales have helped Apple become the world's first company to reach $1 trillion in market capitalization. 


Apple's rising dependence on China has investors concerned. Now that the U.S. and China are trade warring, won't China want to hit Apple where it hurts? Not necessarily. Foxconn, the Taiwanese firm responsible for most iPhone assembly work, employs more than 300,000 people in Henan Province. Sanctioning Apple - and causing those workers to lose their jobs - could cause pandemonium in China's third most populous province. Henan has a population of 94 million. 


At the same time, Apple has long been a China booster. CEO Tim Cook regularly travels to China and meets with senior officials. Apple has been steadily upping its R&D investments in the country. The company also has not resisted Chinese cybersecurity regulations seen as intrusive in the U.S. In February, Apple moved Chinese users' data from its U.S. servers to ones operated by a Chinese state-owned company. 


And of course, anti-China sentiment in the U.S. has risen since Donald Trump became U.S. president. Beijing wouldn't be wise to attack one of the most prominent U.S. firms considered friendly towards China. 


Yet for Apple, doubling down on the China market still carries very real risks. The first is that Chinese consumers will lose interest in its brand. Apple has more brand power than any Chinese rivals, but it lacks the homefield advantage. Brands like Huawei and Xiaomi were born in China and design their products with local consumers in mind. On the back of its China sales, Huawei recently surpassed Apple to become the world's No. 3 handset maker by shipments. 


Apple's mobile phones are among the most expensive in China. For die-hard iOS fans, the price tag is justified. But many other Chinese consumers will opt for a slightly less expensive phone with more bells and whistles. Five years ago, only Samsung and Apple sold truly premium smartphones in China. Today, Apple has to vie with Huawei, Oppo and Xiaomi, which recently produced a near carbon-copy of the iPhone X at a much lower price point. 


Finally, Apple should worry about the safety of its intellectual property in China. A Chinese citizen and former Apple employee who stole schematic designs and sketches of Apple's self-driving car project was recently arrested in San Jose. Had he made it to China, he would have taken a job with a Chinese firm developing autonomous vehicles, investigators say. 


That incident occurred on U.S. soil. Would Apple have the same recourse if a similar incident happened in China? It's something the company should consider before it decides to invest additional hundreds of millions in China-based R&D facilities. 

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