This is Part 1 of a 9-part essay series on Apple’s Success in China. Part 1 introduces the essay series. Part 2 explains Apple’s product-zeitgeist fit in China. Part 3 looks at product localization. Part 4 looks at Apple’s services in China and relationship with Tencent. Part 5 looks at the complexities of operating in China. Part 6 and Part 7 look at Apple’s compliance efforts in respect of the App Store and iCloud respectively. Part 8 looks at Apple’s investment in DiDi. Part 9 concludes with lessons from Apple’s experience in China.
The Only Exception is Apple
As of May 2020, the two largest economies in the world are the United States and China and the shortlist of the most valuable companies in the world is dominated by technology companies. Yet, of these companies, only one derives significant revenues from both countries: Apple Inc.
Much has already been written about Apple Inc. (hereafter simply “Apple”) and its strategies, such as its high degree of vertical integration, approach to innovation, unique organizational structure, and supply chain management. In contrast, Apple’s success in China is relatively under-theorized and poorly understood. This essay series intends to rectify this.
Why Now is a Good Time
Now is an opportune time to investigate this subject.
At the time of writing, the smartphone industry has entered the maturation phase of the technology life cycle. Of the 5.3 billion people on earth aged over 15, around 5 billion have a mobile phone and about 4 billion people have a smartphone. The platform wars have ended, with Google’s Android winning in terms of number of users and Apple’s iOS winning in terms of adoption by high-end users. As such, the current market structure is likely to persist for the foreseeable future, at least until the next generation of technological disruption, if it happens. Unlike Google,1 Apple’s victory extends to China, with an installed base of around 19.5%. Due to the size of the Chinese smartphone market, in absolute terms, this is a larger installed base than in Apple’s home market, the United States.
We are also currently in an era in which US-China relations are highly unstable. This has implications for technology companies, both as objects of policy decisions2 as well as decision-makers facing difficult trade-offs. I would not go so far as to claim that “every tech company is going to have to make a choice between the US and China” or that “[t]here is a fundamental clash of values between the West and China”. But the relatively low-level discussion in this essay series allows the reader to form better judgments regarding such higher-level conclusions.
As such, this essay series is much more than a narrow examination of a multinational company’s attempt to sell gadgets in a particular country. Rather, it is a prism through which we can understand some of the most decisive questions of our time. Will globalization and free trade prevail against the winds of nationalism and protectionism? How will wary governments contend for control and power with mega-cap technology companies with unprecedented access to and influence over user data and user behavior? Apple is perhaps the ideal bellwether for those interested in the answers to these questions.
Structure of Essay Series
Part 2 gives color to the extent of Apple’s success in China and explains Apple’s success in China as the result of its business model and the iPhone’s “product-zeitgeist fit” in the Chinese market.
Part 3 looks at Apple’s product localization efforts for the Chinese market, both in terms of hardware and software, and argue that they cannot explain Apple’s success in China.
Part 4 surveys Apple’s services in China and discusses Apple’s “frenemy” relationship with Tencent in detail.
Part 5-8 looks at how Apple deals with the complexities of operating in China. Part 5 gives an overview of the range of such complexities. Part 6 focuses on the iOS App Store and Part 7 focuses on iCloud, both of which Apple operates quite differently compared to its approaches in other countries. Part 8 elaborates on Apple’s investment in DiDi, a decision that is at odds with Apple’s own M&A history.
Finally, Part 9 concludes by abstracting from Apple’s particular experiences and compiling a list of lessons for non-Chinese (technology) companies looking to replicate Apple’s success.
For the time-constrained, below is a list of the conclusions of this essay series:
- Apple is the only non-Chinese smartphone maker and non-Chinese operator of Internet services in China and dominates the high-end.
- Apple’s unique business model of selling software-differentiated hardware is uniquely suited to overcome the many challenges of the Chinese market that hamstrung other US tech companies.
- The iPhone achieved product-zeitgeist fit in China: its high-end positioning coincided with the emergence of the world’s largest, mobile-first middle class with an appetite for luxury products.
- Apple’s software and hardware localizations aimed at Chinese consumers are minimal at best and many of the most significant changes appear to be motivated by other reasons (e.g. dealing with Chinese state-owned enterprises).
- Apple’s services in China do very poorly. Many of them are banned, regulated or generally perform poorly relative to Chinese companies providing similar services.
- One of these companies is Tencent, which is simultaneously one of Apple’s largest and most important developers and Apple’s largest threat to maintaining product differentiation in China.
- Apple has incurred significant costs to overcome complexities of the Chinese market, such as dealing with coordinated media campaigns by state media, suffering state-linked cyber-attacks and so on.
- In order to comply with local laws and regulations, Apple has made significant compromises to its Chinese App Store and iCloud operations.
- Apple’s peculiar investment in DiDi could only be explained by a desire to demonstrate its commitment to the Chinese market.
- For other non-Chinese (technology) companies looking to replicate Apple’s success, even without considering execution, the company must first have a business model that is a good fit with China’s business environment and overall zeitgeist.
- Google’s Android operating system is widely used in China but Google is unable to directly benefit from this usage as its services are generally unavailable within China.
- See e.g. the US sanctions against Huawei and industrial policy to bring TSMC’s manufacturing to the US, or China’s attempts to develop their own semiconductor industry