This is Part 2 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.
This essay will begin by elaborating on Apple’s success in China, circa 2020 AD. It will then go briefly into Apple’s history in China, before arguing that Apple’s iPhone achieved the mythical product-zeitgeist fit in China and that Apple’s business model uniquely enables its success in China. Finally, it will briefly note the how Apple has organized itself differently in light of its China operating segment. This last point is a foreshadow to the subsequent parts of this essay series, which discusses how Apple has made changes to cater to the Chinese market.
Let’s dive in.
Apple’s Success in China
The extent of Apple’s success in China is under-appreciated.
Thus, Apple has the dual honor of being the only non-Chinese company with significant market share as a smartphone vendor and as an operator of Internet services.
In 2020, the smartphone market has saturated worldwide as well as in China.1 Apple is by far the most profitable smartphone maker (~75% of industry profit, according to WSJ) and approximately 20% of its revenues comes from China.
Statistics on the Chinese smartphone market typically reports on number of smartphones sold by each vendor in each quarter. This glimpse at a flow concept is a proxy for overall market share but does not account for the varying lifespans of different smartphones (high-end vs low-end, iOS vs Android).
According to Morgan Stanley’s Katy Huberty, Apple’s China install base is 19.5% in 2019, but this is probably quite unevenly distributed throughout different parts of China. For example, this Tweet from Dec 2017 suggests the iPhone had a almost 50% market share in Beijing—this is comparable to iPhone’s market share in the US as a whole.2
From these, we can fairly characterize the Chinese smartphone market thus: Apple is holding onto the high-end, with some competition from Android makers like (in descending order of market share) Huawei, Oppo, Vivo, and Xiaomi. This is not necessarily the end-state of the Chinese smartphone industry.3
But one can at least predict that, in a mature market, there is little free energy for new players to enter and acquire significant market share. Expect more zero-sum battles for market share among the remaining players.
Apple is also the only non-Chinese operator of foundational Internet services in China. Here, foundational Internet services primarily refers to the iOS App Store. A later part of this essay series will examine Apple’s (mostly unsuccessful) attempt to expand its other services offerings in China, as well as Apple’s significant compliance burdens in terms of iOS App Store and iCloud.
For now, it suffices to note that because of the closed design of iOS, iPhones can only download third-party software via the App Store. Apple, by leveraging access to its high-end users, thus controls a highly valuable means of distributing software in China.4
For a sense of Apple’s scale in China, using the earlier install base statistics, there is thus an approximately 160 million iPhone users in China (compared to ~100 million in the US). Also, the number of iOS developers in China is 2.2 million in May 2019, the lagrest in the world.5 As such, Apple’s Chinese user base and app developer base are already the largest in the world.
Apple’s History in China
To understand Apple’s subsequent “product-zeitgeist fit” in China, it is helpful to go back in time to understand Apple’s own history.
In Apple’s early history, it was primarily a manufacturer of personal computers. Apple catalyzed the development of PC as a category by creating the first widely purchased computers that adopted a graphical user interface (GUI), which is significantly easier to use compared to the conventional text-based user interface (TUI). This is exemplified by the original Macintosh in 1984, which was the first successful mass-market personal computer to have featured a GUI, built-in screen, and mouse.
During this PC era, Apple has exhibited the same characteristics that will persist into its mobile era. Its products offered superior user experience, better integration between hardware and software and were priced more expensively. Its brand were perceived as trendy and high-end. Unfortunately, these characteristics were not rewarded in the early PC market in the 1990s, in which Windows and Intel emerged as the winners capturing the bulk of the profits.
As noted by analysts, this was because the PC market in the 1990s was dominated by corporate buyers, which comprised roughly 75% of volume.6 Corporate buyers wanted a commodity whose specifications they could easily compare and, as they were not the actual users of the device, generally disregarded factors like aesthetics, ease of configuration, and user experience. Such a market benefited Microsoft, whose operating system Windows enjoyed the network effect resulting from enterprise applications that were already built for IBM PCs, the already-entrenched incumbent at that time.
During Apple’s PC era, China had only started to shift away from a planned economy and began reforming and opening up under Deng Xiaoping in 1979. China was much too poor to be a significant market for PCs during these early days. As China integrated with the global economy, Chinese policymakers sought to replicate the experience of other East Asian countries by becoming a manufacturing hub for the world and making full use of its cheap and reliable labor and decent infrastructure.7 This coincided with Steve Jobs’ hiring of Tim Cook in 1998, who worked to “revamp Apple’s bloated supply chain” by shutting down its own factories and warehouses and replacing them with Asian contract manufacturers.
It is difficult to mark the exact start of Apple’s mobile era. From a product evolution perspective, the iPhone grew out of and was significantly cross-subsidized by Apple’s earlier success with the iPod—the portable music player first released in late 2001—which followed previously unsuccessful handheld products like the Apple Newton and the eMate. However, the iPhone’s significance far outstripped any product Apple has created previously and is difficult to overstate. The iPhone ushered in the smartphone era and made computing truly personal and ubiquitous. In time, smartphones went on to disrupt PCs and enabled a slew of innovations that define the twenty-first century.
Unlike in the corporate PC market, in the smartphone market, buyers purchased smartphones for themselves. This catered to Apple’s consumer-centric strengths, such as providing superior user experience and having a cooler brand image. Today, Apple’s derive the plurality of its revenues from iPhones and, for many iPhone users, their decision to purchase another Apple product (Mac, iPad, Apple Watch, AirPods and so on) is in part motivated by their already having an iPhone.
Returning to our China-centric perspective, Apple set up the first Apple Store in China in Sanlitun, Beijing, in 19 July 2008, allowing Chinese consumers to experience first-hand the full-range of Apple products. In 2009, Apple entered into an exclusive partnership with China Unicom, a Chinese carrier, and, in 2010, China Unicom’s version of iPhone 4 was a hit that cemented the iPhone’s position in the minds of Chinese consumers.
Nonetheless, the importance of Chinese consumers to Apple has always been marginal while Steve Jobs was CEO. Jobs had never visited China and mainland China was typically not among the countries where the iPhone would be sold at launch. In contrast, China’s increasing importance to Apple coincided with Tim Cook’s becoming CEO of Apple.
It is first necessary to understand the magnitude of the growth of Apple’s China business to understand the significant shift under the Tim Cook era. In Apple’s annual 10-K, its net sales in China in 2009 was $769 million, a number that would grow to $12.5 billion in 2011, making China the only other country besides the US to account for more than 10% of Apple’s net sales, and subsequently reach a peak of $56.5 billion in 2015 or nearly 25% of total revenues, which exceeded Apple’s net sales in the whole of Europe.
Notably, in 2013, Tim Cook observed that China will in time become Apple’s largest market. As the following graphs indicate, this prediction did not come to pass, but it is worth contemplating the implications if this became true in the future.8
The iPhone’s Product-Zeitgeist Fit
The iPhone achieved product-zeitgeist fit within the Chinese market.
First, Apple’s business model of selling highly differentiated hardware is more robust to copycats and government regulation. Unlike purely Internet-based services (e.g. Google, Facebook), Apple’s Internet services (App Store, iCloud, Apple Music and so on) are premised on the users owning an Apple device and thus cannot be easily copied.
While a copycat can imitate the form factor of Apple’s products (and Chinese competitors like Xiaomi and Huawei often do precisely this), without Apple’s proprietary components and software (e.g. Apple’s internally designed processors and iOS), they cannot replicate Apple’s user experience.
Similarly, unlike other tech companies whose products typically enjoy winners-take-all network effects, Apple’s high-end positioning typically result in a relatively small market share of well-off users. This made Apple less threatening to Chinese regulators concerned with social stability and foreign influence on China’s information environment.
Second, Apple’s high-end positioning came at a time when Chinese consumers form the largest emerging middle class in the world and exhibit a huge demand luxury items. By 2013, China has become the largest market of luxury items. Somewhat speculatively, this demand for luxury items is arguably a result of China’s rapid economic development, which had created a class of nouveau riche and a larger class of people who aspire to join them. Apple has done well to cater to this demand by modifying its product strategy accordingly.
Third, the fact that China is a mobile-first market also contributes significantly to Chinese consumers’ willingness to spend more on their primary computing device. On this note, it is perhaps instructive to compare China to the second and third most populous countries. Compared to India, where Apple’s market share is in the low single-digit, China’s per capita GDP is significantly higher, thus ensuring that the high-end iPhone has a much larger addressable market. For developed countries like the US, the transition to mobile as the primary computing platform is much slower, as many tasks can already be completed on desktop. Thus, Apple’s timing in creating the iPhone and the modern smartphone industry by extension fortuitously coincided with China’s stage of economic development.
Apple’s internal organization is relatively opaque, but it is possible to observe that China’s greater importance has been reflected in Apple’s senior management’s priorities.
As noted, whereas Steve Jobs has never visited China, seven months after becoming CEO, Tim Cook met with Li Keqiang, who was then the Vice Premier (and currently the Premier) of China to discuss intellectual property protection and avenues for increased collaboration. In his first five years as CEO, Cook visited China more than ten times, each time emphasizing his confidence in the Chinese market. Since 2015, an official Weibo account of Tim Cook is used to communicate directly to Chinese consumers.
On July 18 2017, Apple announced that it would name Isabel Ge Mahe, born in Shenyang, China, as Apple’s Managing Director of Greater China, a region that included mainland China, Hong Kong and Taiwan. This was noteworthy as it went against Apple’s avowed functional organizational structure: Ge’s role is the only geography-specific role among Apple’s senior management. This is a credible signal of Apple’s commitment to the Chinese market and, speculatively, having a Mandarin-speaking ethnic Chinese advocating for Apple’s interests is likely to help Apple’s negotiations with the Chinese government.
Apple’s approach towards government relations in China could be compared with conventional approach of Chinese tech companies. There is no space to fully explore the relationship between the Chinese government and Chinese tech companies, but the following stylistic account suffices for our purposes. Typically, government relations (GR) are not a priority for Chinese startups unless they have successfully scaled to a certain size and have drawn the attention of regulators. At this point, a politically connected person will be brought in to deal with “2G” (to-government) matters. The success with which this head of GR mediates the company’s interests and the Chinese state’s interests varies on a case-by-case basis.
In contrast, Ge was recruited by Steve Jobs from Palm Inc. in 2008 to lead Apple’s wireless technologies team. She was promoted to the Managing Director of Greater China significantly later in her career and does not have any ostensible political connection to the Chinese government.
- Among Chinese Internet trends, the only exponential growth that is likely to continue is mobile data traffic, whose increase far outpace the number of Chinese Internet users. This trend will likely continue with the implementation of 5G networks, with peak data rates up to 100 times faster than current 4G networks. Setting aside the sound and fury surrounding “the 5G race” and Huawei, the Chinese government’s policy to roll out 5G via the three state-owned carriers is likely accelerate 5G implementation.
- As far as I know, there is no reason for China Unicom to have a disproportionately larger base of iPhone users.
- Notably, the fact that Samsung, a manufacturer of premium Android in other markets, today has a negligible market share in China highlights how difficult it is to sustain differentiation as an Android manufacturer.
Samsung’s fate is best attributed to the open-source nature of Android. Google’s strategy for Android has always been a defensive moat for its core search business by making “any layer that lives between themselves and the consumer and make it free” (Gurley, 2011). But a free, open-source operating system also means that competing Android manufacturers are tied to a common base, from which it is difficult to achieve differentiation. From the perspective of Chinese smartphone manufacturers that were previously stuck with low-value low assembly, Android has been a boon, significantly lowering the software barriers to entry. While the smartphone market was rapidly growing, there is space for a variety of Android manufacturers to enter the space. But now that the smartphone market has matured, consolidation is inevitable.
In contrast, Apple, with its integrated approach to software and hardware, is able to create and sustain a more differentiated product offering and thus hold on to its market share through these structural changes.
- Apple has frequently been accused for rent-seeking behavior because of its App Store policies, most of all its 30% cut of all digital goods and services transacted on the iPhone. This is true in China as well, as we shall see in the later part on Apple’s services strategy.
- I was unable to find a directly comparable figure, but apparently the number of US software engineers is 3.4 million.
- This is very ironic, considering it PC stands for personal computer.
- This was of a piece with mainstream wisdom in Western business circles during the 1990s and 2000s, which looked upon outsourcing and contract manufacturing favorably.
- A close look at Apple’s 10-K reports reveal a bit of political correctness: beginning in 2017, Apple’s net sales in Taiwan were included in “China”, thus obviating an earlier distinction between “China” and “Greater China” that ironically still exists in subsequent 10-K reports.