This is Part 9 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 final part of this essay series shall abstract from Apple’s particular experiences and compile a list of lessons for non-Chinese (technology) companies looking to replicate Apple’s success in China. It will then conclude by making the case for why Apple’s future is worth paying attention to.
Learning from Apple’s Experiences
Without even considering execution, one key insight is the the company must first have a business model that is a good fit with China’s business environment and overall zeitgeist. I have attempted to make a tentative list of characteristics of a company’s business model that might be reasons for optimism and pessimism respectively:
Apple itself does not fulfill all the characteristics on the left and this list is tentative because China’s zeitgeist is itself dynamic. As we shall see, Tesla is the one other technology company that is the closest analog to Apple.
Most of these characteristics are self-explanatory and I will comment specifically on a few.
First, due to a mix of domestic competition and government regulation, it is increasingly difficult for foreign technology companies to seize upon horizontal, mass-market network-effect-based opportunities. While there are aspects of network effect-based moats in Apple’s business model (most obviously the App Store), its moat largely derives from proprietary technology.
Second, the success of Apple luxury brand image and skim pricing strategy shows why median and average statistics are a poor way to understand the Chinese economy. Due to the size and topology of the Chinese economy, there simultaneously exists a small subset of highly price inelastic consumers as well as much larger middle class that is more price-sensitive but willing to spend for quality and social signaling. This fractal phenomenon is likely to continue into the future, as continued economic growth will further expand the Chinese middle class. Companies pursuing a high-end strategy thus have to consider how to position their products to achieve effective price discrimination.
Third, while enterprise-facing business models are likelier to face less regulatory scrutiny than consumer-facing ones, given the perception in the China tech/VC space that low-hanging fruits in the consumer space have been fully exhausted, funding and resources are increasingly redirected towards the enterprise software space.
Finally, assuming that a company has successfully achieved a product-market in China, Apple’s experience illustrates the significant costs required to sustain such a business. In contrast to its minimal product localization, its most far-reaching China-specific measures are typically the result of interactions with state-owned entities (e.g. China-specific dual SIM iPhones) or China’s onerous regulatory environment. Apple’s experience suggests that the lines between compliance and public relations in China are quite blurred and are typically conceived as entry fee imposed by the state in exchange for access to the vast Chinese consumer market.
While this essay series has largely focused on Apple’s compromises, this might present a distorted picture of Chinese policy and Chinese business environment as exclusively an obstacle to Apple’s success. This is because this thesis largely does not discuss Apple’s supply side strategy as this was not China-specific as such.1
Rather, Chinese policies are really a double-edged sword.
In Apple’s early years of scaling up the manufacturing of the iPhone, Apple has benefited hugely from Chinese industrial policy to move up the manufacturing value chain from plastic toys and clothes to electronics in the early 2000s. The Chinese local government played a significant role in taking over land to construct factories for Apple’s contract manufacturers and expediting regulatory approvals. Here, Tesla once again lends itself to comparison. Despite the backdrop of the US-China trade war, the company “received various concessions from local authorities ranging from approvals to preferential loans”, its Chinese plant “sped through approvals and construction” and “was completed in record time” and its locally built cars are both exempted form a 10% purchase tax and qualified for a government subsidy.
Similarly, Chinese policies played a huge role in building out its tech sector, which consists of private Chinese Internet companies and smartphone manufacturers built atop a largely state-owned infrastructure layer. For example, 4G coverage in China is remarkably comprehensive, with 100% coverage in urban areas, over 92% coverage in villages (行政村), and significant coverage on subways, high-speed rails, and tourist areas that exceed many developed countries. Mobile data in China is also relatively cheap, with 1GB costing 1.1% of GNI per capita, which is significantly lower than the equivalent figure of 5.4% in Asia-Pacific and 6.8% globally.2 As state-owned entities, these carriers are responsive to political pressure to lower prices, build base stations in rural, unprofitable regions and eliminate inter-provincial “roaming” fees. As a smartphone manufacturer, Apple certainly benefited from these policies as well.
As such, a more nuanced lesson might be a company would do well to be the right side of Chinese policies and either steer clear of adverse policies or be prepared to incur significant compliance and public relations cost as a part of doing business in China.
Until now, this thesis has mostly been backward-looking in its analysis. In contrast, Apple’s future in China appears more uncertain. To be sure, it is difficult to make predictions, especially about the future.
On the demand side, Apple’s China revenues have been significantly more volatile than other regions and thus are the primary cause for Apple’s hit-and-miss revenue targets. At least from today’s vantage point, Tim Cook’s 2013 prediction that China will become “Apple’s top market in the world” seems increasingly unlikely to come true, especially as Apple’s proportion of China revenues declined following 2015. While the centrality of the smartphone as the consumer’s primary computing device remains unchallenged, the iPhone’s lock-in and differentiation have been significantly reduced by China’s developed tech ecosystem—exemplified primarily by WeChat—thereby significantly increase its risk of commodification.
Beginning in 2018, the Trump administration started a trade war with China and escalated actions aimed at Huawei. Apple stands to suffer significantly from this trade war. It manufactures most of its hardware products in China, which are thus subject to the tariffs imposed by Trump, and its significant consumer business in China is an enticing target of retaliation by the Chinese government. Informed observers frequently speculate whether such retaliation is forthcoming and, during the height of the trade war, nationalist sentiments in China argued that patriotic duty requires purchasing Huawei devices instead of Apple devices. It is unclear whether such sentiments were an organic groundswell of opinion or a state-directed astroturfing, or how big a factor this was for Apple’s 2018 and 2019 China revenues.
Arguably, the trade war is only the manifestation of broader geopolitical tensions between US and China. As alluded at various points in the thesis, Apple is often caught in the middle. On the one hand, the Chinese government have arguably stepped up its regulations on technology companies in recent years, leading Apple to adopt the various compliance and public measures outlined above. On the other hand, these measures tend to play poorly before a Western audience. Based on the analyses in earlier sections of this thesis, Apple is neither an arrogant American company that ignores Chinese laws and regulations, nor a profit-seeking pushover that complies with the Chinese government’s every request. Certainly, Apple is not a paragon of transparency and keeps much of its calculus of trade-offs outside of public attention. This is probably strategically sound as neither the Chinese government nor Western press have much sympathy, tolerance, or capacity for a public discussion of such trade-offs.
During the early phase of the coronavirus outbreak, which largely affected China, there was significant discussion of Apple’s reliance on Chinese contract manufacturers and Chinese suppliers. China “provides a stable, efficient, low-cost manufacturing base with an abundant network of suppliers” and its robust infrastructure is hard to replicate in other low-cost developing countries. Apple, the Chinese government, and Chinese suppliers have “formed a triangle of interdependency” that has made it difficult for Apple to diversify its manufacturing base beyond China. Past efforts to manufacture its products outside of China have proved unsuccessful. In response, Tim Cook himself noted that Apple’s current supply chain strategy does not require fundamental overhaul as much as tweaks. In hindsight, now that East Asia has largely recovered from the coronavirus outbreak before the rest of the world, reliance on East Asian manufacturing no longer seems like a mistake.
I hope this essay series has shown that Apple’s China strategy 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? What is the future of US-China economic and political relations? Apple is perhaps the ideal bellwether for those interested in the answers to these questions.
- Apple manufactures most of its products in China, thus there is no basis for comparison for Apple’s general approach.
- CAICT (中国信息通信研究院), (December 2017) 「互联网发展趋势报告(2017-2018 年)」