Apple’s deal with Beijing: access to Chinese manufacturers – and consumers

The most profitable tech companies operating in China are not homegrown internet giants like Alibaba or Tencent, but California-based Apple.

Its China business has grown so fast during the pandemic that it is now generating more profit than the combined income of the country’s two largest technology companies, according to an analysis by the Financial Times.

Apple’s reliance on the country as a manufacturing base — with responsibility for 95 percent of iPhone production, according to Counterpoint, a market intelligence group — is putting it out of business. susceptible for chain shock supply.

Apple on Sunday said that global shipments of its latest high-end iPhones will be late due to the recent Covid-19 outbreak at a Chinese factory run by major assembler Foxconn. It came a week after warning of “significant” headwinds to revenue growth due to the impact of a strong US dollar and supply constraints.

But when it comes to selling its equipment to Chinese customers, business has boomed. Operating profit in greater China – which includes Hong Kong, Macau, Taiwan and mainland China – has risen 104 per cent over the 24 months to $31.2bn in the financial year to September, beating Tencent’s $15.2bn and $13.5bn from Alibaba. in their most recent 12-month period, according to S&P Global Market Intelligence.

The record advantage confirms Apple’s bid with Beijing, allowing the iPhone maker to sail through President Xi Jinping’s crackdown on homegrown technology groups while reaping the rewards of US sanctions, which helped undermine its only real competitor in the country – the national champion. Huawei.

That’s the result of corporate diplomacy led by chief executive Tim Cook, whose regular visits to Beijing in the pre-pandemic period, including meetings with Xi and Chinese tech executives, have helped avoid the fate of other western tech companies. The likes of Alphabet, Meta and Netflix have been locked out of the country.

Critics argue that Apple’s reliance on Chinese manufacturing makes it too susceptible to authoritarian demands. These deals have helped the group maintain unrestricted access to low-cost labor and factories, while becoming the leading luxury brand in the world’s largest consumer market.

“It’s clear for Beijing that it’s a two-way street. They get a lot more good things – a lot of work from it, and prestige,” said Brian Merchant, author One Device: The Secret History of the iPhone. “Salaries, the standard is better for companies that have contracts with Apple. It helps to raise wages towards the middle class.

Filling the void of Huawei

In 2019, Huawei has overtaken Apple in global smartphone sales, becoming second to Samsung, and its rapid growth is led by the Chinese market where Huawei and its sub-brand Honor have reached a combined market share of 42 percent by March 2020, according to Counterpoint.

“It’s like a ‘national factory’ – Chinese citizens want to show how much they love their country and they go out and buy Huawei smartphones,” said Archie Zhang, an analyst at Counterpoint.

Huawei took the lead early with 5G-capable smartphones in August 2019 and has increased Chinese sales of next-generation devices to more than 7 million a month by June 2020, according to M Science, an analytics group.

Apple’s first 5G-equipped handset, the iPhone 12 series, only hit the market in October 2020. At the time, the Trump administration had imposed strong sanctions on Huawei, saying the company was a security threat.

The sanctions cut off access to key technologies, including 5G chipsets, which have proven crippling. Huawei’s market share in China collapsed in the second half of 2020, and it was forced to isolate Honor to save it from sanctions. By 2021, Huawei’s consumer business revenue will halve to $38.3 billion, according to S&P GMI.

While Huawei’s share of the Chinese market dropped from 29 percent in mid-2020 to 7 percent two years later, Apple’s share rose from 9 percent to 17 percent, according to Counterpoint. Almost all of the US group’s sales are in the premium segment, where its dominance has risen from 51 percent to 72 percent in three years.

“Today, Apple has much of the $600-and-above market to itself,” Zhang said. “If you’re going to buy a $1,000 smartphone, there’s nothing else.”

Apple’s China strategy

Apple has worked hard to satisfy the taste of Chinese consumers. As local competitors launch smartphones with larger screens, more advanced cameras with low-light photography and dual-SIM card slots, Apple’s Chinese employees are pushing the Cupertino-based company to follow suit, a person close to the Chinese operations said. .

Cook has given feedback from Chinese customers to “a number of features” including Night mode and a QR code reader. “Even 5G, in some ways, is being strengthened in China, because China is far ahead in the coverage model for 5G,” Cook told the 22-year-old Chinese student in a rare interview meant for social media. “So we listen very carefully to our customers there.”

Concerns have grown that manufacturing is too concentrated in one region, with Apple warning that Foxconn’s main iPhone facility is “operating at significantly reduced capacity” during the US group’s most profitable period of the year.

But over the years, his efforts to stay on Beijing’s side have paid off, such as by promising huge investments and remaining quiet on sensitive subjects.

It agreed to move data storage of Chinese users to a data center owned by the Guizhou provincial government, and has removed thousands of apps from the local App Store at the request of Beijing censors.

Dozens of news outlets have had their apps removed, while encrypted messaging platforms such as WhatsApp, Signal and Telegram have been banned. Apple, which declined to comment, said it must respect the laws of the countries in which it operates.

“Apple’s vision of a controlled, locked-down ecosystem for customer experience maps to the same vision, the same control, that the Communist Party wants in China,” said Nathan Freitas, director at the Guardian Project, a mobile privacy developer. equipment.

“They see eye-to-eye what, for a harmonious society, you need. Only one phone ecosystem, the other is a nation.

Nian Liu contributed reporting from Beijing

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