Apple’s market with Beijing: access to Chinese factories and consumers

The most profitable tech company operating in China is not a local internet giant like Alibaba or Tencent, but California-based Apple.

Its business in China has grown so rapidly during the pandemic that it now generates more profit than the combined revenue of the country’s two largest tech companies, according to analysis by the Financial Times.

Apple’s reliance on the country as a manufacturing base – responsible for 95% of iPhone production, according to market intelligence group Counterpoint – makes the company vulnerable to shocks from the Supply Chain.

Apple said on Sunday that global shipments of its new high-end iPhones would be delayed due to recent Covid-19 outbreaks at Chinese factories run by its main assembler Foxconn. It came a week after warnings of “significant” headwinds to revenue growth due to the impact of a strong US dollar and supply constraints.

Yet when it comes to selling its devices to Chinese consumers, business has exploded. Operating profits in Greater China – which includes Hong Kong, Macau, Taiwan and mainland China – jumped 104% year-on-year to $31.2 billion in the fiscal year ending September, eclipsing the $15.2 billion earned by Tencent and $13.5 billion by Alibaba. over their most recent 12-month period, according to S&P Global Market Intelligence.

The record profits underscore the deal Apple has struck with Beijing, allowing the iPhone maker to weather President Xi Jinping’s crackdown on local tech groups while reaping the rewards of US sanctions, which are helping to hurt its only real competitor in the country – national champion Huawei.

It’s the result of corporate diplomacy led by Chief Executive Tim Cook, whose regular pre-pandemic visits to Beijing, including meetings with Xi and Chinese tech leaders, helped avert the fate of China. other Western technology companies. The likes of Alphabet, Meta and Netflix have been locked out of the country.

Critics say Apple’s reliance on Chinese manufacturing has caused it to acquiesce too readily to authoritarian demands. The deal has allowed the group to maintain unfettered access to the nation’s labor force and profitable factories, while becoming a leading luxury brand in the world’s largest consumer market.

“It is clear to Beijing that this is a two-way street. They get a lot of good out of it – a lot of jobs and prestige,” said Brian Merchant, author of The One Device: The Secret History of the iPhone. “Compensation, standards are better for companies that contract with Apple. This helped raise middle-class wages.

Filling the void of Huawei

In 2019, Huawei had overtaken Apple in global smartphone sales, placing it second behind Samsung, and its rapid growth was driven by the Chinese market where Huawei and its sub-brand Honor had achieved a combined market share of 42%. % in March 2020, according to Counterpoint.

“It was like a ‘national factory’ – Chinese citizens wanted to show how much they loved the country and they went to buy Huawei smartphones,” said Archie Zhang, an analyst at Counterpoint.

Huawei took the lead with 5G-enabled smartphones in August 2019 and boosted Chinese sales of next-generation devices to more than 7 million per month in June 2020, according to M Science, an analyst group.

Apple’s first 5G-equipped handsets, the iPhone 12 series, only hit the market in October 2020. At that time, the Trump administration imposed tough sanctions on Huawei, alleging that the company posed a security threat.

The sanctions have stifled access to key technology, including 5G chipsets, which have proven crippling. Huawei’s market share in China crashed in the second half of 2020, and it was forced to part ways with Honor to save it from sanctions. In 2021, revenue from Huawei’s consumer business halved to $38.3 billion, according to S&P GMI.

While Huawei’s share of the Chinese market has fallen from a high of 29% in mid-2020 to just 7% two years later, Apple’s share has fallen from 9% to 17%, according to Counterpoint. Almost all of the American group’s sales have been made in the high-end segment, where its dominance has increased from 51% to 72% in three years.

“Today Apple has a big chunk of the $600+ market,” Zhang said. “If you’re going to buy a $1,000 smartphone, there’s nothing else.”

Apple’s Chinese strategy

Apple has worked hard to satisfy the tastes of Chinese customers. When local competitors rolled out smartphones with larger screens, more advanced cameras with low-light photography and dual SIM card slots, it was Apple’s Chinese employees who pushed the Cupertino-based company to follow suit, said a person familiar with operations in China. .

Cook credited Chinese customer reviews for “a ton of features,” including night mode and a QR code reader. “Even 5G, in many ways, has been boosted in China, because China is so far ahead in the 5G coverage model,” Cook told a 22-year-old Chinese student in a rare media interview. social. “So we listen very carefully to our customers there.”

Concerns are growing that its manufacturing is too concentrated in one region, with Apple warning that Foxconn’s main iPhone factory was “operating at significantly reduced capacity” during the US group’s most lucrative time of year. .

But for years, his efforts to stand by Beijing have paid off, including pledging big investments and remaining silent on sensitive issues.

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

Dozens of media outlets have had their apps removed, while encrypted messaging platforms such as WhatsApp, Signal and Telegram are banned. Apple, which declined to comment, argued that it must follow the laws of the countries in which it operates.

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

“They see with one eye what you need for a harmonious society. It’s just that one is a phone ecosystem, the other is a nation.

Nian Liu contributed reporting from Beijing