Apple’s bargain with Beijing: access to China’s factories — and consumers

The most profitable tech company operating in China is not a homegrown 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 biggest tech companies, according to an analysis by the Financial Times.

Apple’s reliance on the country as its manufacturing base — which is responsible for 95 percent of iPhone production, according to Counterpoint, a market research group — makes the business vulnerable to supply chain shocks.

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

However, when it comes to selling its devices to Chinese consumers, business has boomed. Operating profit in greater China — which includes Hong Kong, Macau, Taiwan and mainland China — rose 104 percent over the 24 months to $31.2 billion in the financial year to September, beating the $15.2 billion earned by Tencent and 13 .5 billion from Alibaba in the last 12 months, according to S&P Global Market Intelligence.

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The record profit underscores the deal Apple struck with Beijing, allowing the iPhone maker to weather President Xi Jinping’s crackdown on domestic technology groups while reaping the benefits of U.S. sanctions that are helping to damage its only real competitor in the country — national champion Huawei.

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

Critics argue that Apple’s reliance on Chinese manufacturing has made it too willing to accede to authoritarian demands. The deal helped ensure the group retained unfettered access to the country’s cost-effective workforce and factories, while becoming the leading luxury brand in the world’s largest consumer market.

“It is clear to Beijing that it is a two-way street. They get a lot of good returns — a lot of business and prestige,” said Brian Merchant, author of the book One Device: The Secret History of the iPhone. “Salary, standards are better for companies that contract with Apple.” That helped push wages toward the middle class.”

It fills the void of Huawei

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

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

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

Apple’s first 5G-equipped phones, the iPhone 12 series, only appeared on the market in October 2020. By then, the Trump administration had imposed harsh sanctions against Huawei, citing the company as a security threat.

Sanctions have stifled access to key technology, including 5G chipsets, which has proven damaging. Huawei’s market share in China fell in the second half of 2020 and it was forced to spin off Honor to save it from sanctions. According to S&P GMI, in 2021, Huawei’s revenue from its consumer business will halve to $38.3 billion.

As Huawei’s share of the Chinese market fell from a high of 29 percent in mid-2020 to just 7 percent two years later, Apple’s share jumped from 9 percent to 17 percent, according to Counterpoint. Practically all sales of the American group were in the premium segment, where its dominance rose from 51 percent to 72 percent in three years.

“Today, Apple has most 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 tastes of Chinese customers. When local competitors introduced smartphones with larger screens, more advanced low-light photography cameras and dual SIM slots, Chinese Apple employees pushed the Cupertino-based company to follow suit, said one person close to the Chinese business. .

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

Concerns have grown that its production is too concentrated in one region, with Apple warning that Foxconn’s main iPhone plant was “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 promising big investments and staying silent on sensitive issues.

It agreed to move the storage of Chinese user data to a data center owned by the Guizhou provincial government and 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, says it must comply with the laws of the countries in which it operates.

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

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

Nian Liu contributed reporting from Beijing

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