Apple has been in the spotlight recently as the Chinese government issued restrictions on iPhone and other Apple device usage (including Air pods and iPads). It began with restrictions on use by employees of the central government. It was then expanded to employees of some local governments and State-owned entities.
This was significant because China is Apple’s third largest market. So, this could mean a 3-5% revenue hit. More if you could employee families.
But its mostly in the news because of the bigger geopolitical question. Is China finally retaliating to actions by the US government against Chinese tech companies?
That’s the big question this has raised.
- Apple is definitely exposed in China as a business. It’s a major market for them. And they source the vast majority of their manufacturing in China. This cannot be moved quickly. It’s part of a highly developed manufacturing ecosystem.
- The US government has now been taking repeated and escalating actions against Chinese tech companies since 2019. It started with Huawei and the first entity-list ban in 2019. But this has expanded to other companies and to an increasing range of actions against companies. And this is not just in the US – or on foreign companies operating in the US (which is its legal jurisdiction). The US government is also attempting to enforce its rulings on foreign companies in foreign countries. It is attempting to apply its decisions extra-territorially, telling what China companies can and can’t do with other Chinese companies in China. That was a big escalation.
- China has largely not responded. The US has fired every bullet in its gun. China, despite having far more options for action, has really not done much in response.
So, is this last point finally changing? If so, what is the future of Apple in China?
Here is my prediction (i.e., guess):
- In the short-term, Apple is going to be limited to a small segment of the market (under 15%) by various mechanisms. It will be the result of a combination of domestic competition and government action. Apple is good competition for domestic companies, and it helps them become globally competitive, which the government is in favor of. There will also be technology transfer and talent training benefits. Keeping the status quo will also not shock the current manufacturing situation.
- Over the long-term, Apple will likely fade in China. Think 5 years. It has power as a luxury brand, but it is that doesn’t create a lot of staying power with Chinese consumers. And ultimately, domestic smartphone makers are far more aggressive and innovative.
I’m basing this prediction on three forces:
- The role and interests of the State
- The evolving domestic competition
- The demands and interests of Chinese consumers
Force 1: What Are the Role and Interests of the State?
First, the State is not the same as government. You need to think about the Party, local governments, State-owned entities, and the central government. And other actors. Sometimes the interests of the State are clear. For example:
- The State has no significant interests in restaurants. Just standard regulatory stuff.
- The State has strategic and security interests in telco and digital infrastructure.
- The State has strategic interests in electric vehicles and renewable energy. They are both industrial priorities.
How do we know this?
Because the government and its publications say it loudly and often. Just read Global Times or watch CCTV. It’s really not hidden at all when it’s clear.
So, what are the State interests with regards to:
- iPhones as handsets?
- Not much.
- iPhones as software providers?
- Communications and social media apps are a big deal for the State.
- Media and content are a medium priority. Not too unusual.
- App stores are a concern.
- The operating system is a concern.
- iPhones as service providers?
- Apple Pay exists in China but nobody really uses it much. It would be an issue.
- Cloud is a big deal. So is data security.
- Apple as a high-profile US tech company in China?
Think about how the State likely views smartphones.
Does China care if Chinese consumers are staring at US-controlled screens all day long?
Yes. So, the operating system matters.
And we have already seen lots of restrictions on the software and services Apple can use in China. Apps are removed from the China Apple Store – and there are lots of alternatives (it’s not a duopoly). iTunes and Movies are not allowed. Apple Pay is allowed but nobody really uses it.
Overall, Apple has about 15% of the market. That is not bad, and it would be different than if it was 40%. Plus, most of the important software (videos, social media, communication) are Chinese companies like WeChat and Douyin. Not Apple.
Does China want foreign competition for its domestic smartphone makers?
This was definitely true in the past. In 2012-2014, companies like Huawei, Oppo, Xiaomi and Vivo were just getting going in smartphones. Competing against Samsung, Nokia, and Apple in their home market was key to them becoming globally competitive.
Today, it’s not that big of a deal. Chinese smartphone makers dominate the market. And they are doing great in markets around the world.
We do see this today in electric vehicles. Tesla was given a great deal when it entered China (no JV partner, a huge facility in Shanghai). The State wants competition for its domestic companies. And it wants the foreign company to be a training ground for domestic workers in foreign expertise.
Does China want Apple to continue to manufacture or assemble in China?
Yes. Apple is a big part of the economy in certain cities such as Shenzhen and Zhengzhou. It helps keep manufacturing (or at least assembly) on the cutting edge. But it’s not as big of a deal as in the past. Apple needs China more than the reverse in this today.
Does China want to hit back US companies in retaliation for the US government actions?
This is the big unknown. I’m guessing probably not.
US companies like Nvidia are already losing sales. China has a lot of options they could use against Apple and other American companies in China. Lots. Investigations, new data rules, temporary or long-term bans, limiting operations and sales, new permits for opening stores, consumer boycotts, media investigations and so on. And we have seen such things against Korean and Japanese companies in the past.
But after 3 years, we have not seen anything particularly significant against US companies in China. So, a decision clearly has been made in this regard.
That’s my take on Force 1. For more on this you can see:
For those who have read my One Hour China Consumer Book, these are the frameworks I use for B2C companies in China with significant State interests.
Force 2: Does Apple Have a Competitive Advantage in China Smartphones?
This is where we get a clearer picture. I think Apple is far weaker in China than people think.
Apple in China is not Apple outside of China. It lacks much of its ecosystem. It lacks many of its services, which create switching costs. It is far more of a handset maker and a luxury brand than an ecosystem.
Keep in mind, iPhones in China are mostly running non-Apple software (which is available on all smartphones). The big ones are:
- WeChat, which is effectively the operating system for China. Not iOS. Huawei has also launched a new operating system, HarmonyOS. That might become a thing.
- Douyin for entertainment, a walled garden. Tencent Video and iQiyi are others. But this is where people spend most of their time.
- Baidu and WeChat for search.
- Alibaba’s big ecosystem, including cloud and messenger.
- Payment is WeChat Pay and Alipay.
Apple does have the operating system and its App store. But app stores are pretty fragmented in China. There are 9-10 of them, not 2 like in the US.
Looking at hardware, Apple has primitive handsets by China standards. Huawei makes far better handsets. The screens are better. The cameras are much better. Really any China high-end smartphone is a better handset than the iPhone.
Apple also can’t innovate anything like the China companies. Go into any Xiaomi or Huawei store in China and it is packed. Most of the Apple stores are empty because there is never anything new. Apple under Tim Cook is non-innovative. They are way too slow for China.
That said, Apple does have some big strengths in China. Nothing I just said is new. And yet Apple has been running at 15-17% market share.
- Apple has a well-known, famous product in the iPhone, even with the limited ecosystem and services.
- Apple can offer an integrated, seamless user experience. It is not the chaos of Android.
- Consumers like the iPhone. It is viewed as a famous luxury brand and a status symbol. Which brings me to the third and final force.
Force 3: What do Chinese Consumers Want?
This is the big force in China that everyone forgets.
When the Chinese government effectively banned for-profit education it had a major impact on the after-source training centers across China. Their stocks went to near-zero the next day.
But that didn’t stop for-profit education in China. At all.
Because parents want it for their children. They are deeply committed to education for their kids and making them competitive in the national exams. They send them to after-school education starting at age 4-5. So, after the announcement, everyone just shifted to private tutoring.
What Chinese consumers want (especially parents) is a major force. And they usually get what they want one way or another.
If iPhones are banned, they will start coming over the border in suitcases in huge numbers. The black market will surge. Secret shifts will begin at the manufacturing plants, and they will be sold out the back door.
And the government knows this. It is taken into account when things are “banned”. Often the solution is to put upper limits on things it does not want while also giving space for some usage. That is why you can still get VPN in China. That is why you can buy and bring in milk powder from Hong Kong. That is why you can go to Macau for gaming. That is why private education is still happening.
And Chinese consumers really like the iPhone. They are largely viewed as a luxury brand and status symbol in China. This Apple’s greatest strength in the market. And this is the force that needs to be watched carefully. The big lines going into Huawei for their new P50 are concerning.
Putting these three forces together, I think Apple has a window of time before local competitors grow stronger (Force 2) and before the Chinese government no longer needs Apple’s expertise that much (Force 1).
Apple needs to retain the hearts and minds of Chinese urban families as much as possible (Force 3). Being loved by Chinese consumers is likely to be their only real protection long term. And they should accept staying at around 10-15% of the market permanently.
That’s my take right now. Cheers, Jeff
- What TikTok Can Learn From Huawei About the Role of the State (Jeff’s Asia Tech Class – Podcast 39)
- How Tsingtao, CR Snow and the Other Beer SOEs Won Big in China (Pt 2 of 2)
From the Concept Library, concepts for this article are:
- Role of the State
- Giants, Dwarves and the State
From the Company Library, companies for this article are:
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