Apple’s Prestige in China is Collapsing
Once praised by its enormous potential as an emerging economy, China’s stagnant revenue may represent to Apple a threat rather than an opportunity. Historically, China has not been the friendliest market to foreign brands. Google, Twitter, and Facebook have found it tough to do business there due to restrictive censorship policies. However, this has not hindered the Chinese people from discovering the joys of social media: see the successes of Sina Weibo, WeChat, Baidu, and the like. These restrictions also work in favour of many Chinese startups specialised in copying successful western startups. Thus, the ruling Chinese Communist Party (CCP) strict policies over civilian internet use also end up blocking foreign competition of getting a slice of the Chinese market. That is a win-win situation (for the CCP, of course).
Apple’s revenue in China has been stagnant since 2014. What has changed since then? If the rise of Huawei, Xiaomi, vivo, Oppo, Honor, OnePlus, Meizu, and other Chinese players ring a bell for you, it means that you understand the market disruptions that are already in place. I worry if Apple is on the brink of being completely disrupted in China. According to data from Counterpoint Research, Apple’s market share in that region has fallen from 13% in 2018 Q1 to 9% 2019 Q1. It is true that Apple can survive with such a modest market share because its premium prices can sustain generous profit margins. However, watch out for movements in the upcoming quarters, as disruptions in the smartphone market tend to be incredibly fast-paced. Nokia, BlackBerry and Windows Phone disappeared very, very fast.
This is not to mention the current trade war between Trump’s administration and China. Indeed, it seems that the rise of Chinese brands has been a trend since long before Trump’s election. Trump’s rhetoric only gives a touch of politics to this issue, but it is by no means what is causing it. It only provides a motivational boost for the CCP to freed the Chinese people from the imperialistic evils of made-in-China/designed-in-California iPhones. But surely the trend has been in place since before Trump.
The only upside in this situation is that Apple seems to be aware of these issues. Last year, the company took a surprising decision to cut prices off its latest models sold at Chinese retailers. New Apple Store openings have stalled since 2016, from 17 new stores in that year down to 0 in 2019. This halt is a direct consequence of the growing number of consumers who prefer local smartphone brands:
“[A decade ago], Apple was offering a product that was so much better and so different that it made sense for people to show up at the store to buy something,” said Ben Cavender, a senior analyst at Shanghai-based consultancy China Market Research Group. “In 2018, it’s not clear what Apple is selling that’s dramatically different or better than anything else on the market.”
Apple’s diminishing exposition to the Chinese market also coincides with recent developments in the geopolitical sphere. China’s authoritarian regime has become increasingly repressive in recent years. “The ruling Chinese Communist Party (CCP) is tightening its control over the state bureaucracy, the media, online speech, religious groups, universities, businesses, and civil society associations, and it has undermined its own already modest rule-of-law reforms”, according to the think-thank Freedom House. Back in 2018, the National People’s Congress amended the country’s constitution to remove the two-term limit on the presidency. The amendment, which was accepted unanimously, granted the president Xi Jinping (now presitator for life?) the right to rule indefinitely.
Geopolitical issues apart, I don’t believe that these freedom and human rights issues are of genuine concern for capitalists, even for a self-proclaimed human rights advocate like Apple. The thing is that a U-turn towards authoritarianism (or even more authoritarianism, is this case) scares to death any capitalist. Such impact of politics over real economies is known for economists as political cycles. When expectations become obscure, investors act by suspending investment plans or diverting capital to alternative opportunities, ideally where their money could be at lesser risk. They are driven by self-interest, not altruism beliefs, no matter how much their marketing tries to push the image of human rights champion.
However, the CCP has found a way to evade these pressures. If foreign investors are afraid of Beijing’s policies, the party has deep pockets to fund national players, like all Chinese smartphone manufacturers I cited here. If the situations get worse in the future, Apple Retail is locked without a viable disinvestment strategy. Long-lived assets located in China, according to Apple’s annual reports, consist primarily of product tooling, manufacturing process equipment, assets related to retail stores, and related infrastructure. Tooling and manufacturing processes can be moved anywhere in the world. Retail stores? Not much so.
The case of a Chinese smartphone industry closed to foreign competition is a reality already. National players account for more than 80% of the domestic market, while Apple is struggling to keep its 9% slice. Samsung’s disastrous 1% share follows a boycott against South Korean companies after South Korea said it would work with the US on a missile defense system, says analyst Cam MacMurchy:
There are many, many more examples of this, even against American companies. Some protests are genuinely spontaneous (like the Dolce & Gabbana one), but the government-led ones pack the most punch. China’s government has enormous power to influence buying decisions, particularly if it frames certain companies as anti-China.
The situation can become worse in the near future as Beijing does not hide that Apple is a target and a “bargaining chip” in the trade war with the USA. “China is by far the most important overseas market for the U.S.-based Apple, leaving it exposed if Chinese people make it a target of anger and nationalist sentiment,” People’s Daily stated in an article. This publication is an official newspaper of the CCP, providing direct information on the next Beijing’s policies and viewpoints. The article leaves an implied threat:
China doesn’t want to close its doors to Apple despite the trade conflict, but if the U.S. company wants to earn good money in China, it needs to share its development dividends with the Chinese people
China can bar the competition out of its domestic markets, but Chinese manufacturers still rely on western technologies, like the Android OS and ARM CPU architectures, which are core-platforms for their products. This should not be understood that their recipe for success relies solely on mass production, logistics, and economies of scale. Some new-to-the-world product categories have also emerged there, like vaping devices, power banks, electric scooters, drones, to name a few. DJI, which is based in Shenzhen, is the world’s leader in commercial and civilian drones, and it accounts for over 70% of the drone market. Pretty much like how the Japanese and South Korean industries have evolved their industrial powerhouses, it seems that Chinese smartphone manufacturers have mastered and even surpassed western’s design and innovation — with a little help of Beijing. What is open to question is if Apple still has a place in China.
