Will Apple Ever Leave China?

If there’s one word you associate with Apple, the culmination of every commercial, product, feature, and perfectly-rehearsed keynote, the company would like it to be privacy. Anyone can use the word, just as I can put a Tesla bumper sticker on my Hummer, but only Apple has the business model to prove it. And it certainly takes every opportunity to remind us. In 2016, when the FBI demanded it creates a special backdoor, Tim Cook personally and very publicly refused, saying it would “undermine the very freedoms and liberty our government is meant to protect.” It was one of the highest-profile, riskiest, and most controversial debates over privacy in recent times. But, ultimately, whether you think for-profit or on principle, it fought the government and won. That same year, on the other side of the world, China passed The Cyber Security Law, requiring that Apple store Chinese iCloud data inside the country and prompting fear that the government could access it for surveillance. This time, though, no letter to customers, no principled stand, no long, protracted fight. With 20% of its sales and most of its manufacturing in China, Apple has little choice but to comply with censoring apps, podcasts, and services in the world’s largest country. But, as risks grow and strategic calculations change, will this tension ever reach a boiling point? Will there come a day when, either by choice or force, Apple leaves the country altogether?

Every year, Apple faces an impossible task: To source the materials for, assemble, deliver, and meet the demand for millions of new iPhones. The insane scale of the device is both its biggest blessing and its biggest curse. The single most expensive component of the iPhone, for example, is thought to be the OLED screen, at around $110 per unit. If Samsung increased the price of that one part by just $5, it would cost Apple an extra billion dollars over two hundred million devices. The previous-generation, 2013 Mac Pro was assembled in Austin Texas but only because of its relatively low demand. The iPhone simply doesn’t have that luxury. The vast majority of Apple products, therefore, are assembled by contract manufacturers like Foxconn, Pegatron, and Wistron in China. Although not, contrary to popular thinking, strictly because of cost. The average monthly wages in China have more than doubled from $449 US dollars in 2010 to nearly a thousand in 2018. That’s about the same as many European countries, like Latvia, Lithuania, and Croatia, and far higher than other south and southeast Asian countries like the Philippines and Vietnam — where companies like Nike, Adidas, and Under Armor have moved much of their production. But while makers of clothing can, for the most part, hire the cheapest hands, Apple and companies like it, have to be a bit more selective. What China has, more than any other country, are massive amounts of technically-skilled workers in highly concentrated areas, on-demand. Here factories are more cities than buildings. When one manufacturer of electronics needed to quickly increase production to keep up with demand, it was able to hire 35,000 workers in under six weeks. It’s this flexibility that allows Apple to rapidly scale-up production in the summer months leading up to the release of a new iPhone. Altogether, about a million and a half Chinese are involved in assembling Apple products, and another two and a half million Chinese developers create iOS apps.

But even before assembly, Apple relies heavily on Chinese materials. Everything from cameras, to speakers, motors, and batteries are made with 17 elements called lanthanides, or Rare Earth Metals. And, despite their name, they aren’t that hard to find. There are also significant reserves in Brazil, Vietnam, Russia, and India. Having and being willing to use them, though, are two very different things. Measured by actual production, China has a near-monopoly, generating 70% of the world’s supply. 120,000 metric tons a year to 2nd place Australia’s 20,000. The problem is that, although abundant, only in a few areas are these metals clustered in high enough concentrations to justify mining them. And even then, they’re an absolute headache to deal with. Because they bond so easily with other compounds and minerals, after mining, they have to be chemically separated, often from radioactive and carcinogenic materials. Processing one ton of rare earth may generate 2,000 tons of toxic waste. In other words, it’s expensive, time-consuming, and really bad for the environment. From roughly 1965 to 85, over half of the world’s supply came from a single source in California, called the Mountain Pass Mine. Then, around 2000, it was shut down for environmental reasons. At the same time, China realized its strategic value and took the golden opportunity they had just been given to dominate the entire industry. Should China ever withhold them for political leverage, it would, at least temporarily, devastate the U.S. military, and, in the process, American companies. China’s President Xi Jinping has hinted at this possibility by visiting a Rare Earth mine during the trade war. And the supply chain is only the first of Apple’s challenges. The other is the consumer market. Under Tim Cook, China has been a major focus of the company — launching a dual-sim version of the iPhone, QR-code support, and localized features like improvements to Cantonese typing. It’s also leaned-in to its cultural preferences — offering a special red edition of the iPhone and raising prices which helps it be seen as more of a luxury product. And, for the most part, it’s worked. The year it was introduced, the iPhone X was the most popular phone in China, and the country became about as big a market for Apple as all of Europe combined. But it’s also seen the risks. As Chinese economic growth slowed, so did Apple’s success. And it now finds itself caught in the crossfire of US-China tensions. The same conspicuous design which made the iPhone a status symbol becomes a liability during times of increased nationalism. When China’s government plays anti-American propaganda films and Huawei’s ban is perceived as protecting weaker American competitors, owning an iPhone can become embarrassing. According to Goldman Sachs, a retaliatory ban could lose Apple almost a third of its overall profit. Of course, interdependence is a two-way street — Apple also contributes an estimated $24 billion US dollars a year to China’s economy. It’s not, unless things get significantly worse, in China’s best interest to push out Apple completely. But it is in its best interest to keep pushing the boundaries by exerting as much control over Western companies Apple as possible. If Apple will ban VPNs, censor dissenting apps, and move iCloud data on its orders, there’s no reason to think it’ll stop there. The idea that Apple would give up on one of its most important sources of revenue is almost unthinkable, but that’s exactly why China can ask so much of it.

At some point, the things that, individually, wouldn’t be reason enough for Apple to leave China: Slowing economic growth, Tariffs, Censorship, Data storage laws, competitors like Huawei and WeChat, and poor respect for intellectual property, together may hit a critical mass that Apple will no longer tolerate. In the U.S., Tim Cook can persuade the public and successfully hold back the FBI. In China, though, it’s all or nothing. With every demand, Apple has to decide whether saying ‘no’ is worth losing 20% of its revenue and, perhaps even, the most important part of its supply chain. In 2010, Google did just that. After years of following China’s censorship rules, it was, ultimately, a straw that broke the camel’s back: Google noticed the Gmail accounts of human rights activists were being hacked into. Thus far, Tim Cook has always preferred to engage. Unlike other tech CEOs, for example, he continues taking meetings with the U.S. president, despite disagreeing on many issues. Apple argues better it stays in China than cede the market to a more questionable competitor, or someone who doesn’t minimize the amount of data they collect in the first place. In the meantime, it’s preparing for the worst. Pegatron is investing in production sites in Indonesia, while Foxconn and Wistron look to India. In 1909, Norman Angell wrote The Great Illusion, for which he received a Nobel Peace Prize. In it, he argued the economies of the world were so connected and so dependent on one another that the cost of conflict would simply be too great. States, he said, now had too much to lose from going to war. He was right. And so is anyone who dismisses conflict between China and Apple. Strategically, financially, logically speaking, it would be foolish for either one to give up the economic benefits. And yet five years after The Great Illusion was published, it began one of the most deadly conflicts in history. Circumstances can change in an instant, and even the most profitable company on earth is vulnerable.