The most profitable tech company operating in China is not a homegrown internet giant such as Alibaba or Tencent, but California-based Apple.
Its China business grew so quickly during the pandemic that it now generates more profit than the combined income 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 — with responsibility for 95 per cent of iPhone production, according to Counterpoint, a market intelligence group — leaves the business vulnerable to supply chain shocks.
Apple on Sunday said global shipments of its newest high-end iPhones would be delayed because of recent Covid-19 outbreaks at Chinese plants run by its main assembler Foxconn. That came a week after it warned of “significant” headwinds to revenue growth owing to the impact of a strong US dollar and supply constraints.
Yet when it comes to selling its devices to Chinese consumers, business has boomed. Operating profits in greater China — which includes Hong Kong, Macau, Taiwan and mainland China — have shot up 104 per cent over 24 months to $31.2bn in the financial year to September, eclipsing the $15.2bn earned by Tencent and the $13.5bn from Alibaba in their most recent 12-month period, according to S&P Global Market Intelligence.
The record profits underscore the bargain Apple has struck with Beijing, allowing the iPhone maker to sail through President Xi Jinping’s crackdown on homegrown tech groups while reaping the rewards from US sanctions, which are helping to damage its only real competitor in the country — national champion Huawei.
It is the result of corporate diplomacy led by chief executive Tim Cook, whose regular visits to Beijing in pre-pandemic times, including meetings with Xi and Chinese tech executives, have helped avoid the fate of other western tech companies. The likes of Alphabet, Meta and Netflix have been locked out of the country.
Critics argue Apple’s reliance on Chinese manufacturing has made it acquiesce too readily to authoritarian demands. The bargain has helped ensure the group maintains unfettered access to the country’s cost-effective labour force and factories, while becoming a leading luxury brand in the world’s biggest consumer market.
“It’s clear to Beijing that it’s a two-way street. They get a lot of good back — a lot of employment out of it, and prestige,” said Brian Merchant, author of The One Device: The Secret History of the iPhone. “The pay, the standards are better for companies contracting with Apple. It’s helped boost wages towards the middle-class.”
Filling Huawei’s void
In 2019, Huawei had overtaken Apple in global smartphone sales, making it second to Samsung, and its fast growth was led by the Chinese market where Huawei and its sub-brand Honor had reached a combined market share of 42 per cent by March 2020, according to Counterpoint.
“It was like a ‘national factory’ — Chinese citizens wanted to show how much they love the country and they went out to buy Huawei smartphones,” said Archie Zhang, analyst at Counterpoint.
Huawei took an early lead with 5G-capable smartphones in August 2019 and had increased Chinese sales of the next-generation devices to more than 7mn a month by June 2020, according to M Science, an analytics group.
Apple’s first 5G-equipped handsets, the iPhone 12 series, only hit the market in October 2020. By then, the Trump administration had imposed tough sanctions against Huawei, alleging the company was a security threat.
The sanctions choked off access to key technology, including 5G chipsets, which proved crippling. Huawei’s market share in China collapsed in the second half of 2020, and it was forced to spin off Honor to save it from sanctions. In 2021, Huawei’s consumer business revenues halved to $38.3bn, according to S&P GMI.
As Huawei’s share of the Chinese market plummeted from a high of 29 per cent in mid-2020 to just 7 per cent two years later, Apple’s share jumped from 9 per cent to 17 per cent, according to Counterpoint. Virtually all of the US group’s sales were in the premium segment, where its dominance climbed from 51 per cent to 72 per cent in three years.
“Today, Apple has much 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 rolled out smartphones with bigger screens, more advanced cameras with low-light photography and a dual-SIM card slot, it was Apple’s Chinese employees who pushed the Cupertino-based company to follow suit, said one person close to the China operations.
Cook has credited feedback from Chinese customers for “a tonne of features” including Night mode and a QR code reader. “Even 5G, in a lot of ways, was energised in China, because China is so far ahead in the coverage model for 5G,” Cook told a 22-year Chinese student in a rare interview meant for social media. “So we listen very carefully to our customers there.”
Concerns have grown that its manufacturing is too concentrated in one region, with Apple warning that Foxconn’s major iPhone facility was “operating at significantly reduced capacity” during the US group’s most lucrative period of the year.
But for years, its efforts to stay on side with Beijing have paid off, such as by pledging big investments and staying quiet on sensitive subjects.
It acquiesced to moving storage of Chinese user data to a data centre owned by the Guizhou provincial government, and it has removed thousands of apps from the local App Store at the request of Beijing’s censors.
Dozens of news outlets have had their apps removed, while encrypted messaging platforms such as WhatsApp, Signal and Telegram are banned. Apple, which declined to comment, has argued it must respect the laws of countries in which it operates.
“Apple’s vision of a controlled, locked-down ecosystem for the customer experience maps into the same vision, the same control, that the Communist party wants to have in China,” said Nathan Freitas, director at Guardian Project, a developer of mobile privacy tools.
“They see eye-to-eye on what, for a harmonious society, you need. It’s just one is a phone ecosystem, the other is a nation.”
Nian Liu contributed reporting from Beijing