The most profitable tech company in China isn’t a homegrown internet giant like Alibaba or Tencent, it’s California-based Apple.
Its China business grew so rapidly during the pandemic that it now generates more profit than the combined earnings of the country’s two biggest tech companies, according to an analysis by the Financial Times.
Apple’s reliance on the country for manufacturing — which accounts for 95 percent of iPhone production, according to Counterpoint, a market research group — leaves the company vulnerable to supply chain shocks.
Apple on Sunday said global shipments of its latest high-end iPhones would be delayed due to recent Covid-19 outbreaks at Chinese plants operated by its main assembler Foxconn. That came a week after it warned of “significant” headwinds to sales growth from the impact of a strong US dollar and supply shortages.
But when it comes to selling its devices to Chinese consumers, business is booming. Operating profits in Greater China — which includes Hong Kong, Macau, Taiwan and mainland China — rose 104 percent to $31.2 billion in the 24-month period ended September, surpassing the $15.2 billion Tencent’s dollars and dwarfed Alibaba’s $13.5 billion over the past 12 months, according to S&P Global Market Intelligence.
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The record profits underscore the deal Apple has struck with Beijing, allowing the iPhone maker to sail through President Xi Jinping’s crackdown on domestic tech giants while reaping the rewards of U.S. sanctions that are helping its only real competitor in the country – harming the national champion Huawei.
It’s the result of corporate diplomacy led by Chief Executive Tim Cook, whose regular visits to Beijing in the pre-pandemic era, including meetings with Xi and Chinese tech leaders, have helped avoid the fate of other Western tech companies. Companies like Alphabet, Meta and Netflix have been locked out of the country.
Critics argue Apple’s reliance on Chinese manufacturing has led it to give in to willingly authoritarian demands. The deal has helped the group retain full access to the country’s low-cost labor and factories while becoming a leading luxury brand in the world’s largest consumer market.
“Beijing is aware that there is no one-way street. You get a lot of good in return – a lot of employment and prestige,” said Brian Merchant, author of The One Device: The Secret History of the iPhone. “The pay, the standards are better for companies that deal with Apple. It has helped raise wages in favor of the middle class.”
Filling the gap of Huawei
In 2019, Huawei had overtaken Apple in global smartphone sales to second behind Samsung, and its rapid growth was led by the Chinese market, where Huawei and its Honor sub-brand had achieved a combined market share of 42 percent by March 2020. after counterpoint.
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“It was like a ‘national factory’ – Chinese citizens wanted to show how much they love the country and they went to buy Huawei smartphones,” said Archie Zhang, an analyst at Counterpoint.
Huawei took an early lead with 5G-enabled smartphones in August 2019 and had boosted Chinese sales of its next-generation devices to more than 7 million per month by June 2020, according to M Science, an analytics group.
Apple’s first 5G-equipped handsets, the iPhone 12 series, only launched in October 2020. By then, the Trump administration had imposed tough sanctions on Huawei because the company posed a security threat.
The sanctions choked off access to key technologies, including 5G chipsets, which proved crippling. Huawei’s market share in China plummeted in the second half of 2020 and it was forced to spin off Honor to save it from sanctions. Huawei’s consumer revenue halved to $38.3 billion in 2021, according to S&P GMI.
As Huawei’s share of the Chinese market plummeted from a peak of 29 percent in mid-2020 to just 7 percent two years later, Apple’s share rose from 9 percent to 17 percent, according to Counterpoint. Almost all of the US group’s sales came from the premium segment, whose dominance rose from 51 percent to 72 percent within three years.
“Today, Apple has much of the $600+ market to itself,” Zhang said. “When you buy a $1,000 smartphone, there is nothing else.”
Apple’s China strategy
Apple has worked hard to satisfy Chinese customers’ tastes. As local competitors launched smartphones with larger screens, more advanced cameras with low-light photography, and a dual SIM card slot, it was Apple’s Chinese employees who urged the Cupertino-based company to follow suit, said a person close to Chinese firms.
Cook has credited feedback from Chinese customers with “a ton of features,” including night mode and a QR code reader. “Even 5G has been stimulated in China in many ways because China is so far ahead in the coverage model for 5G,” Cook told a 22-year-old Chinese student in a rare interview destined for social media. “That’s why we listen very carefully to our customers there.”
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Concerns that production is too concentrated in one region have mounted, with Apple warning that Foxconn’s large iPhone factory was “operating at significantly reduced capacity” during the US company’s most lucrative time of the year.
But for years, his efforts to stay on side with Beijing, such as pledging major investments and remaining silent on sensitive issues, have paid off.
It agreed to move the storage of Chinese user data to a data center owned by the Guizhou provincial government and it has removed thousands of apps from the local app store at the request of Beijing censors.
Dozens of news outlets have removed their apps, while encrypted messaging platforms like WhatsApp, Signal and Telegram are banned. Apple, which declined to comment, has argued that it must respect the laws of the countries in which it operates.
“Apple’s vision of a controlled, compartmentalized customer experience ecosystem aligns with the same vision, the same control, that the Chinese Communist Party wants to have,” said Nathan Freitas, director at Guardian Project, a developer of mobile privacy tools.
“They see at eye level what is needed for a harmonious society. It’s just one a phone ecosystem, the other a nation.”
Nian Liu contributed coverage from Beijing