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Should Apple Say Goodbye to China?

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Oct. 14 2019, Published 2:15 p.m. ET

China has done it again. Earlier this month, the country pressured Apple (AAPL) to remove HKMap.live from its App Store. According to China, the app allegedly helped Hong Kong protestors track police. The iPhone maker gave in to the demands of the Chinese government and withdrew the app.

This action caused broad-based furor, and Apple faced severe criticism from democracy advocates. The company justified its move by explaining that the app “facilitates, enables, and encourages an activity that is not legal.” Surprisingly, Tim Cook defended the stance. He said, “The app was being used maliciously to target individual officers for violence and to victimize individuals and property where no police are present.”

Another instance resulted in the iPhone maker removing an emoji of the Taiwan flag in the latest updates to iOS 13, as China refuses to recognize the flag.

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A report on late October 11 by BuzzFeed News states that in 2018, Apple told developers of original shows on Apple TV+ to avoid content decisions that could tarnish the image of China. The company faced the shutdown of iTunes Movies and the iBooks Store in China in 2016. Naturally, it doesn’t want the same fate for Apple TV+.

China is a problem child for Apple

China contributes about 20% of Apple’s revenue. The company hugely depends on Chinese factories to assemble iPhones. Apple is on the verge of reviving its flagging iPhone business led by the massive demand for the iPhone 11 from China and India. With so much at stake, the company thinks it wise to put business first and not rub China the wrong way. Matthew Schrader, a China analyst at the German Marshall Fund, says, “That’s the price you pay if you want to be in the market.”

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Troubled relations between China and Hong Kong have prompted companies in the region to take sides. If Apple wants to keep revenues flowing in from China, it can’t afford to irk the government. The US-China trade war is already giving the company a tough time. Tim Cook has tried his best to walk the tightrope. He has managed to shield the iPhone from tariffs so far. However, it could come under the purview of tariffs starting on December 15.

The past hasn’t been any different. In December 2018, China banned Apple from selling its iPhone 6S and iPhone X in response to a suit filed by Qualcomm (QCOM) in 2017. In May, US-imposed restrictions on Huawei led to a rise in the “Boycott Apple” movement in China.

Apple’s dependence on China

Apple commanded a larger piece of the pie in China’s smartphone market. However, the weak Chinese economy and the emergence of local rivals have worsened things for Apple. Political issues and China’s growing feelings of nationalism are the other factors at play. Huawei is the most significant pain for the iPhone maker, while other dominants are Vivo, Oppo, Xiaomi, and Samsung. Greater China, which includes China, Taiwan, and Hong Kong, is Apple’s third-largest market after the US and Europe.

However, its revenue from China is shrinking. Cook pointed out that slowing iPhone sales in China are the primary cause of Apple’s slowdown. By introducing the affordable iPhone 11, Apple is aiming to counter its revenue loss by increasing sales volumes.

In the third quarter of fiscal 2019, Apple’s revenue from Greater China dropped 4% YoY (year-over-year), while its operating profit in the region fell 5.6%.

The heavy reliance on China is the reason why Apple always gives in to its demand. Analysts believe that if China retaliates, Apple could see a 10%–20% impact on its bottom line. It could, therefore, lead to a $6 billion–$12 billion loss for Apple in a year.

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Should Apple move away from China?

Apple has an enormous dependence on China. However, China has been a problem child for the company. In the wake of existing geopolitical issues and intensifying domestic competition, Apple may need to alter its strategy. It may have to look for other emerging markets and lower its expectations for Chinese markets.

In terms of its production base, Apple is slowly moving out of China. It has already invested $1 billion in India. As a market, India holds immense potential, as it has the world’s second-highest number of smartphone users. Business Standard indicated that Apple viewed India as the next China. Cook said, “We began to produce the iPhone SE there (India) during the quarter, and we’re really happy with how that’s going. And so we’re bringing all of our energies to bear there. I see a lot of similarities to where China was several years ago.”

Though India’s GDP is far below China’s, Cook said that this isn’t an important metric for the company. A young population, an increase in discretionary spending, and an improving network infrastructure could turn India into the next China for Apple. Read more in Can Apple Expand the iPhone Market in India?

Time for Plan B?

As Apple continues to give in to China’s demands, it needs to ask itself whether this is really necessary. The company is losing its grip in China and is standing on shaky ground. As the region is an epicenter of problems, does the iPhone maker need a Plan B in place? Expanding in a newer market won’t be devoid of challenges either.

As Trump announces a “Phase 1 deal” with China, will the situation improve? With Apple’s fourth-quarter results around the corner, its Chinese revenue figures will be in focus. But how long must that focus remain?

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