There is a common saying among expats in China – particularly longtime “China Hands” – that goes like this: The more time you spend in China, the less you understand it. So it’s with this in mind that we try and break down exactly what’s going wrong for Apple in China these days, likely a confluence of factors from politics and economics to nationalism and a rapidly changing consumer market. There’s no easy answer.
People have begun wondering what’s wrong following a few worrying signs: Apple announced a severe slowdown in iPhone sales in China on its recent earnings call, a new report by IDC confirmed a concerning tumble in iPhone sales, and Apple’s uncharacteristic decision to cut prices on the latest model phones sold at some of China’s largest retailers. These don’t seem like moves that would be made by a strong, confident company.
So what’s wrong in China? Let’s dig in.
Let’s face it, competition in the technology realm is fierce in China. If you haven’t been there, it’s hard to understand the dizzying speed at which innovation happens — and the willingness of even older people to become early adopters.
While the country claims to have a 5,000-year unbroken civilization, this current era of innovation and optimism has made people hungry for anything “new”. In the early days of smartphone sales, Apple had cachet, but with a perceived slow development cycle there’s a lot more interest in Huawei phones, in particular. Huawei is a national champion that manufactures high-quality phones at nearly half the cost (take a look at some of the photos taken with the P20).
Chinese manufacturers also create phones tailored for the Chinese market, with dual-SIM slots (now finally available on some iPhone models), local GPS providers, and popular selfie apps that are way over-modulated for western tastes. (If you want to see what I mean, download Tantan, China’s answer to Tinder).
Even foreigners I meet on this side of the world love their Huawei phones, concerns over spying excepted.
Of course, comparing specs is important in China, but isn’t enough to move the needle in Huawei’s favor on its own. That requires…
China is a big country, with a lot of people — 1.4 billion of them, roughly. But while media attention showers the country in praise for its perceived riches, the truth is the vast majority of the people in China remain poor. The per-capita GDP of the USA is nearly $60,000, but only $8,800 in China, on par with places like Lebanon and Cuba and just slightly above Botswana. Sure, people in China aspire to own nice things, but without a social safety net, a savings account becomes a do-or-die necessity.
A massive wealth gap, though, still leaves millions of wealthy people in the eastern cities of Beijing, Shanghai, Guangzhou, Shenzhen, and others, who don’t hide their ability to pay whatever Apple asks. But even with them, doubt is setting in, partially driven by…
Culture / Nationalism
This is a hard one to explain without ruffling a few feathers, but let’s just say that the cultural divide between the United States and China is probably so much more vast than most people realize. From top to bottom, inside and out, from belief systems to decision-making, everything about China is different.
Adding to that is an authoritarian government that has long stoked nationalist tendencies through propaganda delivered over the country’s television, radio and internet airwaves, which it directly controls. If China, or its people, feel attacked or treated unfairly, there is plenty of evidence showing that large-scale boycotts of foreign brands have worked.
Most recently, after a private conversation featuring Dolce & Gabbana founder Stefano Gabbana making disparaging remarks about China leaked, several flagship shops were forced to close and events canceled.
Then there was the boycott against South Korean companies after South Korea said it would work with the US on a missile defense system. From a Forbes article in 2017:
Much of the wrath has targeted Lotte, a Korean conglomerate that will swap land to allow installation of the anti-missile system. Supposed failure of regulatory inspections suddenly prompted the closure of 55 Lotte stores, about half the total in China. Chinese have also quit arriving South Korea on tours. About 3,300 tourists wouldn’t leave a cruise ship that arrived Saturday at the South Korean resort island of Jeju. Korean pop concerts once popular in China are off the marquees.
Lotte is, loosely speaking, similar to Walmart, and the closure of 55 stores dealt a blow to their revenue. 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.
Apple isn’t an official target yet, but it’s treading awfully close. I already have anecdotal reports that some Chinese companies are frowning upon staff still using iPhones, and people are ditching them for Chinese-branded smartphones. A combination of trade war rhetoric, cheaper/better models produced by Chinese companies, and general distaste for anything seen as “yesterday’s hit” is a real factor that will affect Apple’s future in the country.
If the trade war intensifies, Apple is a massive target for China — the country still contributed $13.17 billion to Apple’s coffers in the last quarter and is also where the majority of its products are manufactured — making the company particularly vulnerable compared to its peers. The precipitous drop of nearly $5 billion in China revenue last quarter was without any official call to boycott Apple products. This could get worse before it gets better.
Fads do matter in China, a lot. It’s a country dominated by the idea of “face”, of presenting an idealized version of oneself to others. There is still a pretty narrow band of what’s considered “acceptable” in China in terms of self-expression, as the culture is still dominantly uniform. (I know this will provoke comments, so I will add this: I know there are exceptions, China is growing and changing quickly, there are some excellent artists/musicans/playwrights/LGBT people/activists etc. But generally speaking, compared to western countries, there is a lot more societal pressure from family to conform to certain kinds of lifestyles deemed acceptable).
With so few ways to really stand out, one key differentiator is the choice of mobile phone. But for years now, the iPhone hasn’t really undergone any large physical design changes that would be noticeable to others, aside from maybe the introduction of the notch with the iPhone X in 2017. I personally don’t think Apple should change the look and feel of the phone just for change’s sake, but it’s true that in China, people want the newest and most cutting-edge — so they can show it off. The go-it-slow approach to innovation and continual tweaks to improve the user experience just aren’t sexy enough for some of the country’s highest earners and biggest influencers.
A unique quirk in China’s mobile phone industry is the dominance of WeChat, which has become the de facto operating system for Chinese users. I wrote a piece looking at how WeChat works and why it’s so popular earlier, but the reliance on this single app, which works well on both Android and iOS, makes the choice of operating system much less important and removes Apple’s normal “stickiness”. It, alone, makes the Chinese smartphone market unique.
So what’s next?
It’s very difficult to put one’s finger on a single statistic, or one element of the Chinese economy, to explain Apple’s decline. A concoction of all of the reasons above create a toxic brew that Apple is now confronting — and that’s without taking into consideration other macro-economic trends like China’s slowing economy and devaluation of its currency.
Make no mistake: Apple has been one of the most successful US companies operating in China to date, but its long-term success there is far from secure. There could be some even bumpier days ahead.
Photo: The Observer