1 May 2020 | By DF
This is a 9-part essay series on Apple’s Success in China. Part 1 introduces the essay series. Part 2 explains Apple’s product-zeitgeist fit in China. Part 3 looks at product localization. Part 4 looks at Apple’s services in China and relationship with Tencent. Part 5 looks at the complexities of operating in China. Part 6 and Part 7 look at Apple’s compliance efforts in respect of the App Store and iCloud respectively. Part 8 looks at Apple’s investment in DiDi. Part 9 concludes with lessons from Apple’s experience in China.
This final part of this essay series shall abstract from Apple's particular experiences and compile a list of lessons for non-Chinese (technology) companies looking to replicate Apple's success in China.
Without even considering execution, one key insight is the the company must first have a business model that is a good fit with China’s business environment and overall zeitgeist. I have attempted to make a tentative list of characteristics of a company’s business model that might be reasons for optimism and pessimism respectively:
Apple itself does not fulfill all the characteristics on the left and this list is tentative because China’s zeitgeist is itself dynamic. As we shall see, Tesla is the one other technology company that is the closest analog to Apple.
Most of these characteristics are self-explanatory and I will comment specifically on a few.
First, due to a mix of domestic competition and government regulation, it is increasingly difficult for foreign technology companies to seize upon horizontal, mass-market network-effect-based opportunities. While there are aspects of network effect-based moats in Apple's business model (most obviously the App Store), its moat largely derives from proprietary technology.
Second, the success of Apple luxury brand image and skim pricing strategy shows why median and average statistics are a poor way to understand the Chinese economy. Due to the size and topology of the Chinese economy, there simultaneously exists a small subset of highly price inelastic consumers as well as much larger middle class that is more price-sensitive but willing to spend for quality and social signaling. This fractal phenomenon is likely to continue into the future, as continued economic growth will further expand the Chinese middle class. Companies pursuing a high-end strategy thus have to consider how to position their products to achieve effective price discrimination.
Third, while enterprise-facing business models are likelier to face less regulatory scrutiny than consumer-facing ones, given the perception in the China tech/VC space that low-hanging fruits in the consumer space have been fully exhausted, funding and resources are increasingly redirected towards the enterprise software space.
Finally, assuming that a company has successfully achieved a product-market in China, Apple’s experience illustrates the significant costs required to sustain such a business. In contrast to its minimal product localization, its most far-reaching China-specific measures are typically the result of interactions with state-owned entities (e.g. China-specific dual SIM iPhones) or China’s onerous regulatory environment. Apple’s experience suggests that the lines between compliance and public relations in China are quite blurred and are typically conceived as entry fee imposed by the state in exchange for access to the vast Chinese consumer market.
While this essay series has largely focused on Apple’s compromises, this might present a distorted picture of Chinese policy and Chinese business environment as exclusively an obstacle to Apple’s success. This is because this thesis largely does not discuss Apple’s supply side strategy as this was not China-specific as such.((Apple manufactures most of its products in China, thus there is no basis for comparison for Apple’s general approach.))
Rather, Chinese policies are really a double-edged sword.
In Apple’s early years of scaling up the manufacturing of the iPhone, Apple has benefited hugely from Chinese industrial policy to move up the manufacturing value chain from plastic toys and clothes to electronics in the early 2000s. The Chinese local government played a significant role in taking over land to construct factories for Apple’s contract manufacturers and expediting regulatory approvals. Here, Tesla once again lends itself to comparison. Despite the backdrop of the US-China trade war, the company “received various concessions from local authorities ranging from approvals to preferential loans”, its Chinese plant “sped through approvals and construction” and “was completed in record time” and its locally built cars are both exempted form a 10% purchase tax and qualified for a government subsidy.
Similarly, Chinese policies played a huge role in building out its tech sector, which consists of private Chinese Internet companies and smartphone manufacturers built atop a largely state-owned infrastructure layer. For example, 4G coverage in China is remarkably comprehensive, with 100% coverage in urban areas, over 92% coverage in villages (行政村), and significant coverage on subways, high-speed rails, and tourist areas that exceed many developed countries. Mobile data in China is also relatively cheap, with 1GB costing 1.1% of GNI per capita, which is significantly lower than the equivalent figure of 5.4% in Asia-Pacific and 6.8% globally.((CAICT (中国信息通信研究院), (December 2017) 「互联网发展趋势报告(2017-2018 年)」)) As state-owned entities, these carriers are responsive to political pressure to lower prices, build base stations in rural, unprofitable regions and eliminate inter-provincial “roaming” fees. As a smartphone manufacturer, Apple certainly benefited from these policies as well.
As such, a more nuanced lesson might be a company would do well to be the right side of Chinese policies and either steer clear of adverse policies or be prepared to incur significant compliance and public relations cost as a part of doing business in China.
Until now, this thesis has mostly been backward-looking in its analysis. In contrast, Apple’s future in China appears more uncertain. To be sure, it is difficult to make predictions, especially about the future.