Tim Cook said Apple and China had a ‘symbiotic’ relationship just 6 months ago. Now Beijing’s reported iPhone ban may mean the good feelings are over
Just a few months ago, Tim Cook was one of the few U.S. CEOs brave enough to venture to China after its reopening. In March, Apple’s chief executive attended a high-profile government-organized conference, met with China’s leaders, and proudly declared that Apple and China had a “symbiotic kind of relationship.”
That relationship is now being tested amid reports that Beijing is stopping some of its state employees from using Apple's smartphone, as China takes a hard line against any official use of foreign technologies.
Beijing is ordering officials in some government departments to stop using iPhones, the Wall Street Journal reported Wednesday. Beijing is also considering extending the ban across the government and to state-owned enterprises, Bloomberg reported Thursday.
The news hit Apple’s stocks hard. Shares are now down by almost 7% over the past two days, wiping out $200 billion in market value for the tech company. (Apple is still the world’s most valuable company by far, at $2.7 trillion versus second-place Microsoft at $2.4 trillion.)
Apple did not immediately respond to a request for comment.
If Beijing really does limit the use of the iPhone, it’s a potential blow to the close connection between Apple and China. Yet it was a relationship that was already slightly shaky after supply chain disruptions, and is now pressured by the return of a competitor: Huawei Technologies.
How important is China to Apple?
China is key to Apple’s supply chain and to its sales.
Apple relies on Chinese suppliers to make many of its electronics, including the iPhone, iPad, AirPods and its upcoming Vision Pro headset. About half of Apple’s smartphones are made in a giant factory complex in Zhengzhou, nicknamed “iPhone City”, operated by electronics manufacturer Foxconn.
China is also a major consumer market for Apple, as its largest market outside of the U.S. The company generated $15.8 billion in sales from China alone last quarter, just over 19% of its total. And Chinese consumers flock to the iPhone too: Apple has 65% market share for premium phones over $600, according to the Wall Street Journal citing data from research firm IDC. (Apple is in fourth place overall, behind cheaper domestic brands Oppo, Vivo and Honor, according to the South China Morning Post.)
Apple also complies with Chinese regulations on censorship and data security, including storing the personal data of its Chinese customers in domestic data centers.
But recent events may have pushed Apple to reconsider its reliance on the country. COVID-zero lockdowns, especially in Zhengzhou, drove the company to warn last November that production of the then-latest model iPhones would be lower than expected heading into the U.S. holiday season.
China’s economic slowdown could also weigh on smartphone sales, though Apple has managed to withstand the drop in consumer confidence thus far. Apple was the only smartphone vendor among the top five in China to increase its sales last quarter, according to CNBC.
Apple is investing in manufacturing elsewhere in Asia to diversify its supply chain. The company now makes 7% of its iPhones in India, and has reportedly started production of the next iPhone in the South Asian country. Apple is also shifting some production of iPads, Macbooks and AirPods to Vietnam.
And the company also hopes that India will be the next big market for its electronics. Cook called the country “a hugely exciting market for us” in a call with analysts in February, and Apple opened its first retail outlets in the country earlier this year.
Espionage concerns
China reportedly set out a plan in 2019 to remove all foreign technology from government operations within three years. The decision was motivated partly by U.S. sanctions on Huawei, barring it from buying advanced chips. The Chinese company was forced to stop producing its premium phones, revealing U.S. leverage over China’s tech sector.
Last year, China ordered government agencies to stop using foreign-made PCs and software, diverting them from Western companies like HP and Microsoft towards domestic alternatives like Lenovo and Kingsoft.
Chinese concerns about data security and espionage have even extended to Tesla, with officials at times barring the company’s electric cars from sensitive areas.
Of course, the U.S. has similar espionage concerns when it comes to Chinese-made hardware and software. Washington has pushed U.S. telecoms companies to strip Huawei from their 5G networks, and has banned TikTok, from China-based developer ByteDance, from government devices. The U.S. is currently discussing whether to ban TikTok from the U.S. entirely.
An alternative
And another threat for Apple may loom on the horizon.
Huawei, at one point the world’s largest smartphone manufacturer, quietly launched the Mate 60 Pro last week. The phone features performance that keeps pace with Apple’s iPhone, and a processor that’s only a few years behind the cutting-edge. The technological achievement comes despite years of U.S. controls on sales of advanced chips and chipmaking equipment to Huawei and China more broadly in a bid to kneecap the country’s semiconductor sector.
On Friday, Huawei announced an even more powerful version of the Mate 60 Pro, which features more memory and connections to China’s GPS competitor, BeiDou.
While Huawei was muted about the phone’s release, Chinese state media was not. “The resurgence of Huawei smartphones after three years of forced silence is enough to prove that the US’ extreme suppression has failed,” wrote the Global Times, a state-run English-language outlet.
The U.S. Commerce Department on Thursday said it would investigate how Huawei got its hands on the advanced chip, made by the also-blacklisted Semiconductor Manufacturing International Corporation, China's largest chipmaker.
This story was originally featured on Fortune.com
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