Apple Floats Above China Technology Crackdown — For Now

The Chinese government under President Xi Jinping has rattled investors in Chinese technology companies by announcing regulatory measures meant to curb the country’s fast-growing economy while reasserting control over some of its biggest companies. But the big U.S. technology company most exposed to China — Apple Inc. — is likely insulated from the turmoil for the time being.          

“The crackdown out of Beijing has caught investors by surprise given the scale and scope,” said Dan Ives, an Apple analyst at Wedbush Securities. “It’s a major overhang on Chinese tech names, but Apple has been able to navigate the China political climate unlike any other U.S technology company in the last thirty years. Apple is able to be more Teflon-like in terms of regulatory focus.”          

On Tuesday — when Chinese tech giant Tencent Holdings had its worst day in a decade and Chinese tech companies ranging from food delivery to online tutoring sectors continued a multi-day free fall — Apple underscored its dominance by releasing earnings that topped Wall Street expectations for both sales and profit and reported quarterly revenue that topped $100 billion for the first time. That included strong growth in Apple’s Greater China region, in which it reported $14.8 billion in sales, up 58% from the same quarter a year ago.

Under the premise of tackling the technology industry’s anti-competitive practices and cybersecurity concerns to curbing rising costs of tutoring companies, the Chinese government has sent a clear message: It is not afraid to wipe out massive economic gains in order to pursue its policies. “China goes back and forth on cracking down on their companies,” said Mark Zgutowicz, an analyst at Rosenblatt Securities. “If you think about Tencent, Alibaba, JD.com — China does not want any of their companies to get too big for them to control. And whenever these companies get too big for their britches, China will come down and say, ‘You know what, we’re going to regulate this or bring in another competitor.’”

Apple’s manufacturing supply chain is based in China and Taiwan, where nearly every iPhone, iPad and Mac computer is made. Over the years, China has proven itself to be both an important customer and partner to Apple.

According to Zgutowicz, Apple’s presence in China is actually a boon to the government’s agenda. Chinese technology companies like Huawei Technologies, Shenzhen Zhixin New Information Technology, Vivo Communication Technology Company and Guangdong Oppo Mobile Telecommunications Corp. have more or the same amount of mobile phone market share in China as Apple, according to data from market research firm Counterpoint. This means that Apple is simply another player that keeps its domestic companies from getting too big. “Ironically, Apple keeps the other companies in check,” Żgutowicz said. “It keeps things level for the other Chinese manufacturers.”

Apple may not be facing the brunt of the Chinese crackdown, but it has not been totally immune to its regulatory bodies in recent years. In 2017, after China passed a cybersecurity law that required technology companies operating in China to store Chinese users’ data in the country, Apple agreed to build two data centers in the country. Cook ensured the public that it would keep that data safe. But a recent New York Times investigation asserted that the company had more or less given up control of the computers inside the data center to the Chinese state. 

In August 2020, Apple took down 47,000 applications from its App Store at the request of the Chinese government for not obtaining the appropriate gaming licenses, according to Rich Bishop, CEO of AppInChina, a Beijing-based firm that helps applications localize and obey local laws in order to publish its apps in China. This request came after a decade of China turning a blind eye on how Apple operates its App Store in the country. “It is very unclear why the Chinese government has allowed Apple to operate until now without compliance with Chinese law,” said Bishop. “I would imagine it is because Apple contributes a lot to the Chinese economy in terms of manufacturing and sales — or maybe they have solid government relationships.”

The company’s heavy reliance on the region was an effort led in large part by Tim Cook, who worked at Apple for thirteen years under Steve Jobs before becoming its CEO in 2011. In the early 2000s, the Chinese government and its business leaders welcomed Apple, spending billions to build factories, power plants and employee housing. In one instance in 2004, when Apple was looking to expand its footprint in the country, a manufacturing partner in China physically moved a mountain in order to make space for an iPod-building factory. 

Chief executives at some of Apple’s largest supply chain partners in China and Taiwan have become billionaires themselves. Zhou Qunfei, who chairs Lens Technology, a smartphone screen supplier that has long been one of Apple’s earliest suppliers for the iPhone, is one of the greater China region’s richest women, worth a cool $12.7 billion. Terry Gou, who founded Foxconn and assembles iPhones for Apple, is the richest person in Taiwan with a net worth of $6.7 billion. “Part of this tight-wire balancing act for Apple and Cook has been to make sure they are successful in China without any blowback from the ongoing U.S.-China Cold Tech War,” said Ives of Wedbush. “And the reality is that in a peak iPhone cycle, Apple through its supply chain is one of the biggest importers in the whole country of China, potentially employing more than a million employees across the broader supply chain in the country.” 

Apple and the greater China region have enjoyed a symbiotic relationship, but the company has made concessions in order to placate an increasingly controlling government. For now, it works — until the Chinese government starts to see Apple as a threat. “China welcomes the competition as long as Apple doesn’t get too big,” said Zgutowicz. “But whenever a company starts to get too big, they will see it from miles away. They do not want companies to get too big and create their own government with their users.”

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