The Economist USA - 22.02.2020

64 Business The EconomistFebruary 22nd 2020

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the debate over privacy legislation was

conducted had been long established be-

fore thegdpr, but regulation inaiis na-

scent. Experts still quarrel over such basic

questions as whataiactually is. And the

eu, where politicians tend to favour strict-

er regulation, may overdo it. This could

push the tech giants to differentiate their

regional offerings after all (and stymie Eu-

rope’s startups). Worse, the data strategy

could easily turn protectionist.

If theeu’s digital plans became restric-

tive policy driven by protectionism, that

would limit Europe’s ability to set global

rules which could help to give its firms a

much-needed leg up. It would also make it

much harder for theeuto establish what

the digital world will badly need, should

regulation of tech remain stalled in Ameri-

ca even after the presidential election. At

risk is Europe’s role as a third “techno-

sphere”—one that is not controlled by a

handful of tech titans, as it is in America, or

by the Chinese state. 7

N

o american companymakes as much

money in China as Apple. While few

make that much money at all, Apple raked

in $44bn of revenues in Greater China dur-

ing the 2019 financial year, mostly from

selling iPhones. That is more than the glo-

bal sales of United Airlines and Nike and

about as much as Tencent, a domestic tech

giant. Few countries have as much power

as China to shape Apple’s fortunes.

The virus that has swept across the

country is doing just that, hurting both

manufacturing operations and sales of

iPhones in Apple’s second-biggest market.

Many of the migrant workers on whom Ap-

ple and its contract manufacturers depend

have not yet returned to their posts as the

movement of people is restricted by the

government. Shoppers have not yet re-

turned to the streets. As a result, on Febru-

ary 17th Apple warned investors that it

would miss its revenue guidance for the

quarter. The firm’s shares, which have been

on the ascent since last summer, dropped

by nearly 2% after the announcement.

The short-term threat to Apple’s busi-

ness in China is best understood against

the backdrop of the firm’s longer-term suc-

cess. Apple’s Chinese fortune was built in

the first half of the past decade, when its

revenues in the country grew from $2.8bn

in 2010 to $59bn in 2015. Sales have slipped

in subsequent years (see chart on next

page), but were still sufficient for the Chi-

nese market to account for 18% of Apple’s

total revenues over the past ten years, sec-

ond only to America. Apple says that it is

gradually reopening its retail shops and

that all of its iPhone manufacturing sites

have reopened too, although their ramp up

is going more slowly than it anticipated.

Even if the virus outbreak proves to be no

more than a blip, the 2020s are unlikely to

treat Apple so well.

Its vital Chinese manufacturing opera-

tions are threatened by conflict with Amer-

ica over trade and technology. The trade

war may also have damaged Apple’s brand.

The number of iPhones it sells in China is

plummeting. Most importantly Apple’s

new strategy for growing revenue by sell-

ing subscriptions to services is far more

complicated in China than selling iPhones.

Apple’s engine of growth may not just be

dormant, but extinct.

Start with supply chains. Apple is deep-

ly dependent on China’s high-tech manu-

facturing ecosystem. Only China offers the

labour and infrastructure needed to manu-

facture hundreds of thousands of devices a

day, the volume Apple must produce in the

run up to the release of a new phone. Dur-

ing Apple’s China boom Foxconn, a Tai-

wanese contract manufacturer, was the

driving force behind the building of a new

factory town near Zhengzhou in Henan

province, to support iPhone manufacture.

No other contract manufacturer could get

close to that scale. The local government

shelled out $1.5bn to help build factories

and housing for 400,000 workers, and

$10bn for a new airport.

That dependency leaves Apple’s manu-

facturing base exposed to the economic

and technological conflict between Ameri-

ca and China. Smart lobbying has kept its

products outside America’s tariffs regime

so far, but other threats loom. America’s

Department of Commerce is working on

new rules that would curtail the export of

technical components to China. Such bar-

riers could cripple Apple’s manufacturing

there. It has nowhere else to turn. Efforts to

establish a manufacturing base in Brazil

failed. Indian operations have proved more

fruitful, but are still small. Apple is bound

to China and the virus shows how strongly.

Sales of Apple’s core product, the

iPhone, are also on the wane in China. Ac-

cording to Canalys, a research firm, iPhone

sales in China dropped by 21% in 2019, to

27.5m, even after price cuts, a tactic that

Apple rarely employs. Selling fewer phones

means not only lost sales but also deprives

Apple of future revenues. Sales of services,

like app-store purchases and Apple Music,

and wearables like AirPods and watches,

designed to integrate with the device, are

linked to iPhone sales. Though Apple still

has plenty of Chinese iPhone users, slip-

ping sales put a cap on the future revenue.

Apple must also grapple with the Chi-

nese government. The firm has always

walked a fine line, quietly making compro-

mises like agreeing to store users’ cloud

data on Chinese servers. The company’s

leaders are adamant that the devices which

Apple sells in China come with the same

HONG KONG

Sales and manufacturing have been hurt by a virus lockdown but the tech giant

has bigger problems

Apple in China

Red plateau

What’s ailing Apple in China?