The EconomistFebruary 22nd 2020 Business 652
1encryption, security and privacy mecha-
nisms that are offered in the rest of the
world. But the government’s desire to con-
trol information and data means that there
are products that Apple cannot offer to Chi-
nese iPhone users, denting revenues and
making its devices less appealing.
China’s Communist Party has proved
surprisingly adept at stuffing the genie of a
free internet back into its bottle. Apple has
had to help. In 2017 the firm removed virtu-
al-private-network apps from its Chinese
app store. These let Chinese netizens jump
through cracks in the Great Firewall and
out onto the wider internet. Anything
where Apple plays a more explicit editorial
role, like its new curated news and stream-
ing services, is beyond the pale. Not being
able to sell its full range of services in China
means Apple is leaving money on the table
for every active iPhone in the country. App
Store sales make up most of Apple’s ser-
vices revenue, and while those are growing
in China, the complete absence of its latest
service plays will matter in future.
Apple’s latest quarterly results, released
on January 28th (before the scale of the vi-
rus outbreak was clear), showed worldwide
iPhone sales rebounding after a disap-
pointing performance the previous year.
Apple says that it is “fundamentally strong,
and this disruption to our business is only
temporary.” Revenues grew by 9% to
$91.8bn. Sales of accessories and services
that cluster around the iPhone grew too.
Tim Cook, Apple’s boss, said that Apple had
seen “double-digit” growth from sales of
iPhones, services and wearables in main-
land China. Although some specific pro-
duct categories grew fast, overall sales in
China were up by just 3% for the quarter,
slower than anywhere but Japan, where
sales shrank.
There is one ray of light in China. The 5g
iPhone, with much faster connectivity, is
reportedly due to go on sale in late 2020.
But will it provide a sales bonanza? What a
5 giPhone will offer to well-heeled Chinese
customers that they do not already have is
unclear. Chinese consumers in large citiesare used to high-quality mobile-phone
connections. It is common to see an entire
metro carriage of commuters streaming
high-definition video on the move, some-
thing that few American or European net-
works can handle. Phones made by Hua-
wei, a Chinese tech giant, are as good or
better than anything Apple offers.
Even the success of a 5giPhone would
only be a temporary salve. As the decou-
pling of the American and Chinese techno-
logical ecosystems grinds on, it will only
get harder for Apple to tap into the Chinese
market and run its Chinese supply chains
efficiently. That Apple was the first large
American company to issue a revised fore-
cast as a result of the virus shows just how
dependent the firm is on China, for both
supply and demand. Opportunities else-
where may make up for some lost rev-
enues—selling streaming services to
Americans is a good business, if competi-
tive. But it will be almost impossible for
Apple to find a new growth engine quite as
powerful as China. 7Apple of its iSource: BloombergGreater China, Apple revenues, $bnYears ending September01020304050602010 11 12 13 14 15 16 17 18 19“I
t is goingto be an almighty legal mess
for months and years to come.” That
grim prognosis of the potential legal and
business consequences of the viral out-
break in China comes from a veteran of the
country’s business scene. Dan Harris of
Harris Bricken, an American law firm, wor-
ries that today’s trickle of mainland suppli-
ers declaring force majeure(fm), an obscure
legal manoeuvre used to get out of con-
tracts, could turn into a tidal wave.
The crisis has certainly put many firms
in a bind. If this were a normal year, most
factories would have shut for a week or so
in early February so that migrant workers
could return to their villages to celebrate
Chinese new year. By now, plants would be
roaring at full capacity. But because of a
lockdown of a large area around Wuhan,
the outbreak’s centre, and ongoing restric-
tions on travel, workers are only slowly
trickling back. Morgan Stanley, an invest-
ment bank, reckons that production may
reach only 60% to 80% of normal levels by
the end of February.
The result is that the supply chains of
global firms, which often rely on “just in
time” deliveries of stocks, are being dis-
rupted. Chinese buyers of imported com-
modities are also hurt, thanks to weak local
demand. Nomura, a Japanese bank, thinksChinese year-on-year economic growth
could plunge to 3% in the first quarter,
down from 6% the previous quarter.
China Inc is panicking. Firms are start-
ing to invoke fmto avoid paying non-per-
formance penalties on contracts. On Feb-
ruary 17th, the China Council for the
Promotion of International Trade (ccpit),
an official body, revealed that it has already
issued over 1,600 “fmcertificates” to firms
in 30 sectors covering contracts worth over
$15bn. These give official support to its in-
vocation. More are likely to come.
All this raises several questions. First,
since this clause typically refers to “acts of
God” like earthquakes and hurricanes,
does it really apply to an epidemic probably
caused by humans eating exotic animals
and to the heavy-handed government re-
sponse to it? Second, even if deemed rele-
vant, will fmreally work in practice? And
finally, is a lengthy legal tangle inevitable?
On the first question, common sense
suggests no but precedent and officialdom
say yes. David Buxbaum of Anderson & An-
derson, a lawyer who has worked in China
since 1972, reports that some suppliers suc-
cessfully invoked fmin local courts in the
wake of the sarsvirus outbreak of 2003. On
February 10th, the National People’s Con-
gress ruled that policies implemented to
control the virus (such as production curbs
and city lockdowns) that interfere with
contracts should be considered fm.
On whether invoking this clause will
really work, legal opinion is divided. Many
trading contracts fall under international
jurisdictions less friendly to this claim
than China with courts not overly im-
pressed by fm certificates. Earlier this
month, cnooc, a Chinese state-run oil
firm, invoked fmin refusing to accept a
shipment of liquefied natural gas from
Royal Dutch Shell and Total—a claim re-NEW YORK
Chinese firms use an obscure legal
clause to wiggle out of contractsForce majeureA force to be
reckoned with
Turning off the gas