62 Business The EconomistJune 1st 2019
L
ong beforeTim Cook became Apple’s boss, when his job was to
wring costs out of the company’s supply chain, he learned of a
problem with a supplier in China. “This is really bad,” he told his
staff. “Someone should be in China driving this.” Thirty minutes
later he saw one of his executives sitting at a table. “Why are you
still here?” he asked quietly. The executive stood up, drove directly
to San Francisco’s airport and bought a ticket to China.
This anecdote, recounted in Walter Isaacson’s biography of
Steve Jobs, Apple’s founder, is one of only a few tales in print that
offer an insight into the management style of Mr Cook, who took
over from Jobs shortly before he died of cancer in October 2011. It is
telling. While Jobs, the irascible creative genius behind Apple’s
bestselling products, stole the show, Mr Cook, who is both courtly
and deeply private, plugged away behind the scenes to cement a re-
lationship crucial to Apple’s soaring success: that with China.
In the early days of Apple, Jobs wanted to make his Macintosh
computers in America. With his trademark obsessiveness, he built
a factory of pure white to produce them (and wore white gloves to
check for dust). When Mr Cook joined the company in 1998 he
changed all that, deploying his soothing Alabama lilt and a fear-
some work ethic (he gets up at 4am) to forge an unrivalled supply
chain running through Asia. Today labels on nearly all iDevices
read, “Designed by Apple in California. Assembled in China”.
Mr Cook’s bet on China extended beyond its factories to its con-
sumers. Sales to the region have risen from next-to-nothing in
2010 to $52bn last year, or almost a fifth of Apple’s revenues. Since
Donald Trump’s election in 2016, “Tim Apple” (as America’s presi-
dent once called him) has jetted to Washington and Beijing to try to
ease rising trade tensions between the two superpowers. Horace
Dediu, a technology analyst, says Mr Cook “knows how to navigate
the political mind”.
Given his reputation as a logistical mastermind, it is worth ask-
ing why he has ignored the first rule of supply-chain management:
the risk of keeping too many important eggs in one basket. In Mr
Cook’s case, that basket is China. The trade bust-up is getting ugli-
er. If it leads to an anti-American backlash in China, it could spell
trouble for Apple—and for Mr Cook personally.
Mr Cook’s lobbying has helped Apple avoid direct hits from MrTrump’s tariffs, already imposed on $250bn-worth of Chinese im-
ports. But its shares have fallen by almost 12% in the past month.
On June 1st, after The Economistwent to press, China was expected
to retaliate with tariffs on $60bn of American goods, including
components for Apple devices. Mr Trump has threatened a levy of
25% on $300bn more of imports if trade talks do not produce a
breakthrough. This would cover the iPhone, by far Apple’s biggest
source of revenue. Morgan Stanley, a bank, estimates that it could
add $160 to the cost of a $999 iPhone xs.Apple could absorb the
cost or pass it on to buyers. Either way, profits would suffer.
A more immediate threat may be a Chinese reprisal for the
Trump administration’s decision in May, on national-security
grounds, to stop American companies from supplying Huawei,
China’s tech champion (and the biggest seller of smartphones in
China), with chips, software and other technology. A Chinese con-
sumer boycott of Apple products could accelerate their shift to-
wards other, cheaper brands. Because of the trade tensions, Citi, a
bank, has halved its forecast for iPhone sales in China in the sec-
ond half of this year, from almost 14.5m to 7.2m units.
Others reckon that Apple could offset Chinese losses by luring
customers away from Huawei in other countries—but only if it
could continue to churn them out in Chinese factories. Although
Apple has tentatively started production of some iPhones in India
for local customers, it appears if anything to have increased its
China exposure, even as Mr Trump’s trade bluster has intensified.
According to a review of Apple’s top 200 suppliers by the Nikkei
Asian Review, a Japanese publication, last year those from China
(41) exceeded those from America (37) for the first time—though
Apple stresses the importance of its American supply chain. China
has recently released draft cyber-security regulations that cover
threats to national security and supply chains. Andrew Gilholm of
Control Risks, a consultancy, says these could be weaponised
against big American firms in China if the situation deteriorates.
That would be the nuclear option. It looks unlikely for the time
being. The costs for China would be huge; Mr Dediu estimates that
Apple contributes about $24bn a year to China’s economy. Some
1.5m Chinese help assemble Apple products. A further 2.5m Chi-
nese software engineers create apps for the ios operating system.
Appetite for punishment may be weak. On May 26th Ren Zhengfei,
Huawei’s boss, told Bloomberg tvthat he would be the first to prot-
est if China hits back against Apple. “Apple is my teacher, it’s in the
lead,” he said. “As a student why go against my teacher? Never.”
Mr Ren can always change his mind. So can China. Whereas
Huawei claims to have a Plan B to survive its blacklisting by Ameri-
ca, and Samsung, a rival smartphone-maker from South Korea, is
shifting supply chains from China, Apple appears to have no clear
alternative to assembly in China. Few other places possess the ex-
pertise to produce the high-end components that Apple needs. The
existing network would take years to unscramble.On Apple watch
One fix would be for Apple to develop another indispensable pro-
duct that no self-respecting affluent Chinese consumer could do
without. For all his success, Mr Cook has not yet managed this. An-
other would be to develop services that do not need production in
China. Apple’s much-trailed announcement in March of new vid-
eo-streaming, payments and other services shows it is trying. They
may prove a hit, but would be no substitute for the iPhone. Mr
Cook must be hoping that he has not miscalculated the risks to the
supply chains he has so intricately engineered. 7Schumpeter iPhoney war
Does Apple’s boss have a Plan Bin China?