China’s Amped Up Criticism Puts Apple in Curious Position

| Analysis

Apple is in the process of enduring a government-orchestrated PR campaign against the company, accusing Apple of ripping off Chinese consumers with warranty policies that are inferior to warranties Apple offers the rest of the world. The situation puts Apple in a curious position.

Apple in China

Let's start with manufacturing. Apple makes almost all of its products in China and Taiwan. There are at least seven hundred thousand people—maybe as many as a million—assembling Apple devices and manufacturing the components that go into them.

Even in a country of 1.3 billion people, being directly responsible for a million jobs is a pretty big deal. One would think that China would value Apple's decision to outsource its manufacturing operations in the country, especially considering the reality that Apple paying (through Foxconn) those employees more than other manufacturing positions pay.

One might think, but in the last few weeks there have been two separate attacks from state-owned media outlets, and on Thursday a Chinese regulator jumped into the mix.

The first attack came from the CCTV network and a show called 315. According to media reports about the show, Apple was accused of using refurbished parts for iPhone repairs in China and offering warranty terms that were inferior to what Apple provides in the rest of the world.

Apple responded with a statement to the effect that its warranties in China were similar to the rest of the world's, but it was that response that earned the second attack. The People's Daily, which is owned by the Communist Party, criticized Apple's response and accused Apple of "unparalleled arrogance." Apparently The People's Daily didn't have access to a dictionary before penning that piece.

The entertaining part of this saga is that it backfired. After the 315 report, a host of celebrities took to Weibo—a Twitter analog that is very popular in China—to pile on and express their dismay that Apple could treat its customers so poorly.

When an actor and Samsung spokesman named Peter Ho included "Post around 8:20" at the end of a post echoing the TV show, savvy Weibo users accused him and other celebrities as having been instructed to make their comments. The hashtag #postaround820 became a thing and the backlash against 315 turned the situation into one that was favorable to Apple.

On Thursday, whatever aspect of the government is behind this campaign doubled down by having a bureaucrat in the State Administration for Industry and Commerce encourage authorities to crack down on Apple.

The question is why? What's the goal here? Is China truly concerned about Apple's warranty practices? Maybe, but folks on Weibo were busily asking the same question. Why Apple? They pointed out persistent problems with tainted milk and other consumer protection issues that get ignored and wanted to know why Apple was being targeted.

One possibility is that the government is concerned about the rise of foreign premium brands like Apple and the potential outflow of cash from the country that each sale of an iPhone represents. Indeed, this could be the very reason it's been so hard for Apple to get a deal with state-owned China Mobile.

Another possibility is that China is merely working to help promote the growth of home-grown smartphone manufacturers. By criticizing Apple and coupling it with a patriotic spin, China may hope that local brands of smartphones get more attention.

Another fanciful theory I've personally entertained is that China wants more cooperation with tracking mobile device use and users. Perhaps Apple was asked to do something and declined, and the attacks were either a message or punishment. I've heard nary a peep to that effect, however, and it's mere speculation on my part.

Along those same lines, China might simply understand that local manufacturers will be easier to control when it comes to such issues, and government officials want to curb Apple now, rather than later.

Heck, maybe it's something even simpler. Some party boss might be pissed at Apple or have investments in local manufacturers. He could be using his powers to advance a personal agenda or make a little money.

Whatever the cause, Apple is in a weird spot. It makes its products in China, China is its second biggest market and destined to be its largest (barring problems like this one). Getting into China Mobile alone could result in tens of millions of new iPhone sales every year.

In other words, problems for China could be really bad for Apple, even while an Apple slowdown or pullout of China would be bad for the Chinese economy.

As I said in the Apple Context Machine, these are some tough issues. I'm glad my job is simply to discuss them, rather than solve them. I don't envy Apple CEO Tim Cook's task of negotiating these waters.

This piece was developed in part from a discussion with Jeff Gamet in episode 197 of the Apple Context Machine.

Image made with help from Shutterstock.

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Comments

Lee Dronick

The question is why? What’s the goal here?

At first I am thinking that it is about baksheesh, and Samsung being willing to pay more of it. However, your comment about tracking Chinese users maybe the reason. Though of course it could be a number of things.

Shahid Batalvi

“Diplomacy by other means”
You make life miserable for Huawei and ZTE in USA with your recently enacted law, we will do the same for Apple in China in other ways. You back off, we back off.

looper

“You make life miserable for Huawei and ZTE in USA with your recently enacted law, we will do the same for Apple in China in other ways.”  What specific “recently enacted law” are you thinking of?

ctopher

That would most likely be the “Consolidated and Further Continuing Appropriations Act, 2013” signed by President Obama on March 26, 2013

Bill Number H.R.933 for the 113th Congress. I believe the relevant section is in “DIVISION B—COMMERCE, JUSTICE, SCIENCE, AND RELATED AGENCIES APPROPRIATIONS ACT, 2013” TITLE V GENERAL PROVISIONS Sec. 516. (a) and (b)

Sec. 516. (a) None of the funds appropriated or otherwise made available under this Act may be used by the Departments of Commerce and Justice, the National Aeronautics and Space Administration, or the National Science Foundation to acquire an information technology system unless the head of the entity involved, in consultation with the Federal Bureau of Investigation or other appropriate Federal entity, has made an assessment of any associated risk of cyber-espionage or sabotage associated with the acquisition of such system, including any risk associated with such system being produced, manufactured or assembled by one or more entities that are owned, directed or subsidized by the People’s Republic of China.
(b) None of the funds appropriated or otherwise made available under this Act may be used to acquire an information technology system described in an assessment required by subsection (a) and produced, manufactured or assembled by one or more entities that are owned, directed or subsidized by the People’s Republic of China unless the head of the assessing entity described in subsection (a) determines, and reports that determination to the Committees on Appropriations of the House of Representatives and the Senate, that the acquisition of such system is in the national interest of the United States.

Shahid Batalvi

Well done “ctopher”. Right on target.
Also it is not just US federal departments, there is tacit influence on private entities as well.
See news excerpt below:

“House Intelligence Committee Chair Mike Rogers (R-Michigan) says Softbank and Sprint Nextel are telling his committee they will try to phase out Chinese network equipment used by Clearwire. Sprint owns the majority of Clearwire and is trying to buy the rest. The concern about Chinese equipment arises from a recent Congressional warning about potential national security risks. That report named Chinese vendors Huawei and ZTE as possible threats, and Huawei is a supplier of network equipment to Clearwire.
Japan’s Softbank, which is in the process of buying a 70% stake in Sprint Nextel, is also a Huawei customer. According to the Wall Street Journal, Washington may not approve the Softbank-Sprint deal unless the companies promise to notify the government about plannned core network equipment purchases.”

wab95

Another fanciful theory I’ve personally entertained is that China wants more cooperation with tracking mobile device use and users. Perhaps Apple was asked to do something and declined, and the attacks were either a message or punishment. I’ve heard nary a peep to that effect, however, and it’s mere speculation on my part.

Bryan:

Of all the theories you pose, this is the one I would credit as the most plausible. To that end, both ctopher and Shahid Batalvi appear to provide substantive input.

The Chinese government is about nothing if not about control. While there may be something to the idea of trying to throw support behind local industries, which would almost certainly happen if said companies were owned by party apparatchiks (for the good of the people’s economy, of course), the Communist Party have shown a savvy understanding of the use of power with international companies to curb their behaviour to service party practices and interests (‘Resistance is futile. We will assimilate your biological and technological distinctiveness to service our own’). To that end, preparing Apple to comply with domestic surveillance practices could be the target. 

Another aspect of this is the Communist Party’s penchant allowing international companies to enter the market and compete, but then appropriate their technology and inventions, if any were done while they were doing business in China (not necessarily using Chinese technology, parts, IP or anything else - this is apparently just a temporal relationship). This was highlighted a couple of years ago by the BBC, in a podcast of their contrasting the growth of India vs China, and was described by a Western businesswoman as part of the cost of doing business in China. Also described in that podcast was the practice of the government quickly and unambiguously establishing that it is in charge over any outside interests. China may be preparing Apple for ‘sharing’ their technology with their comrades, for the good of the people.

This thing about ‘arrogance’ is cultural, with a strong trend in the region of getting all parties to view their place as, if not subordinates to a superior power, then as equals and comrades in the great collective. Individuality and standing out being things left to the arrogant or the ridiculous - both abhorred in equal measure (although if an individual achieves objective success, it is okay to let all know of it, and even self portraits and statues might be in order).

Apple, under Tim Cook, undoubtedly possess the finesse, diplomacy and perspective over the big picture to undoubtedly guide them to a successful but safe middle ground. It will take, however, regular self assessment and introspection, as well as some ground truth from Apple clients and analysts outside of China, to keep Apple true to its core principles.

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