June 25, 2021 Copyright by Difference Group Ltd

 

Apple amid US Cold War against China 

 

By Dan Steinbock

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America's most valuable $2 trillion company is no longer immune to US geopolitics. Apple's global success is an anomaly to the protectionist Trump-Biden administrations - for all the wrong reasons.

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Recently, Apple announced a set of additional privacy protections. The “private relay” feature obscures a user’s web browsing from service providers and advertisers. It will not be available to users in China.

After the announcement, New York Times reported that Apple had given in to China in a hard bargain for the Chinese market.[1] Inadvertently, major media are today contributing protectionism, as they did in the '50s.

 

No multinational can ignore local responsiveness    

While Apple has not made the private relay feature to users in China, the same goes for several other countries, including Belarus, Colombia, Egypt, Kazakhstan, the Philippines, Saudi Arabia, South Africa, Turkmenistan, and Uganda.[2]
Since the 1980s, the leading multinationals have sought to reconcile global efficiencies with responsiveness to local markets.[3]  Yet, many American technology giants still earn the bulk of their revenues in the high-income US and Western European markets. In contrast, Apple has proved more innovative in global markets.[4]
In China, the company is trying to adjust to local market practices, just as all foreign and especially Chinese companies face great adjustment pressures in the US. 
There’s a difference, though. Apple and other foreign ICT giants remain welcome in the Chinese mainland. Yet, the reverse no longer applies, as evidenced by a decade of increasing persecution of Chinese technology companies in America from Huawei to Tik Tok, and the consequent plunge of Chinese FDI in America.[5]

 

Where’s the money    

Still another protectionist assumption is the idea that "the Chinese are taking away American jobs." When the Trump and Biden administrations say they seek “to bring jobs back from China,” the premise is that Apple’s “dependency on the Chinese” keeps jobs away from American people. The assumption is flawed. 
In August 2018, Apple became the first publicly-traded US company valued at over $1 trillion; today its market capitalization amounts to $2.2 trillion. Its products are said to have some 1.7 billion users worldwide. Let’s illustrate the point with the value captured as a percent of the retail price of a smartphone (iPhone 7). 
Apple captures a whopping 42% of the retail price of each iPhone sold. The rest goes to the cost of materials (22%), distribution (15%), IP licenses (5%), and countries like South Korea (1%), Japan (1%) and Taiwan (1%). Labor costs in China account for only1 percent of the total (Figure 1).[6]

 

Figure 1    Value capture for iPhone 7.

 

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Source: Kendrick, J. and Kraemer, K.L. 2017, WIPO.

 

 

Usually, multinationals' revenues contribute to consumer welfare via progressive taxation. However, US companies tend to minimize taxes via creative accounting and tax havens, so there’s a gap between what’s paid officially and effectively.[7]
Since the 1980s, these disruptive changes have dramatically contributed to erosion in progressive taxation, consumer welfare and thus to income polarization in America. That’s America’s challenge, however; not China’s.

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Apple, offshoring and Taiwan 

So, if the value capture isn’t the issue, what about offshoring to China? That’s the third misguided assumption. 
Apple’s “Greater China” market includes not just China, but Hong Kong and Taiwan. It has assembled most of its products in China for a quarter of a century, thanks to Foxconn (Hon Hai), the huge Taiwanese multinational electronics contract manufacturer founded by Taiwanese billionaire Terry Gou.[8]
Moreover, work conditions at Foxconn factories have been a matter of public debate since the early 2010s. Moreover, the basic salary for a worker at a Foxconn facility is about $315 per month; less than 10% of the median American salary.[9]
In June 2017, Foxconn said it would build a $10 billion TV manufacturing plant in southeastern Wisconsin that would initially employ 3,000 workers set to increase to 13,000, in return for the highest subsidies in US history.[10]  A few months later, a plant was launched in Mount Pleasant, Wisconsin (Figure 2). 

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Figure 2     The Rise and Fall of Foxconn’s US venture

 

 

 

 

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June 2018 groundbreaking ceremony in Wisconsin: Guo with House of Representatives Speaker Paul Ryan, US President Donald Trump, Wisconsin Governor Scott Walker, and Christopher Murdock 

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Source: Wikimedia Commons
 

 

However, Foxconn began soon to reconsidering its initial plant plans and the high labor costs in the US. Following Biden’s election triumph, Foxconn announced it would reduce its planned investment to $672 million with 1,454 new jobs.[11]
After Wisconsin’s commercial debacle, Guo tried to enter politics. He hoped to stabilize Taiwan’s future by challenging the nationalist DPP’s Tsai Ing-wen in the 2020 election. As Guo finished second in the Kuomintang primary, he distanced himself from politics and the incumbent Tsai was re-elected.[12]
Irrespective of Taiwan’s commercial or political future, the fact remains that as long as per capita incomes will differ significantly among economies, opportunities for offshoring will abound.

 

Geopolitics vs Chinese market potential     
And the final misguided protectionist assumption. What if Apple would refocus its operations into the US, as it is being pressured to do? 
In the past decade, Apple’s quarterly revenues from Greater China have increased to $21.3 billion (1Q 2021). Its revenues from China remain around 15% of the total. That’s still significantly less relative to highly exposed US companies in China.[13]
Last year, Apple had a great year in China, where full year shipments returned to the 2018 level, driven by both iPhone 11 and iPhone 12 models.[14] It has recently added a dozen new Chinese companies to its supplier list.[15] Chinese market is vital to Apple’s global future. 
The developer community of Apple’s iOS app ecosystem has surged to over 4.4 million third-party developers in China.[16] Moreover, China's shipment of wearable devices notched robust year-on-year expansion in the first quarter of 2021.[17]
To position for the lucrative electric car future, Apple is in early-stage talks with BYD and CATL, and possible other companies over battery supplies for the "Apple Car,” which it is reportedly planning to start producing in 2024.[18] Chinese car market is critical to Apple since rapid growth remains in the mainland.[19]
Over time, Apple’s revenues from China have potential to increase significantly, thanks to its innovative ecosystem which is hard to replicate by the competitors.[20]  Yet, in the White House, economic terms are now subject to geopolitics. Apple’s plans could be derailed by US pressures to keep manufacturing in the US. 

 

Undermining US competitiveness    
To sustain its global position, Apple is trying to navigate amid the US Cold War against China. If it ignores US views, it will face pressures in the US; its largest current market. If it neglects Chinese views, it risks failure in China; its pivotal future market. What is certain is that 

1.    Apple cannot ignore local responsiveness in any global market. 
2.    Americans did not lose their jobs to the Chinese. Rather, income polarization in America is driven by misguided domestic policies that derail consumer welfare.
3.    Nor is offshoring the cause of U.S. malaise. In Apple’s case, i has benefited particularly Taiwan. Chinese workers have salaries Americans can’t and don’t accept.
4.    If Apple is forced out from China, it stands to lose far more in smartphones, development, wearables, electric cars and new future segments.

Like other US ICT giants, Apple has already lost billions of dollars in missed opportunities.[21]  Apple’s asset is its extensive win-win innovation ecosystem, which is based on competition and cooperation across borders worldwide. In contrast, the new US protectionism is predicated on inefficient win-lose ecosystems, mainly in high-income economies. 
Apple’s greatest challenge is not China, but the underlying conflict its ecosystem and Trump-Biden protectionism.

 

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Endnotes

[1]  “Just as [Apple’s CEO] Tim Cook figured out how to make China work for Apple, China is making Apple work for the Chinese government.” See Nicas, Jack et al. 2021. “Censorship, Surveillance and Profits: A Hard Bargain for Apple in China.” New York Times, May 17.

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[2]  Goodfellow, J. 2021. “Apple's role in the splintering of the internet.” Campaign Asia, Jun. 14.

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[3] For the classic statement, see Bartlett, C.A. and Ghoshal, S. 1989. Managing Across Borders: The Transnational Solution. HBSP.

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[4] Apple’s global approach has intensified particularly in the past decade. It used to be a fairly US-centric company in the past. In the past, Nordic giants, such as Nokia and Ericsson, made more than 95 percent of their revenues in foreign markets. Due to the small home market, they came closest to being truly “global.” See Steinbock, Dan. 2016. “Apple iPhone4 Success Masks Global Strategic Challenges.” Harvard Business Review, Jun. 25. See also Steinbock, D. 2010. Winning Across Global Markets. Jossey-Bass; 2005; and Steinbock, D. 2003. Strategy and Competition in the Worldwide Mobile Marketplace. Amacom.

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[5] Steinbock, D. 2021. “From Trump's TikTok mess to US tech 'cold war' vs China.” China Daily, Aug. 14; Steinbock, D. 2017. “The Trump Administration's IP Battle Against China.” Georgetown Journal of International Affairs, Nov. 14; Steinbock, Dan. 2012. The Case for Huawei in America. Huawei America.

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[6]  Nor are such allocations unique to Apple’s iPhone; the allocations are fairly similar for Samsung (Galaxy 7) and Huawei (P9). See Kendrick, J. and Kraemer, K.L. 2017. Intangible assets and value capture in global value chains: the smartphone industry. Economic Research/Working Paper No. 41, World Intellectual Property Organization (WIPO), Nov.

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[7]  On the discrepancy, see e.g., “Silicon Valley giants accused of avoiding over $100 billion in taxes over the last decade.” CNBC, Dec 2, 2019. On Apple and taxation, see “Commentary: Apple Avoided $40 Billion in Taxes. Now It Wants a Gold Star?” Fortune, Jan 19, 2018. For Apple’s perspective, see “The facts about Apple’s tax payments.” Apple Inc, Nov. 6, 2017.

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[8]  Though headquartered in new Taipei City, Taiwan, Foxconn employs 1.2 million people. Gou launched his first factory in China in 1988. Starting with Compaq desktops, Foxconn began to serve other US technology giants in the mid-‘90s, including HP, IBM, and Apple.  On Foxconn, see Steinbock 2003, op. cit.

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[9] See e.g., Mozur, Paul. 2012. "Life Inside Foxconn's Facility in Shenzhen." Wall Street Journal, Dec. 19. On Foxconn salaries, see “What is it like inside Foxconn: the world’s largest iPhone assembly plant in China.” South China Morning Post, Mar 1, 2019. On US median monthly earnings, see “Usual Weekly Earnings of Wage and Salary Workers 1Q 2021.” Bureau of Labor Statistics, Apr 16, 2021.

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[10]  Foxconn was set to receive $3-$4.8 billion of subsidies, by far the largest subsidy ever given to a foreign firm in U.S. history. Compare Richmond, Todd. 2017. "State wouldn't break even on Foxconn incentives for 25 years". AP, Aug. 8; Rushe, Dominic. 2018. "'It’s a huge subsidy': the $4.8bn gamble to lure Foxconn to America". The Guardian, Jul. 2.

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[11]  Tax credits, too, were reduced to $8 million. "Exclusive: Foxconn reconsidering plans to make LCD panels at." Reuters. Jan 30, 2019.

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[12]  After the nationalist DPP’s Tsai Ing-wen won Taiwan’s 2016 presidential election and Trump had his triumph later in the year, both began to dismantle America’s “One China” policy. That’s when Guo tried to intervene. In the 2012 presidential election, Gou, a veteran member of the Taiwanese Kuomintang, supported the incumbent Ma Ying-jeou’s successful re-election over the nationalist DPP’s Tsai Ing-wen. Where Ma built cooperative long-term ties with China, Tsai sought distance from Beijing and built military ties with Washington.

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[13] US companies with high revenue exposure to China include the casino giant Wynn Resorts (75%), or semiconductor players, such as Qualcomm (67%), Micron Technology (57%), Broadcomm (50%), and Texas Instruments (44%).  See “10 US Companies with Highest Revenue Exposure to China.” Valuewalk, Aug 3, 2020.

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[14]  Apple took global smartphone top spot as iPhone 12 demand surged in Q4 2020 According to Canalys, Apple was fifth in smartphone shipments in China, with 12.0 million units. See “China smartphone market recorded its first growth in four years, with year-on-year shipments increasing 27% in Q1 2021.” Canalys, Apr 29, 2021

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[15]  The Chinese mainland's quick recovery from the pandemic, and its stable supply chain, resulted in it having the majority of Apple suppliers, which remain highly competitive. In China, the marketplace also continues to increase faster than elsewhere. See “Apple adds 12 more mainland firms to its supplier list.” China Daily, Jun. 6, 2021.

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[16]  That translates to a 76 percent increase from two years ago. See “Apple sees surge in Chinese app developers.” China Daily, May 31, 2021.

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[17]  Apple wants to remain one of the top-3 vendors along with Huawei and Xiaomi. See “China's wearable devices shipment surges in Q1.” China Daily, Jun. 7, 2021.

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[18]  See “Apple in talks with Chinese firms for 'Apple Car' batteries.” Apple Insider, Jun 8, 2021. As the US seeks to attract more electric car manufacturing, Apple has made building manufacturing facilities in the US a condition for potential battery suppliers. Reportedly, CATL is concerned with both the cost of facilities in the States, and the tensions between the US and China. It is already committed to building a new automotive battery plant in Shanghai.

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[19]  As the Chinese market expected to continue expanding, growth for most of the Chinese companies is expected to exceed the market average. China’s electric vehicle sales to grow by more than 50% in 2021 after modest 2020, due to the pandemic crisis. See “China’s electric vehicle sales to grow by more than 50% in 2021 after modest 2020.” Canalys, Feb 22, 2021. While the US had 1.2 million units, China was behind with over 830,000. In the US, the penetration was already 30 percent, but in China only 12 percent.

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[20]  For a classic statement, see Linde, Greg. 2009. Who Captures Value in a Global Innovation Network? The Case of Apple's iPod. Communications of the ACM, 52(3):140-144, Mar.

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[21]  Prior to Trump’s trade wars, Chinese revenues had soared to $18.4 billion (1Q 2016) exceeding the share of Europe. But after half a decade of escalating “America First” stances in US trade, technology and geopolitics, Apple’s revenues have increased more slowly in the mainland.

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