Why Apple closed a secret US$275b deal with Chinese government – Victor Shih

 

Victor Shih

Apple’s current successful position in the China market did not come for free, disclosed the AppleInsider this week, but was triggered off by a US$ 275 billion deal between the company and the central government in 2016. Political analyst Victor Shih explains how CEO Cook dealt with governmental concerns about the US firm.

AppleInsider:

Over multiple visits, Cook is said to have lobbied officials on behalf of Apple, as well as signing the deal with a Chinese government agency. The lobbying against various threats hat would’ve affected the App Store, Apple Pay, and other products was mostly successful, if unreported at the time.

The deal was kept secret both by the company’s own culture and by the opaque workings of the Chinese government, and was politically wise according to political economist Victor Shih. It is thought that as Apple has to appease China as both a major market and a manufacturing base, it had to keep the government happy while also not appearing to other countries as appeasing China.

“Apple likely wanted to avoid the optics of groveling to the Chinese government,” said Shih.

The key deal was a 1,250-word agreement created by Apple’s government affairs, which it thought could improve its relations with the government and potentially let Apple get the ear of senior leaders. The memorandum of understanding with the National Development and Reform Commission was signed shortly after Cook announced a $1 billion investment in Didi Chuxing in May (2016).

More in the AppleInsider.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your (online) meeting or conference? Do get in touch or fill in our speakers’ request form.

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Patriotism not key for consumer purchases - Shaun Rein

Shaun Rein

Quality, price, and value drive China's consumers, not patriotism, says business analyst Shaun Rein in the LA Times. They might say something patriotic, but that is not key for their purchases, although China's media might suggest nationalism is more than window-dressing.

LA Times:

“Typically, they will say something patriotic or nationalistic,” Shaun Rein, business analyst and founder of the China Market Research Group, said of the Chinese survey respondents. “But when it comes to actually buying something, they don’t care about that so much. They care more about quality, price, and value.”... 

There is a trend of rising Chinese preference for Chinese goods, Rein said, particularly in consumer electronics, where Huawei mobile phones have taken over Apple’s market share in China. But patriotism still isn’t as important as getting a good deal when it comes to consumer decisions, he said. “If the product is not comparable quality, they won’t boycott. It’s just like people still want to buy Canada Goose, because there’s nothing comparable in China,” he said, referring to the Canadian parka brand.

More in the LA Times.

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How Tencent's WeChat takes on Apple - Matthew Brennan

Matthew Brennan

Tencent's WeChat released last week to manage its successful mini-programs, moving ahead with an operating system, pushing against the already embattled competitor Apple, says Tencent watcher Matthew Brennan in CNBC.  The fight might focus on China, where mini-programs are most popular.

CNBC:

A recent update of the WeChat app from Chinese tech juggernaut Tencent could have "serious ramifications" for Apple, according to one analyst. 

The WeChat update, which came out this week, involves a redesign in the way mini-programs — apps within the app — are presented. With that change, users now "essentially have a second home screen" on their phones, said Matthew Brennan, co-founder and managing director at consultancy China Channel. 

While a change in user interface may not immediately seem like a game changer, experts said it signals a significant shift in the Chinese tech space... 

Commenting on the potential financial impact of the design change in WeChat on Apple, Brennan...generally agreed that the impact would be more long-term in nature... 

Brennan said the mini-programs on WeChat are "not designed to be very big" and are unlikely to compete against the games that feature on Apple's App Store.

More on CNBC.

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How Apple suffers from China's downturn - Shaun Rein

Shaun Rein

Apple was already losing ground to domestic mobile phone makers, but the economic downturn and patriotism towards Huawei will make the US giant even more vulnerable, says business analyst Shaun Rein, author of The War for China's Wallet: Profiting from the New World Order to the BBC.

BBC:

In the view of Shanghai-based Shaun Rein, Tim Cook is right to blame China. The founder of the China Market Research Group tells us he is very worried about the state of the Chinese economy: "It's the absolute worst I've seen in the 20 years I've been in China. Everything has really stalled in the last quarter." 

And he says that fall in consumer confidence, coupled with the growing trade war with the United States, has made people more nationalistic about the phones they buy. 

"There's a lot of pride in buying Chinese products made by Chinese for Chinese. After the United States got Canada to arrest the CFO of Huawei that caused a lot of Chinese to be angry. And so a lot of Chinese consumers in a show of patriotism are saying let's not buy Apple let's buy Huawei and show support for the Chinese state." 

Even if those trade tensions ease, it is hard to see Chinese phone buyers turning back to Apple in large numbers now the spell has been broken.

More at the BBC. Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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On the China market, the iPhone does not make a difference - Ben Cavender

Ben Cavender

Once Apple's iPhone was a much-wanted device for the picky Chinese consumers. But those glamorous days are over as domestic brands offer more than their US competitor, says branding analyst Ben Cavender to Patently Apple.

Patently Apple:

Ben Cavender, a senior analyst at Shanghai-based consultancy China Market Research Group, said the novelty of the iPhone attracted throngs of Chinese shoppers to Apple stores a decade ago, but many consumers in the country have since developed an affinity for local smartphone brands. 

Cavender added that "At that time, Apple was offering a product that was so much better and so different that it made sense for people to show up at the store to buy something. In 2018, it’s not clear what Apple is selling that’s dramatically different or better than anything else on the market."

More at Patently Apple.

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US brands fear higher prices as trade war moves on - Andy Mok

Andy Mok

The People's Daily has hit out to Apple for making its capital on the expense of China, but all iconic American brands fear to be hit by the ongoing trade war between China and the US, says business analyst Andy Mok at CGTN.

CGTN:

Apple has now become the first-ever one-trillion-U.S.-dollar publicly listed American company. But with a trade war ratcheting up between China and the United States for over a month now, and the Chinese market being vital to Apple, will the company get away intact? 

According to Andy Mok, founder of Red Pagoda Resources in Beijing, any iconic American brands will be concerned about China-U.S. trade tensions, because they are very visible symbols and could easily become collateral damage. But he pointed out that it's the consumer who will finally bear the price. 

"Apple’s unique position is that it’s shown their customers are very price insensitive that they can get away with charging 800 dollars, 900 dollars, even 1,000 dollars for their smartphone. So I think Tim Cook is very right in saying that this is an attack on the consumer, because I think they will and would be able to successfully pass that through to the final consumer," Mok said during a discussion on CGTN's World Insight with Tian Wei.

More at CGTN.

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Next in the trade war, the consumers? - Shaun Rein/Victor Shih

Victor Shih

China has been reluctantly been shooting back with tariffs at US imports up to know in the Donald Trump trade war. It might be even more reluctant to use the powerful tool of its consumers in the trade war, says political analyst Victor Shih in the Financial Post. But it could, and Apple and Starbucks should prepare, says business analyst Shaun Rein on Fox News.

Financial Post:

China has been careful to pose as the good guy in this fight. The spectacle of Beijing unleashing nationalist boycotts on Procter & Gamble Co., Coca-Cola Co. and Apple would make that facade harder to maintain, and give ammunition to the U.S. argument that China’s economy is ultimately a tool of the Party. 

The lack of consumer boycotts is “a bit unusual, but consistent with the Chinese rhetoric that China would be a defender of the global trading order,” Victor Shih, an associate professor and expert on China at the University of California, San Diego, said. “The reality is that the status quo allows China to protect many of its industries, so China wants to maintain the status quo.” 

Don’t count on that forbearance continuing if tensions escalate. In all, Chinese subsidiaries of U.S. companies had about US$223 billion in revenue in 2015, according to Deutsche Bank AG. Reduce those sales by just 20 per cent – a rather modest target, given what consumer boycotts did to Korean firms last year – and you’ve already done US$45 billion in damage, more than equivalent to the 10 per cent tariff the U.S. is threatening to levy on a further US$400 billion of imports if Beijing doesn’t back down.

Fox News:

Shaun Rein, managing director at the China Market Research Group in Shanghai, told The Post that the Chinese government could stoke anti-American sentiments among consumers, similar to its boycotts last year on South Korea’s Lotte Group, causing dozens of their stores to close. “If I was Starbucks or Apple,” he said, “I would be scared right now.”

More in the Financial Post and Fox News.

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Why the Chinese censor might not like my book - Shaun Rein

Shaun Rein

How to make money in China, and how the country works as a powerbroker are the key subjects of The War for China's Wallet: Profiting from the New World Order by author Shaun Rein. For NPR he tells what companies are doing well, but also why the Chinese censor might ban his book, as they did with previous ones.

NPR:

Brancaccio: Now, international companies have a huge stake in figuring out how to crack this, and which companies are doing better do you think, Shaun, which are doing worse in understanding where China is going? 

Rein: I think you see companies like Starbucks are doing really well. Apple's also doing very well. For both companies, China is their largest market out of the United States. Another great example would be KFC — over 50 percent of their global revenue comes from China. So these companies are keeping their core brand DNAs, but they are localizing to fit the needs of the Chinese consumers. So for instance, with Starbucks, in the United States, I believe about 80 percent of their sales are takeout. In China, about 80 percent of their sales are dining in, because Chinese like to go feel part of an American culture, feel like they're part of a globally sophisticated elite, and they're able to do that by having coffee. Luxury in a cup. 

Brancaccio: Before we go, I want to bring up something Shaun, I don't know if it's a sore subject, but I remember a couple of books ago, you wrote the book "The End of Cheap China." That was not embraced in China, that book. 

Rein: That book was actually banned in China. The Chinese government didn't like it because it talked about local corrupt officials that were protecting the red light districts and really stealing from everyday Chinese. So that book was banned in the country. 

Brancaccio: Getting any feedback on the new one? 

Rein: The state-owned media has gone quiet on me. When they first heard that I was writing this book, "The War for China's Wallet," they wanted to interview me and profile me. After they saw the advance media copies, they stopped returning my calls. So I'm expecting that this book is going to get banned, too. And I'll get a little bit of heat in the coming months. 

Brancaccio: What do you think, what's so controversial from the Chinese perspective about what you've just been talking about? 

Rein: I think that the government doesn't want people to know the framework that they punish other countries and companies if they don't follow what they want. So I mean, if you look at it, when Liu Xiaobo won the Nobel Peace Prize, China blocked imports of salmon from Norway. Overnight, that dropped from about 80 percent market share down to zero percent.

More in NPR. Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Why Tim Cook kowtowed to China - Shaun Rein

Shaun Rein

Apple removed many VPN's from its Chinese app store, and CEO Tim Cook joined China's internet propaganda show last week. Author Shaun Rein of The War for China's Wallet: Profiting from the New World Order explains in ChinaFile why Tim Cook got an audience in Wuzhen, and Google's Sundar Pichai not.

Shaun Rein:

The rewards China bestows on the these foreign Internet companies can be huge—China is Apple’s largest market outside of the United States. It generated 18 percent of Apple’s global revenue in the third quarter of 2017. Most of its products are assembled in China. Executives salivate at the size of the Chinese consumer market. It has become the largest market outside of the U.S. for companies ranging from Starbucks to Nike. 

China has a long memory, too. While Tim Cook spoke to a packed auditorium in Wuzhen, his counterpart at Google, Sundar Pichai, spoke to an empty room. Reports were that authorities never made it clear what time Pichai’s speech was set, so no one knew when to attend. But Cook’s words in support of China’s Internet policies will be used in propaganda by the government to show how open they are to foreign players. And Cook will be rewarded with continued access to the lucrative Chinese wallet. 

China has smartly used it wallet to get what it wants politically beyond its own borders. See how publisher Springer censored its own book catalog. China’s wallet is a power so large and lucrative that no single Internet company can withstand it. Going forward, it is only at the government-to-government level that these issues can be worked out. It is surprising that neither the Obama nor Trump administrations made a bigger push for greater access for Western technology firms in China—such a push should be couched not as a human rights issue but one based on money. America’s Internet companies are losing out on billions of dollars of profit under the current policies.

More at ChinaFile.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Why e-readers are doing well in China - Shaun Rein

Shaun Rein and his books

The Hong Kong IPO by Tencent's China Literature, driving on a Chinese e-reader, was a big hit, while e-readers like Amazon Kindle are clearly over their highpoint. Business analyst Shaun Rein explains in CNNMoney why e-readers go like crazy in China.

CNNMoney:

Compared with other smartphone distractions like video games and streaming TV, e-books may seem a bit low-tech. 

But they appeal to many Chinese, as they are subject to less stringent government censorship rules than movies and TV. 

"There's a lot more flexibility and freedom," said Shaun Rein, managing director of China Market Research in Shanghai. The most popular genres are romance and fantasy, he added. 

Rein said that local e-reading platforms are also more popular than foreign entrants, like Amazon's Kindle. That's despite the U.S. behemoth's e-book store having been in China for almost five years. 

Apple's iBooks service in China was abruptly shut down last year, reportedly on government orders. 

China Literature's Qidian.com portal lets users buy individual chapters for the equivalent of a couple of U.S. dollars, rather than forking out for an entire title. 

"It's seen as virtually free and it builds up momentum" for the following chapters, Rein said. Unlike Amazon's Kindle Store, the titles on Qidian.com are mostly written by enthusiastic amateurs hoping to strike it rich as the next J.K. Rowling. Part of China Literature's long-term strategy is licensing out this steady flow of content into other media, like TV series, games and movies.

More in CNNMoney.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form.

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Brainpower: How China changes the world - Jeffrey Towson

Jeffrey Towson

Apple's Steve Jobs was the first American CEO to discover China's massive brainpower potential when he got the first iPhone produced in six weeks time, by 200,000 workers and 8,700 engineers. China's massive brainpower is a disrupting force for the world, says Beida business professor Jeffrey Towson, co-author of The One Hour China Book (2017 Edition) on his weblog.

Jeffrey Towson:

There are two important aspects to this story – which may have become somewhat embellished over time. The first is how incredibly fast, flexible, and smart the Chinese manufacturing ecosystem is. This situation was not about being cheap. It was about speed and flexibility. Figuring out how to redesign iPhone screens took lots of brainpower deployed quickly. In the US, the iPhone screens simply could not have been redesigned in such a short timeframe. 

The second is that Apple had 8,700 Chinese industrial engineers overseeing production. That is a lot of engineers. The New York Times reported that Apple had estimated it would take 9 months to find this many engineers in the US. In China, they found them in about 15 days. 

This is a story of Chinese brainpower as a game-changer in global business. The ability to mobilize so much talent, so many engineers, and so quickly, is something new in the world. 

But we have also heard this kind of story before. 

Twenty years ago, the scale of Chinese manufacturing began emerging as a similarly game-changing phenomenon. Suddenly, everything from shoes to bicycles began to become much cheaper than before. Low-cost Chinese manufacturing changed what was possible in industry after industry. “Made in China” became a household phrase. 

Businesses around the world have since incorporated the large-scale and low-cost of Chinese manufacturing into their operations. And it wasn’t really optional. Businesses either had to take advantage of the phenomenon or suffer as their competitors did. 

The large scale and low cost of Chinese brainpower is another game changer. Suddenly thousands of engineers can be ramped up in a matter of days. And this phenomenon is starting to ripple through industry after industry. What is the impact on the pharmaceutical industry if companies can now access tens of thousands of scientists cheaply? If your competitor is opening a research and development center in China with 10,000 technical specialists, how big of a problem is that for you? Chinese brainpower is starting to impact many industries – often in unexpected ways.”

More at Jeffrey Towson's weblog.

Jeffrey Towson is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers' request form. 

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.

Why is Didi raising so much capital? - Jeffrey Towson

Jeffrey Towson

Since last year car-hailing giant Didi Chuxing has been raising over US$15 billion, even after it won the costly competitive struggle with Uber. Beida business professor Jeffrey Towson sees at his weblog four reasons why Didi continues to raise so much capital. Here are two of them.

 Jeffrey Towson:

Explanation 3: Going international. 

Another natural use of the newly raised funds would be to expand abroad given that Chinese app users are already going abroad in great numbers. Didi led a $100 million fundraising round for Brazilian ride-sharing app 99 in January and earlier invested in India’s Ola, Southeast Asia’s Grab and American app Lyft as part of an alliance of the four companies to take on Uber globally. In March, Didi opened an R&D center in Silicon Valley. I would not be surprised to see another string of international investments over the next twelve months, especially in Southeast Asia. 

Explanation 4: There is a big disruption coming. 

In theory, self-driving cars (i.e., autonomous driving) could reduce costs dramatically for Didi. Some reports suggest that driver fees, insurance and driver acquisition costs add up to two-thirds of the company’s operating expenses. 

However, the cost-saving argument misses the bigger implication of self-driving cars. If the technology is successful, it could wipe out the business model and competitive advantage of most ride-sharing services and could be a body blow to Didi’s current business. 

The reason this sector has consolidated down to just one or two dominant companies per region is because of the powerful economics of two-sided platforms. To get drivers, you need riders. To get riders, you need lots of drivers. Being bigger in a region not only creates a superior service — since more drivers means shorter wait times for pick up — it also creates an insurmountable barrier for new entrants. 

Self-driving cars will disrupt this competitive strength. If you no longer need drivers, you no longer have a two-sided network. Didi and Uber will then be exposed to new entrants with good cars, clever technology and different operating systems. Self-driving cars could make driver-rider networks obsolete or marginal at best. 

So Didi and Uber have a strategic imperative to transition to this new technology and search for a new source of competitive advantage. This could be by becoming the transportation ecosystem in which self-driving cars operate. It could be by becoming the operating system, the “Microsoft of moving computers.” It could be by integrating with public transportation services. Possibly though there may just not be an opportunity to be so dominant in this emerging market. 

Google, Apple, Uber and lots of major Chinese companies are rushing into self-driving cars (article here). One to keep an eye on in China is Baidu. It is developing an open-source autonomous driving platform involving hardware, software and cloud data services. This could enable lots more automotive and autonomous driving companies to enter the business. Code-named Apollo, Baidu’s project will provide capabilities in obstacle perception, trajectory planning, vehicle control and vehicle operating systems. Note that Baidu first successfully road tested its self-driving cars on the highways of Beijing back in December 2015.

More reasons at Jeffrey Towson's weblog.

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Sticking to the law might be a good idea - Shaun Rein

Shaun Rein

Australian Crown expats who get incarcerated illustrate that sticking to China´s rules and regulations might be a good idea when doing business in China. Airbnb and Apple even risk a backlash of their Western constituency by hosting their China data in China. Still the best way to move forward, says Shanghai-based business analyst Shaun Rein in The Street.

The Street:

Some experts hold different views, believing that government protectionism has limited U.S. tech firms' access to the Chinese market, forced them to do joint ventures and ultimately replace them with Chinese counterparts. 

"American internet players can succeed in China - they just have to follow Chinese law, understand the Chinese consumer and localize services," said Shaun Rein, Managing Director at Shanghai-based China Market Research Group. "Most western internet players have failed in China not because of government protectionism but because they simply did not understand the market and went against aggressive, well capitalized local players."

More in The Street.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

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How China is changing the world - Any Mok

Andy Mok

The world has been eagerly hoping to see how China would adjust to the Western world. What they did not realize, says Andy Mok, managing director at Red Pagoda Resources in Beijing in Newsmax. What the world did not see was how much China started to change the world.

Newsmax:

The rise of Chinese tech powerhouses isn’t exactly new, even if it’s recent headlines – the pounding of Uber, the faltering of Apple – that have caught readers’ attention overseas. “What a lot of western policy makers and institutional investors have not recognized … they’ve been focused on how the outside world is going to change China. What many people have missed is actually how China is going to change the world,” says Andy Mok, managing director at Red Pagoda Resources in Beijing. He cited how Chinese audiences are now influencing Hollywood casting decisions. “The more and more the Chinese middle class becomes a driving force globally of product decisions, that’s becoming more apparent.”

More in Newsmax.

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Youngsters: more nationalistic - James Roy

James Roy

American companies and stores like KFC and Apple faced angry crowds after an international court ruled against China on its South China Sea policies, even smashing their iPhone's. A protest that went even too far to China´s government. It is mostly the younger who are more nationalistic and patriotic, says retail analyst James Roy to AP.

AP:

"This is not the right way to express patriotism," the state-run Xinhua news agency wrote on Wednesday. The slightly more independent China Daily called the device smashing "jingoism that does a disservice to the spirit of devotion to the nation." 

"The Chinese public, as optimistic and positive as they are, are deeply patriotic and nationalistic, especially people who are younger," said James Roy of the research firm China Market Research Group. Apple is one of the brands that is "just very closely associated with the United States, and you are seeing people picking the closest symbol they can think of to demonstrate against," according to Roy.

More in AP.

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How Apple avoids paying tax in the US - Paul Gillis

Paul Gillis

Companies have a range of legitimate ways to avoid paying tax in the US. Apple is using one of them by not setting up a venture arm for its overseas investment, but by directly reinvesting its revenue from overseas, for example its hefty investments in car-hailing service Didi, says Beida accounting professor Paul Gillis to Marketplace.

Marketplace:

But Apple does face one possible disadvantage with its investments. Most of Apple’s cash is overseas, which means Apple would face a large tax burden if it tries to bring it back to the U.S. 

On one hand, Apple has already found a use for this capital with its investment in Didi. Paul Gillis, a professor at Peking University’s Guanghua School of Management, said Apple will likely use profit from Chinese sales held in its corporate subsidiaries in China for the Didi investment. Investing the capital, instead of trying to bring it back to the U.S., avoids a 5% to 10% tax China charges for removing proceeds from the country as well as U.S. repatriation taxes 

“Using it to buy an interest in Didi is a legitimate way to use those funds without any tax consequences because those funds remain in China and remain Chinese assets,” Gillis said. “That wouldn’t be evading taxes doing that. They’re just making a decision not to take the money back to the U.S. and doing something else.”

More in Marketplace.

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Related articles

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Can the iPhone SE succeed in China? - James Roy

James Roy

Apple tries to take on domestic smartphone competitors in China by launching its cheaper iPhone SE. But the jury is still out on the question whether that is a smart move for the premium brand, says retail analyst James Roy to the VOA.

VOA:

Sales have stagnated at Apple. In January the company forecast a drop in sales for Apple products, which would be the first decline since 2003. To boost purchases the company is targeting new customers in China, its biggest market, and India, its fastest growing. 

James Roy, a Business Analyst at China Market Research Group, said Apple is now challenging Chinese smartphone brands in their home market. 

“At this point you have a number of Chinese smart phones that have gotten very good at offering good smartphones at the lower to middle end of the market,” he said.

More at the VOA.

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Going cheap not good for Apple´s China market - Shaun Rein

Shaun Rein

Apple has presented its iPhone SE, a cheaper model of earlier iPhones. For the China market, such a more might not be good, says business analyst Shaun Rein to Reuters. They might be copying earlier mistakes on this competitive market.

Reuters:

In China, analysts warned the iPhone SE could mirror the disappointing outcome of Apple's iPhone 5C, which was launched as an affordable gadget three years ago. It was also less technologically advanced than the top phone at the time. 

"The 5C was awful, no one wanted it. Everyone knew that if you bought it you had no money," said Shanghai-based Shaun Rein, founder of China Market Research Group. "Just going cheap doesn't mean it'll do well," he said.

More at Reuters.

Shaun Rein is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

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