Ban and Billions in Losses: Exploring the Escalating Clashes Between Beijing and Apple

On September 12, 2023, the globe tuned in to witness the grand stage of Apple's annual global conference. Amidst the anticipation, Apple unveiled its crown jewel, the iPhone 15, alongside a lineup of sleek new MacBook Pro models and a tantalizing array of accessories, including the celebrated iPad and the ever-enticing Apple Watch.
Nevertheless, this momentous occasion unfolded amidst a backdrop of formidable challenges for the American tech behemoth, courtesy of a recent setback delivered by the Chinese government.
On September 7, 2023, Apple's shares nosedived by 2.9% in response to emerging reports that China intended to broaden its restrictions on iPhone usage, extending the ban to encompass government-affiliated entities and corporate organizations.
This development raised concerns among investors about the world's largest company's ability to conduct business in China, the world's second-largest economy.
As a result, Apple lost approximately $200 billion, making it the worst-performing stock on the Dow Jones Industrial Average, according to CNN on September 8, 2023.
So, why did China take this step against Apple? How did the relationship between Apple and China reach this point? What measures is the American company taking to avoid further clashes with the Chinese dragon?
To understand the dynamics of a battle between a corporate heavyweight and a nation as powerful as China, it is essential to comprehend the magnitude of this tech giant's influence.
Forbes, in a report published on June 30, 2023, revealed that Apple's market capitalization had surpassed $3 trillion, making it the most valuable company on Earth, surpassing even the entire economy of the United Kingdom, which ranks as the world's sixth-largest economy.
Despite this financial prowess, Apple finds itself entangled in a battle with the Asian giant China, which boasts the second-largest economy globally. China leverages its vast population (approximately two billion people) and the expansiveness of its market as a weapon in its technological race and confrontation with Washington.
This includes the ban on the use of Apple's iPhone by 700 million Chinese employees, a critical demographic for the tech company. The severity of this move becomes apparent when considering that Beijing is Apple's most significant market, contributing to 19% of its annual revenue.
China's Danger
On September 8, 2023, The Wall Street Journal, an American newspaper, published a report shedding light on the dynamics of the Apple-China conflict and the Chinese government's ban on iPhone usage.
While Chinese officials have attributed the ban to concerns over cybersecurity, it appears to be an economic maneuver, a strategic play by China to counter U.S. sanctions on Chinese tech giants like Huawei and Chinese technology, according to the report.
In 2020, during the tenure of former President Donald Trump, the White House imposed sanctions on the Chinese phone company Huawei, restricting its access to electronic chips essential for manufacturing its products, which directly competed with American tech giants like Apple.
The Wall Street Journal emphasized that Beijing's decision holds significant weight due to China being the largest consumer of iPhones globally, contributing to approximately 19% of Apple's annual revenue.
China's share in Apple's global sales stands at 20%, underscoring the potential impact of further sanctions on the American tech company.
The relationship between Apple and Beijing dates back to 1998 when Tim Cook, Apple's CEO, led the company's shift in production to China. Under Cook's leadership, years of investment, strategic marketing, and careful corporate diplomacy allowed Apple to build a robust manufacturing presence in China, generating profits in the country surpassing those of any other Western or Chinese company.
Apple presently operates around 50 stores in China, compared to 270 in the United States, illustrating its significant retail presence in the Chinese market.
A Key Player Amidst Tensions
Apple has been keen to maintain a unique relationship with the Chinese government, fully adhering to Beijing's instructions and periodic requests. For instance, in 2018, the company withdrew around 25,000 apps from the App Store in China to comply with Chinese government and societal standards.
This commitment has allowed Apple to maintain a prominent position in China, avoiding the fate of other American tech giants, including Google, Meta, Exxon, and Micron, which have all faced restrictions or complete bans on their products.
On September 17, 2023, Paul Triolo, a partner at the advisory group Albright Stonebridge, spoke about why Apple has held a special status in China, even up to the current significant confrontation.
He told the Financial Times that Apple invested heavily in its relationships with both the central and local Chinese governments and created hundreds of thousands of jobs.
The American company was very keen on complying with local regulations and removing politically sensitive apps, which allowed it to remain a key player in the Chinese market to this day, according to him.
The Cause of the Clash
Apple found itself caught up in the escalating economic warfare between Washington and Beijing, resulting in casualties on both sides.
On August 18, 2023, the Turkish research center SETA published a research paper by researcher Kadir Ustun on the limits of the conflict between the two global powers.
Over the past 20 years, American giants such as Apple, Starbucks, Nike, Boeing, Disney, General Motors, McDonald's, and Walmart have been in a race to increase their market share in China.
However, the Trump administration's explicit and harsh behavior in 2020, imposing sanctions on China and Chinese companies, intensified the economic conflict, Ustun said.
Washington's efforts to punish Chinese companies like Huawei in response to the risk of losing leadership in 5G technology to China prompted the latter to retaliate and scale down American companies on its soil.
He emphasized that "Washington, engaged in a conflict with China to protect American leadership in areas such as space and artificial intelligence, should have avoided taking steps that would harm the budgets of major American companies."
According to Ustun, these dynamics, though, should not be interpreted as favorable to China, as the departure of American companies from Beijing would have dire consequences for the Chinese economy.
Optimal Alternative
Indeed, Apple has initiated alternative plans to replace or reduce its reliance on China as a primary source in Asia. The company has signed production agreements in other countries, with India leading the way, followed by Vietnam, Taiwan, and South Korea.
On February 28, 2023, Bloomberg reported that Chinese suppliers to Apple are moving their production capacities out of the country much faster than expected. This move is attributed to the escalating tensions between Beijing and Washington, prompting the American company to expedite its exploration of strategic locations beyond China.
It was noted that already, 9 out of Apple's top 10 suppliers are preparing for extensive moves to countries like India, incentivized by Indian Prime Minister Narendra Modi's "Make in India" initiative.
However, the American agency estimated that it may take 8 years to move 10% of Apple's capacity out of China.
It was concluded that India would be the optimal alternative for Apple, and, in general, the flow will continuously move away from China and will never return as it once was.
Sources
- Apple loses $200 billion in two days: What is the role of China and Huawei? [Arabic]
- Apple shares decline after China bans government officials from using iPhones at work [Arabic]
- Apple’s China headache and Alibaba’s surprise shake-up
- China Becoming Third Rail for US Megacap Investors
- Apple shares decline after China bans government officials from using iPhones at work [Arabic]
- Why did China prevent its officials from using the iPhone?! How did Apple lose $310 billion?! [Arabic]
- A race between Apple suppliers to exit China: Who will win the 'dragon' cake? [Arabic]