Apple’s China Success: TIME Asks the Wrong Question

June 22, 2012

This week’s Time magazine cover story is entitled “The Cult of Apple in China” and includes, from what I can tell, a decent rundown of the reasons behind Apple’s strong performance in the Middle Kingdom. I haven’t actually read the full story, since it is available only to subscribers and it’s been many years since I bothered paying for a news weekly. Plenty of other folks have reported on the article, though, and Time itself has published a companion piece.

Without knowing the complete context within which this sentence appeared, I was nevertheless taken aback when I saw the following excerpt:

How much longer will an increasingly nationalistic government allow foreign companies like Apple to profit so handsomely on its shores?

Fascinating. The implication here is that Beijing will only permit foreign companies a modicum of success before it firmly places a Communist boot on that foreign investor’s neck, putting that company in its rightful place. Well yes, that certainly has happened in the past to some foreign firms here, but how likely is it that Apple will suffer the same fate?

Before we can answer that question, we have to look at what has happened to other foreign enterprises that have experienced catastrophic problems in China. Entire books have been written on this subject, so allow me to generalize a bit. Why do foreign companies fail in China? Of the myriad business and legal difficulties, we should probably zero in on issues directly or indirectly related to government action. After all, the rhetorical question posed in the Time cover story suggests that it is the government itself standing by and monitoring Apple’s profitability, and waiting for the right time to strike.

So what can the government do if it wishes to sabotage a foreign company? Quite a number of things of course. First of all, every company in China, foreign or domestic, must pass an annual review. If the government was hell-bent against a foreign investor, it could simply instruct local officials to withhold the green light on that annual review. That being said, the government simply doesn’t do that sort of thing. Too obvious, too in-your-face protectionist. Most governments are smarter than that.

Similarly, many companies can only maintain their operations because of one or more regulatory licenses that they hold. Indeed, Apple, either directly or through its distributors, is beholden to the government in this regard. You can’t do much as an electronics/telecom company without securing one or more regulatory licenses. So there is that.

Have other foreign companies been essentially shut down over the failure to renew regulatory licenses? Certainly some have, but I wouldn’t call that tactic common when it comes to government intervention into a specific sector or with respect to an individual company; even Google has had some of its licenses renewed since its much-publicized tiff with Beijing over Internet censorship. The government is much more likely to proactively set up high barriers to entry in a specific sector using regulatory licensing, and this kind of licensing regime is usually tied in to other policy initiatives. I’m thinking, for example, of what happened with online video file sharing a number of years ago, where an entirely new set of requirements and rules were set up to restrict investment and monitor operators.

Alternatively, the government could selectively enforce any number of laws. The Time cover story mentions labor issues a number of times. If the government really wanted to smack Apple around, couldn’t it go after Apple’s local manufacturing partners, such as Foxconn? Yes, I’m sure there are some labor violations going on down south that could come into play, but remember that Foxconn is a huge employer and taxpayer in Guangdong and elsewhere. Moreover, if the government went after Apple’s partners and not other labor law violators, the charges of selective enforcement and protectionism would be nasty. I don’t think the government really wants to mess around in that sandbox.

Where else can we look for possible government meddling? If we want to focus on the most likely kind of foreign company that can run into trouble in China, we have to talk about patented technology. As I’ve written about for years, China’s economic planners have established a certain number of key industries important to the nation’s future and continued development. In each of these sectors, national champions have been established in a variety of ways; these are pretty much always State-owned enterprises.

What happens to a foreign company that has the ability to compete against one of these national champions? Well, first of all, foreign investment restrictions usually take care of the problem at the outset. However, if the sector has not been closed or restricted, there are indirect measures that can be taken to ensure that a national champion maintains its dominance. As it so happens, many of these key sectors involve high-tech products, many of which are patented. A lot of this know-how or patented technology has therefore been brought onshore and transferred to Chinese companies. In some instances, the patents of foreign entities have even been invalidated.

We begin to get a good picture of what kinds of companies the Chinese government will not, to paraphrase the Time cover story, allow to flourish. So what about all the rest? Surely there are a whole lot of foreign companies that are doing quite well here. Why are they allowed to profit when a Chinese domestic counterpart could be substituted in its place?

There are two answers. The first is that many successful foreign invested enterprises in China have strong brands and are expert at marketing. For example, there are numerous cola products out there in the marketplace, but Coca-Cola is doing just fine all over the world. Certainly the product itself has something to do with this, but branding and marketing are just as important, if not more so. The “domestic alternative” approach was tried by a cola company a few years ago, and its marketing campaign failed miserably.

Which brings us to Apple. There are many iPhone competitors, for example, and there are many iPhone copycats. Why does the iPhone continue to sell so well in China? Several reasons no doubt, but a lot of the success relates to branding, marketing, image, and consumer trends amongst the upper and middle classes here. Are these things that the government could easily take away, substituting a domestic competitor in Apple’s place? I don’t think so.

The second answer, and my general response to that key line in the Time cover story, is that the government here has no problem with foreign companies being profitable. The situation with key industries and national champions are special cases, not the rule. Why are companies like Coca-Cola, Unilever, and Nike allowed to do so well in China? For the same reasons that they do so well in many other countries.

There is no Communist cabal in China waiting in the wings to sabotage every successful foreign invested enterprise. Even that suggestion smacks of ignorance and misguided ideology. Apple is not being “allowed” to do well in China, it simply is doing well.