Apple sets course for China policy minefield

A person holds a red iPhone product at a Apple store in Nanjing, Jiangsu province, China, March 25, 2017. Picture taken March 25, 2017. REUTERS/Stringer

HONG KONG (Reuters Breakingviews) - Apple risks overstaying its welcome in China. The $800 billion iPhone maker has enjoyed massive success in the People’s Republic compared to foreign peers. But as it pushes into cloud, payments and services, it confronts the same unpredictable regulators and local competitors that drove out the likes of Facebook and Uber.

It’s no secret that China favours home-grown champions over foreign businesses, for economic and national security reasons. Yet the People’s Republic brought in over a fifth of Apple’s total revenue in the last fiscal year, and a quarter of its $60 billion in operating profit, according to analysts at Bernstein. To compare, China accounted for just a fraction of total revenue at IBM, Oracle, and EMC. And unlike chipmaker Qualcomm, which was slapped with a record $975 million anti-trust fine two years ago, boss Tim Cook has steered clear of Beijing’s wrath so far.

These days, Apple’s biggest threat comes from local rivals. iPhone shipments tumbled 27 percent year on year in the first quarter of 2017, as Huawei and OPPO gain market share, according to IDC. Weak sales of Apple’s older, cheaper models, as well as premium customers waiting longer to upgrade to the next phone, have weighed on China revenue for the past few quarters.

So Apple wants to bring in more money from apps and services. The company said in July it was opening up its first local data centre with a partner to power its iCloud service. App store sales in China, though still small, are up 90 percent year on year in 2016, making the country the fastest-growing and highest-paying app market for the company.

Beijing is paying attention. Censors forced Apple to shut down its online book and film stores just six months after launching, the New York Times reported last year, citing sources. Tough cyber-security laws on data surveillance and storage requirements add uncertainty to iCloud. Meanwhile, Apple will have to catch up to Alibaba, Tencent and Baidu, which already dominate in cloud storage, mobile payments, app stores and online content.

The company is investing heavily and opening new R&D centres in China. It has also appointed its first managing director for the region. Turbulent times await her.


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