Apple’s ugly China deal mostly bought time

3 minute read

A man talks on an iPhone in Beijing July 24, 2013. A sharp drop in Apple Inc's China revenue in April-June underscores the challenges it faces in its second-largest market as the technology gap with cheaper local rivals narrows and as Samsung Electronics keeps up a steady stream of new models across all price ranges. REUTERS/Kim Kyung-Hoon (CHINA - Tags: BUSINESS TELECOMS SCIENCE TECHNOLOGY) - GM1E97O1BUY01

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HONG KONG, Dec 8 (Reuters Breakingviews) - Apple (AAPL.O) could pay an even bigger price for its secret deal in China. Chief Executive Tim Cook signed an undisclosed agreement in 2016 promising Beijing $275 billion of investment in the country over five years in exchange for relaxing pressure on its business, according to a report published on Tuesday. He may have had little choice, but it muddles the return calculus.

Coerced technology transfer in exchange for market access is a point of major diplomatic friction between China and its trade partners, but many executives accept it as a cost of doing business. Everyone from Microsoft (MSFT.O) to Boeing (BA.N) has built research and development centres in the People’s Republic, or directly handed over intellectual property. The quid pro quo doesn’t always pay off. Westinghouse, for example, swapped nuclear reactor knowhow for contracts and then went bankrupt anyway.

The deal came after Chinese officials had been targeting the iPhone maker for various lapses; its sales in the country tumbled 17% in 2016. Sustained crackdowns could have destabilised its supply chain and global profitability. Apart from a respite from pressure, it’s unclear what benefits Apple reaped. A $1 billion investment in Chinese ride-sharing provider Didi Global (DIDI.N) which was part of the package, according to the report by technology news site The Information, has been a rocky one, and politically sticky in Washington: Apple’s money may have helped Didi drive U.S. rival Uber (UBER.N) out of China.

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As a canny investor, Apple, which declined to comment on the article, surely put some of the money into projects that were going to be developed anyway. To placate Beijing, though, some capital may have served more like donations to state enterprises and local governments. The company generated $249 billion of sales in Greater China over the last five years, less than the pledged amount.

Apple’s share of the Chinese smartphone market has remained roughly static since 2016, even though it benefitted somewhat from White House sanctions that pushed Huawei, its closest domestic rival, out of the smartphone business. The decision to hide the deal from shareholders will make it even harder for Cook to justify now. The heightened geopolitical tension also augurs greater blowback at home. If nothing else, Apple at least bought itself some time. Just how much and at what cost is the question.

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CONTEXT NEWS

- Apple signed a secret agreement with the Chinese government in 2016 to invest over $275 billion to support official strategic initiatives, technology news site The Information reported on Dec. 7. Apple declined to comment on the matter to Reuters Breakingviews.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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