The China-Apple Cold War Heats Up

Yoko Kubota, reporting from Beijing for The Wall Street Journal Wednesday (News+ link):

China ordered officials at central government agencies not to use Apple’s iPhones and other foreign-branded devices for work or bring them into the office, people familiar with the matter said.

In recent weeks, staff were given the instructions by their superiors in workplace chat groups or meetings, the people said. The directive is the latest step in Beijing’s campaign to cut reliance on foreign technology and enhance cybersecurity, and comes as China seeks to limit flows of sensitive information outside of China’s borders. The move by Beijing could have a chilling effect for foreign brands in China, including Apple. Apple dominates the high-end smartphone market in the country and counts China as one of its biggest markets, relying on it for about 19% of its overall revenue.

Jenny Leonard and Debby Wu, reporting for Bloomberg1 Thursday:

China plans to expand a ban on the use of iPhones in sensitive departments to government-backed agencies and state companies, a sign of growing challenges for Apple Inc. in its biggest foreign market and global production base.

Several agencies have begun instructing staff not to bring their iPhones to work, people familiar with the matter said, affirming a previous report from the Wall Street Journal. In addition, Beijing intends to extend that restriction far more broadly to a plethora of state-owned enterprises and other government-controlled organizations, said the people, who asked not to be identified discussing a sensitive matter.

[Inside Baseball Interpolation: I have often mentioned here that Bloomberg, as a news organization, is uniquely fanatical about scoops — being the first to break news, and in particular, market-moving news. And they expect credit for their scoops when the news is re-reported elsewhere. So trust me, it pains them to credit the Journal for this scoop. But here’s where the Bloomberg institutional dickheadedness is revealed: check out the link for the word “report” in the blockquote above. Hint: It doesn’t link to, you know, the Wall Street Journal story that broke the news.]

If Beijing goes ahead, the unprecedented blockade will be the culmination of a yearslong effort to root out foreign technology use in sensitive environments, coinciding with Beijing’s effort to reduce its reliance on American software and circuitry.

This gets to the nut of my intense curiosity regarding this edict. How much of it is nationalism — the CCP turning up the dial on the inherently jingoist mindset of a police state — and how much of it, if any, is about the fact that iPhones are secure, and their security is outside the reach of the CCP? The Chinese government surely wants to surveil what government employees do on their phones, and iPhones make that harder.

Lastly, where does Apple’s unique relationship with the Chinese government play into this? Apple remains dependent upon China for manufacturing, the iPhone in particular. They make some iPhones elsewhere, but the overwhelming majority are assembled in China, and there’s no other supply chain on earth that can replace it today. That’s a terrible starting point for any negotiation. But: China gets a lot from Apple. Over the course of my lifetime, China has been fighting to change the perception of what “Made in China” stands for. It’s always meant cheap. It used to also imply shoddy. Apple is the feather in China’s cap. iPhones aren’t just the nicest phones in the world — they’re arguably the nicest and most complex mass-produced consumer products in any category. And they are made almost exclusively in China.

The Chinese government surely bristles at the pariah status of Huawei globally, but there’s no plausible scenario where any Chinese company achieves the sort of prestige Apple has. Huawei phones, at best, are third-rate, and everyone knows it, including everyone in China.2 If China maintains its symbiotic relationship with Apple, China will remain firmly associated with the most prestigious technology brand in the world. If not, and Apple migrates its primary manufacturing elsewhere, China again drops to being associated only with second- and third-rate products. Even worse, the best company — in that scenario — would have chosen to part with China. China gains enormous prestige from Apple; Apple takes a reputational hit from its reliance upon a brutal human-rights-violating communist dictatorship.

Perhaps China feels free to antagonize Apple out of the belief that Apple cannot eliminate its dependence upon Chinese manufacturing. But even if that’s true, the message to other companies (say, carmakers) eyeing a move to Chinese assembly would be this: once you grow dependent upon China we’ll screw you like we screwed Apple. China’s intended message to the world isn’t merely that they’re the most capable nation for manufacturing, it’s that they’re also a trustworthy and dependable partner.

This sandbagging of Apple regarding iPhone usage by government employees says the opposite: that China cannot be trusted as a partner.

So here’s how I tally the detente. If Apple can ease away from its dependence upon China for manufacturing, they might. But the risk is that doing so will upset the Xi Jinping regime and Apple will suffer in consumer product sales within China. (Perhaps that’s what we’re seeing now?)

If Apple does ease away from China, though, who can China replace them with? Who could they tout as a world-class technology company that relies upon China for manufacturing? Second place is so far behind Apple you can’t see it.

  1. Bloomberg, of course, is the publication that published “The Big Hack” in October 2018 — a sensational story alleging that data centers of Apple, Amazon, and dozens of other companies were compromised by China’s intelligence services. The story presented no confirmable evidence at all, was vehemently denied by all companies involved, has not been confirmed by a single other publication (despite much effort to do so), and has been largely discredited by one of Bloomberg’s own sources. By all appearances “The Big Hack” was complete bullshit. Yet Bloomberg has issued no correction or retraction, and their only ostensibly substantial follow-up contained not one shred of evidence to back up their allegations. Bloomberg seemingly hopes we’ll all just forget about it. I say we do not just forget about it. Everything they publish should be treated with skepticism until they retract “The Big Hack” or provide evidence that any of it was true. ↩︎

  2. Here’s a fun paragraph from Mark Gurman from another Bloomberg piece on this:

    If consumers in China are looking to dump Apple, the new Huawei phone could provide an alternative. It sports a larger display and battery than the upcoming highest-end iPhone 15 Pro. The device also has higher-resolution cameras and a price that undercuts its US-based rival.

    No one is complaining that the iPhone Max/Plus displays aren’t big enough. A larger battery does not mean longer battery life. And most ridiculously, “higher-resolution cameras” not only doesn’t mean “better cameras”, there are like zero people on the planet, including Joe Huawei himself, who believes any Huawei phone has cameras that are competitive with those in iPhones. “Resolution” is the last refuge of camera scoundrels. For Chinese consumers Huawei offers two things over an iPhone: it’s a Chinese company, and the phones are cheaper. Apple should worry about the Chinese government. Apple has nothing to worry about from Huawei. ↩︎︎