China doesn’t want to ‘close its doors’ to Apple, but…

Responding to Trump’s tariffs—and to Apple’s $1 trillion market cap—China demands a bigger share of Apple’s profits.

Published Tuesday in the state-owned People’s Daily:

China is by far the most important overseas market for the US-based Apple, leaving it exposed if Chinese people make it a target of anger and nationalist sentiment. China doesn’t want to close its doors to Apple despite the trade conflict, but if the US company wants to earn good money in China, its needs to share its development dividends with the Chinese people.

In an increasingly interconnected world, Apple is a particularly good example of global manufacturing. China now serves as a key production and processing base for Apple. Many Chinese companies have been included in Apple’s production chain to provide parts and components or assembly work. This has allowed Apple to benefit from China’s ample supply of cheap labor.

In the case of the iPhone, some statistics show Chinese processors only get 1.8 percent of the total profits created by the device.

Apple’s contribution to job creation in China is notable, but the company enjoys most of the profits created from its Chinese business. It is impractical and unreasonable to kick the company out of China, but if Apple wants to continue raking in enormous profits from the Chinese markets amid trade tensions, the company needs to do more to share the economic cake with local Chinese people.

My take: As the trade war heated up, Apple was China’s trump card. Now they’ve played it—or threatened to—and it rings a little hollow. The fact is, China can’t afford to lose Apple, and Apple can’t afford to lose China. “I’m not buying it,” said Jim Cramer this morning. “They would target some other companies first.”

7 Comments

  1. Turley Muller said:

    Can’t blame them for being pissed. When value added to iPhones by Chinese firms is single digits (2% in this article) but the full value is included in exports it can create a problem. Components from US are included in the value. It’s nets to zero, since it’s an export and import, but everything else from Europe and other Asian countries get assigned to China when it exports finished devices. Rational folks understand that the trade numbers don’t tell the whole story and come with caveats. This trade war is completely unnecessary and potentially could cause long term damage.

    1
    August 7, 2018
    • If I understand the application of import duties correctly, they only apply to the components originating from the country of origin.

      In the case of the iPhone that would amount to all components actually MANUFACTURED in China (excluding Taiwan). This may include Samsung components manufactured in China (batteries and displays), chassis, screws, adhesives, packaging, circuit boards, and assembly.

      China says that amounts to 2% of the sale price. I’d say that is an understatement and Apple (better than anybody) knows exactly how much it is.

      If the 2% claim is accurate then a 30% duty would increase iPhone X COGS no more than $6, an amount Apple could easily absorb as it would only apply to units sold in the US.

      2
      August 7, 2018
  2. David Emery said:

    Let the Chinese start sharing their profits generated from US companies and US technologies, and we’ll talk.

    But I agree with the $1T valuation, Apple has become a punching bag for everyone with an ax to grind on economic issues.

    3
    August 7, 2018
  3. Looking at the volume of iPhone units sold each year, it would appear that Brazil screwed up big time when they reneged on the manufacturing deal they made with Apple.

    2
    August 7, 2018
  4. Richard Wanderman said:

    Foxconn, a Taiwanese company, has assembly plants in other countries like Brazil and could build new ones in other, smaller Asian countries to preserve some of the supply chain. No doubt it won’t come to that but I think Apple has quite a bit of leverage here.

    0
    August 8, 2018

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