Apple’s presence in China has been in the news a lot recently. After a week of seemingly orchestrated public criticism, their CEO Tim Cook took the ‘unprecedented’ step of publicly apologizing to Chinese consumers in an open letter on their Chinese language website.
There were two things here that caught me and which I thought merited closer attention.
First, the format of the complaints about Apple are noteworthy. When they first began, my reaction was that this was almost certainly an organized campaign, but was who was doing the organizing and to what end? My initial guess was that Apple was undergoing negotiations with China’s wireless carriers, notably China Mobile. This is not the first time a foreign company has been attacked in the press during private bargaining sessions. And to be fair, this happens to companies everywhere. It is not uncommon for Wall Street analysts and the US business press to get caught up as outlets for various parties negotiating positions, a sort of corporate public diplomacy.
China Mobile is one of the last major wireless carriers that does not stock the iPhone. In part, this is due to technical reasons. China Mobile’s 3G network runs on the domestic TD-SCDMA standard, which is not used anywhere else. So for Apple to sell to China Mobile it would need to design a new version of the iPhone. The phone would need a new baseband, but the Qualcomm modem used in today’s iPhone already supports TD-SCDMA, at least in theory. There is a lot of mystery around Qualcomm’s TD-SCDMA products. They originally announced support for the standard over two years ago, but this has yet to ship in a single phone. The history of Qualcomm’s TD-SCDMA strategy is a whole different rabbit hole, that we will not go down today. But the point here is that the technical issues around a China Mobile iPhone are solvable.
A bigger issue for China Mobile and Apple is just the straightforward business issue. Someone at Apple once described this process to us as “The Immovable Object meeting the Irresistible Force.” We will leave it to you to decide which is which, but these are two big companies that are both used to always having their way, so reaching common business terms has taken a lot of negotiation. And it would not surprise us if China Mobile was able to enlist the support of other parts of the establishment for help at the bargaining table.
The second element of this that we thought has been overlooked is the long history in China of the ‘self-criticism’. This is an important part of Chinese politics, particularly since 1949. I lived in China for seven years, and still spend a lot of time there. The apology or self-criticism is one of those cultural nuances whose importance is hard to translate into English. Anthropologists would probably say this has something to do with submitting to the consensus and showing that the apologizer is willing to comply with the dominant regime. In the US, admission of guilt is generally something to be avoided in legal settings, as it sets one up for punishment. But just as a guilty plea in a criminal case can result in a plea bargain for a reduced sentence, the self-criticism in China can often serve as punishment in its own right. In turbulent political situations, the self-criticism has been an important part of reconciliation and eventual rehabilitation for fallen politicians. Or if you get stopped at customs and found to have inappropriate magazines in your suitcase, a written apology across the cover can often get the problem solved quickly. (We are of course, speaking hypothetically, this would never happen to us….)
In this light, we think Apple’s apology is incredibly important and may eventually result in a much stronger position for them in China. True, this will come at a price. Their apology will probably weaken them somewhat in their negotiations with China Mobile. For instance, the apology focused on Apple’s warranty policy, so now they will probably have to provide extra warranty reserves to cover China Mobile’s “added maintenance costs” associated with the iPhone. Perhaps all China Mobile iPhone subscribers will get discounted or free Apple Care.
However, more importantly, Apple has shown that it is willing to submit to China’s unique conditions. That is the whole point of the self-criticism. We fought the law and the law won.
This stands in marked contrast to Google. And I think that is the whole point. It is no secret that Google and the government of China do not agree on many things. Google has been openly critical of the government there, and it seems unlikely that they can change that with just an apology. So while there is a strain of thought in the blogosphere that Apple’s apology now puts it at a disadvantage versus Android in China, I think the opposite is true. China now seems to have the backing of China’s press and probably elements of the broader political order. By contrast, Google struggles to support the hundreds of handset makers now building Android phones.
This does not mean that Apple is a preferred vendor. Companies like Lenovo and Xiaomi and many others will remain fierce competitors in the smartphone market, but Apple does have a much stronger position in China now than Google does.
If you want to take this even further, there are some who would argue that this whole affair was really about Google, and Apple was just the pawn or the collateral damage. I think it is safe to say that many groups in this world are concerned about the growing prevalence about Google and Android in the smartphone industry. Major carriers are working with Microsoft, Blackberry and Mozilla to build alternatives. Samsung is increasingly masking Android’s role in their smartphone. Few companies in China have the ability to negotiate at that scale, so it is not surprising that the government takes a more active role in providing a collective negotiating position. For instance, Qualcomm appears to have to negotiate with China’s government over the royalty rates it charges its licensees there.
When I was in China last year, several people pointed out that the government had recently passed a new regulation regarding which software could be pre-loaded on smartphones. At the time, this had led to no specific changes. However, many suggested that this would open the door to banning apps like Gmail, Google Play and Google Maps on Android phones. This has not happened, so far.
Now, Apple has apologized and promised to improve the terms of the maintenance it offers to its customers. What would happen if the government required Android phones to offer similar terms. Google’s very limited presence in China is just not large enough to support a broad-based warranty policy along these terms. Admittedly, much of Apple’s remedial actions center on hardware replacement, something that is beyond Google’s purview anyway. Nonetheless, Apple did pledge to provide a “clear and concise” warranty policy on its website. As Google does not even have a license to operate any website in China, it could not technically comply with this policy.
So while Apple seems to have emerged from these developments mostly unharmed, we think Android management should be paying close attention to developments in China.