Why Apple is unlikely to face backlash from China over new U.S. rule on Huawei
People wearing face masks walk past an Apple store in Beijing on March 17, 2020 in Beijing, China.
Fred Lee | Getty Images
Apple is unlikely to face backlash from the Chinese government over a new U.S. rule designed to target Huawei, experts told CNBC, despite threats from state-backed media.
The iPhone maker has a good relationship with Beijing and, indirectly via its manufacturing partners, employs hundreds of thousands of workers in the world’s second-largest economy, factors that could dissuade China from taking action against the company.
On Friday, the U.S. moved to cut off chip supplies to Huawei with a rule that requires foreign firms using American software or equipment for manufacturing chips to sell to the Chinese giant, to get a license. That will hit Taiwan’s TSMC, Huawei’s main supplier of chips, and it could deal a big blow to the networking equipment maker, experts told CNBC.
In response, China is ready to take “countermeasures,” according to the state-backed Global Times citing a “source close to the Chinese government.”
The publication, which is often regarded as being close to the Chinese Communist Party, said these measures could include putting some companies on a so-called “unreliable entity list.” It’s unclear what this list entails as it has not been published. But it was something floated by China last year after Huawei was thrown on a U.S. blacklist known as the Entity List.
Other measures could include “imposing restrictions on or launching investigations into U.S. companies like Qualcomm, Cisco and Apple according to Chinese laws and regulations like Cybersecurity Review Measures and Anti-monopoly Law,” the Global Times said.
Risks to China supply chain, jobs
The iPhone maker is one of the few U.S. technology firms that has found success in China over the past few years, with sales from the Greater China region accounting for around 16% of sales in the March quarter.
But China is not only critical for revenue. It’s also where most iPhones are assembled by its manufacturing partner Foxconn and the country is a critical part of Apple’s supply chain. Foxconn employs hundreds of thousands of people in China.
While moving production outside of China is not an easy task, American technology firms including Apple are looking at other countries such as India and Vietnam. Last year, Apple was reportedly looking to start a trial for the production of its AirPods in Vietnam and asked suppliers to look into moving 15% to 30% of production from China to Southeast Asia.
China may not want to risk accelerating this move.
“China is already facing headwinds as companies such as Apple look to diversify their manufacturing base,” Neil Shah, research director at Counterpoint Research, told CNBC. “So it could be a double whammy if China targets Apple in China and indirectly Foxconn, it would further accelerate the manufacturing to outside of China.”
Meanwhile, Apple has 42 stores in China and multiple partners that distribute its product. On top of that, Apple said last year that it has 2.5 million developers on its platform. Since the App Store launched in China in 2010, developers have earned more than 200 billion yuan ($28.1 billion).
“Apple has huge direct and indirect contribution to the Chinese economy. So Beijing will have to think twice before targeting Apple,” Shah said.
Relationship with Beijing
Apple has also forged a good relationship with authorities in Beijing, according to Paul Triolo, head of Eurasia Group’s geotechnology practice.
“We do not think Beijing will go after Apple. There could be some brand boycott efforts, but not major moves against high profile companies like Apple that have very good relationships with local governments and Beijing,” Triolo told CNBC.
It’s not the first time Apple has been caught in the middle of a battle between Washington and Huawei. Last year, after Huawei as put on the U.S. Entity List in May, some social media citizens in China rallied behind the company and said they would no longer buy Apple products. But that social media backlash didn’t appear to have a huge effect on the company.
Indeed, Apple has to be very careful how it operates in China, where there is heavy censorship. Authorities often ask companies to comply with removal requests of content that the government does not like.
Last year, Apple removed a mapping app from its App Store that was used by anti-government protesters in Hong Kong after Chinese state media ran a piece headlined: “Is Apple helping HK rioters engage in more violence?” The protest movement in Hong Kong is aimed at pushing back against the perceived growing influence of China on the special administrative region.
Apple said at the time that it removed the mapping app because it “has been used in ways that endanger law enforcement and residents in Hong Kong” and has been “used to target and ambush police.”
And in 2017, the company removed several virtual private network (VPN) apps from it Chinese App Store. VPNs are required to access sites that are blocked in China such as Google and Facebook.
The company has been criticized in the past for some of these actions. Last year, a group of bipartisan U.S. lawmakers penned an open letter raising their concerns about Apple’s removal of the Hong Kong app.
So what will China do?
Instead of going after Apple in a big way, Beijing could target other firms.
“Based on what Chinese officials have been saying, at a minimum there will likely be investigations of U.S. companies for anti-monopoly behavior and for compliance with the provisions of the cybersecurity law. But this gives Beijing a lot of flexibility in terms of reacting to satisfy Chinese social media activists demanding a strong response, but not further poisoning the business environment in China for foreign, particularly U.S. firms,” Triolo said.
“The companies most likely to be included on the unreliable entities list and targeted for some action are those already subject to some market access limitations and that Beijing sees as sufficient symbolic to show strong anger over the move, without engendering a major response from the business community, further supply chain movement out of China, etc.”