Apple's product development, supplier relations, and market strategy in China

¶ … Apple (the computer company) with relation to China. The paper will need to focus on the company's product development and supplier relations within the Chinese market.

Apple

"Apple Inc. (NASDAQ: AAPL; formerly Apple Computer, Inc.) is an American multinational corporation that designs and sells consumer electronics, computer software, and personal computers. The company's best-known hardware products are the Macintosh line of computers, the iPod, the iPhone and the iPad. Its software includes the OS X and iOS operating system; the iTunes media browser; and the iLife and iWork creativity and production suites. Apple is the world's third-largest mobile phone maker after Samsung and Nokia. Established on April 1, 1976 in Cupertino, California, and incorporated January 3, 1977… Fortune magazine named Apple the most admired company in the United States in 2008, and in the world from 2008 to 2012" (Wikipedia: Apple Inc.)

The following essay describes Apple's relationship with China focusing specifically on the company's product development and supplier relations within the Chinese market.

Apple's History with China

China has a definite love affair with Apple. In 2008, Apple had barely made its cut with China, but then business took off and Apple had resolved to make China its number 1 priority among the BRIC (Brazil, Russia, India, China) countries. Results of sales only solidify that decision. An exultant COO Tim Cook told analysts in January 2011 that "We put enormous energy in China and the result of that has been absolutely staggering" (CNN Money, 2011). In 2011, Apple proclaimed that it planned to build 25 Apple Stores in China within the next two years. Several of those stores have already opened, and Apple went further in their overtures to that country going out of their way to slant their smartphones with Chinese characteristics and qualities that would appeal to Chinese consumers. Examples of these qualities include the following:

Baidu has been made as a search engine in the Apple Safari browser

Apple has offered a better way to input Chinese characters into Mac OS X

Apple has integrated eight new Chinese fonts with Mac OS X

Apple has made video sites Tudou and Yokou, and Sina Weibo (China's Twitter-like microblogging service) easily accessible to iOS 6 users and has allowed them to facilely integrate content.

Apple has equipped iOS with a new Chinese dictionary

Apple has equipped iPhone Siri with ability to speak Mandarin and Cantonese

Apple and China really seemed to take off.

In 2010 however, a scandal occurred with their supplier relations that almost seemed to blow all.

Apple's products are produced in China by a $61 billion company named Foxconn which may well be the world's largest producer of electronic components. In September 2012, newspapers such as the British Telegraph reported that 16 people had attempted to take their lives by jumping off factory roofs and that 12 had succeeded in killing themselves., whilst another 20 were stopped before they could jump. The reason? Chine laborers working for Apple were making only about 51 cents per hour, whilst Foxconn was spending billions of dollars on building another plant in Chengdu where they could pay laborers even less than that.

Even now, this scandal has left its ramifications with some feeling that Apple's relationship with China is exploitative and Apple, even though it upped its wages, improved its labor conditions, and tightened its security, having lost greatly over the incident.

It is too soon to comment about Foxconn's exact impact on Apple's products. Apple seems to be still selling better to China than it does to America. Their present relationship can perhaps best be summed up by advisors Tim Hanson, Ron Gross, and James Early who, commenting for the Motley Fool in 2012, analyzed Apple's relationship with manufacturers in China relationship and commented that the relationship is not as black and white as some may believe. It is rather composed of shades of gray, although there may be more white than black. As recently, as April 2012, the Daily Freeman noted that:

Apple is generating record revenue growth in mainland China, thanks in large part to a deal with China Telecom (CHA) during the fiscal second quarter, as well as an expanded relationship with China Unicom (CHU)… CEO Tim Cook said yesterday on Apple's earnings conference call that it was an incredible three months in China, which produced $7.9 billion in revenue, up three-fold. (http://finance.yahoo.com/news/apples-future-products-made-china-152300792.html)

Apple's product development with China

Apple's love affair with China and the reciprocal relationship was first noted by business analyst McKenzie in June 2012. In June 2012, McKenzie noted that:

Steve Jobs never paid much attention to China, but now Apple's interest in the country could hardly be more obvious. In his short tenure at the top, Tim Cook has already embarked on a high-profile trip to China, talked about the importance of being a change agent for manufacturing in the country, and & #8230; has overseen a keynote at the World Wide Developers Conference that placed the world's largest Internet market on the same podium as the U.S. (Pandodaily, 2012).

Apple, apparently, sees great potential in China for the year before there was no mention of the country in its WWDC address. Come this year, and Apple keeled over to seduce China. This was, no doubt, due to the fact that Apple is realizing that a great chunk of its revenues come from that mammoth super spending power. Apple's revenue from China reached $12.4 billion in the first half of the fiscal year -- nearly as much as it made in the entirety of 2011, when it hauled in $13.3 billion. In June 2012, it was noticed that China had become Apple's second largest market with an exultant Cook proclaiming that "I've never seen so many people rise into the middle class who aspire to buy Apple products" (Pandodaily).

The stories of China's love relationship with Apple have been dramatic. They include that of one teenager even selling his kidney in order to procure an iPhone and iPad. Commented Richard Robinson, the Beijing-based co-founder of social networking company Youlu and mobile games producer Kooky Panda: "The iPhone is a very aspirational item… It's the same reason Starbucks has done well in China. Consumers are price sensitive, to a point. Then they will pay real money for status and quality." (ibid.)

And Chinese consumers, in the beginning of the year, were flocking to Apple not just for Apple's hardware, but for their apps too.

Whilst it is true that few of China's 1.3 billion citizens can afford an iPhone, Morgan Stanley's Katy Hubert estimates that there is a fundamental target market of approximately 50 million middle-class Chinese who have plenty of disposable income and a "strong interest in smartphones and the Apple brand" (CNN Money). Meanwhile Apple stores in China were reputed in 2011 to have drawn more customers than Apple stores located anywhere else in the world (ibid.) In December of that same year, it was reported that China Unicom (CHU) was unable to fulfill about a third of its orders whilst the iPhone 4 had been sold out for two months.

In 2008, Apple was just beginning to make their cut with China. Today, according to Morgan Stanley's Katy Hubert, Asia Pacific is the company's largest earnings driver, representing 39% of the company's operating income growth last quarter (CNN Money).

As the figure below shows, between years 2009 to the present, Apples sales in China have spiked to an all-time high Apple's sales in China. Sales in China gradually crescendo over Apple's four quarters in 2009 leaping in 2010 with the iPhone and iPad 4 to huge heights that peaked sales of 5000 million.

Fig. 1. Statistics of Apple's product development with China: 2009-2011

The only problem may be the present -- which may also be a blip on the horizon.

The Present: Apple with China

The present can actually better be described in shades of gray than in terms of black and white, possibly veering towards more shades of white than gray. Rathee (2012) reports that Chinese consumers seem to have turned their attention to Google's Android operating system preferring those to the new Apple smartphone introduced earlier the year.: "Apple saw its iPhone shipments more than double year over year, but they were down 37% compared with the first quarter of the year." In fact, Samsung was the top smartphone vendor with a 17% share, followed by ZTE, Lenovo, and Huawei. Apple, meanwhile, dropped to the fifth place.

According to Canalys analyst Chris Jones, Apple's fall from favor with the Chinese market is due not only to the fact that they are also one of the most - if not the most -- expensive brand, but that they also have to compete in a gray market. Chinese consumers prefer the cheaper brand. Change in seasonality for iPhone product debuts also affected sales:

It used to be a June launch and then it would roll around the world. That changed last year when it got introduced in October… It came there [to China] in Q1 and was a big initial volume as people rushed out to buy it. Typically, volumes do drop sequentially in the quarter and there was the fairly typical slowdown after the initial rush. (http://pandodaily.com/2012/06/12/siri-learns-mandarin-while-apple-falls-in-love-with-china)

Analyst Chris Jones had remarked this about the iPhone 4S last year. Apple seems to be sharing the same fate.

On the other hand, China still seems to be a huge productive company for Apple: small wonder since its products are made there. Whilst it is true that Apple may be seeing drops in sale from China, these drops are insignificant.

The importance of China, said Channing Smith, manager of the Capital Advisors Growth Fund, cannot be understated: "China is very important, and China will be an enormous growth market. What I'll be interested in seeing is the sustainability, and I want to see if they can replicate what we've seen in the U.S. In other countries." (Daily Freeman (04/25/12)

Apple's Supplier Relations with China

In 2010, Apple reached their first impasse with China with news of Foxconn's suicide reaching the media. Foxconn is the world's largest producer of electronic components working for companies such as Dell, Hewlett-Packard, and Apple, and in September 2012, newspapers such as the British Telegraph reported that 16 people had attempted to take their lives by jumping off factory roofs and that 12 had succeeded in killing themselves., whilst another 20 were stopped before they could jump. The reason? Chine laborers working for Apple were making only about 51 cents per hour, whilst Foxconn was spending billions of dollars on building another plant in Chengdu where they could pay laborers even less than that. More than that, working conditions was horrendous.

Reuters reported that Chinese workers have "twisted Fox Conn's Chinese name so that it now sounds like: 'Run to your Death'." (Gewirtz, October 18, 2010).

The suicides were not the only events that led to this nomer. Reliable Chinese company reports and advocacy groups reported that:

Under-age workers have helped build Apple's products, and the company's suppliers have improperly disposed of hazardous waste and falsified records… More troubling, the groups say, is some suppliers' disregard for workers' health. Two years ago, 137 workers at an Apple supplier in eastern China were injured after they were ordered to use a poisonous chemical to clean iPhone screens. Within seven months last year, two explosions at iPad factories, including in Chengdu, killed four people and injured 77. (http://www.zdnet.com/blog/government/is-apples-suicide-factory-outsourcing-to-even-cheaper-chinese-peasants/9537)

Apple had been alerted prior to those blasts and had failed to respond.

n recent years, however, Apple has asserted that it has improved its factories. Reports are conflicting with many observers, former executives, and analysts remaining unconvinced. Apple says that it has a supplier code of conduct that details standard and that conditions in its factories are regulated and matched against its coda. If any are found deficient, they are instantly addressed.

Significant problems, nonetheless, remain. Apple itself recorded that more than half of its suppliers have violated at least one aspect of the code of conduct every year since 2007, and have in some instances even violated the law. Other analysts report internal pressure within Apple to simultaneously meet demands of sustainability / safety with the needs of rapid customer service and product delivery as well as producing affordable products.

Whilst Apple writes that it requires discovered labor violations to be remedied, with suppliers who refuse being terminated, suppliers are actually harder and costly to find and this circumscriptions are, accordingly, often ignored.

Analysis of its audits, however, tells us that improvement may be on the way. In 2007, Apple conducted over three dozen audits, two-thirds of which indicated that employees regularly worked more than 60 hours a week. Violations included hiring 15-year-old and falsifying accounts. Between 2008-2010, audits showed evidence of large numbers of employees who worked more than six days a week with many working extended overtime for minimum wage. Some had pay withheld as punishment. More than a hundred workers had been injured by toxic chemical exposures.