Tim Cook’s secret deal with Beijing is a controversial case study for doing business in China

The trouble started in 2015. Apple was preparing to release its first Apple Watch in China, which had become one of its fastest-growing markets. But Chinese regulators threatened to withhold approval of the product unless the company heeded orders from China’s Bureau of Surveying and Mapping to make the Diaoyu Islands—the focus of a bitter territorial dispute between China and Japan—appear larger-than-scale on Apple Maps. Reluctantly, Apple complied.

There was more friction in 2016. Chinese regulators ordered Apple to shut down its iTunes Store for China because it didn’t have the proper licenses. The State Encryption Management Bureau blocked Apple’s ability to store a customer encryption key for Apple Pay. A government think tank dinged Apple for its lackluster corporate social responsibility record in China. Apple’s China sales began to slide.

And yet Apple weathered the storm. Fast-forward to today and Apple’s iPhone is the top-selling smartphone in China, which once again ranks as the second-largest market for Apple products after the U.S.

How did Apple do it? The Information‘s Wayne Ma tells the inside story of Apple’s travails—and its remarkable recovery—in China in a new report published Tuesday.

One of the main takeaways of Ma’s account—which draws on interviews and a trove of internal corporate documents—is that Apple owes its success in China to CEO Tim Cook, who made multiple trips to China to personally lobby Chinese officials to abandon policies and regulations detrimental to Apple’s products and services. Indeed, Ma suggests, Apple was so dependent on Cook’s relationships and diplomatic charm in China that other senior executives worried that the company would be in dire straits in the country if Cook were to step down.

But the report’s bombshell revelation is that, as part of his lobbying effort, Cook signed a secret 1,250-word agreement with the National Development and Reform Commission, China’s top economic planning authority, committing Apple to a five-year package of investments, business deals, and worker training programs Apple’s own internal documents estimate to be worth more than $275 billion.

Apple pledged in the agreement to help Chinese manufacturers develop “the most advanced manufacturing technologies” and “support the training of high-quality Chinese talents.” Apple also offered a $1 billion investment in Didi Global, at the time China’s most valuable startup, to help it battle U.S.-based Uber for control of China’s ride-hailing market.

Ma concludes that “Apple’s experience also offers lessons for other foreign companies entering China—including Tesla, which has encountered challenges with regulators on multiple fronts as its sales boom in the country.”

But I couldn’t help thinking that the tale of Apple’s China turnaround might also prove a useful case study for embattled Chinese companies like Alibaba Group Holding, Tencent Holdings, and Didi, whose shares plunged 20% last week on news that the company will delist from the New York Stock Exchange and relist in Hong Kong to comply with new Chinese data security rules.

Apple’s experience suggests that there is, or at least could be, life after crackdown for tech companies operating in China. But it also underscores just how far businesses must go to ingratiate themselves with their regulatory overseers in the country.

The Information‘s Apple scoop was catnip for critics of U.S. Firms and investors with extensive business dealings in China. Fox News commentator Laura Ingraham Tuesday blasted Cook as a “collaborator” with, and an “apologist” for China’s ruling Communist Party.

Reuters columnist Pete Sweeney deplored Apple’s “ugly China deal” and questioned whether it was really worth it. “The decision to hide the deal from shareholders will make it even harder for Cook to justify now,” Sweeney wrote. “The heightened geopolitical tension also augurs greater blowback at home.”

It’s hard to dispute that last point.

In December 2017, Cook, on one of his many sojourns to China, joined us at the Coins2Day Global Forum in the southern Chinese city of Guangzhou. In an interview with my former Coins2Day colleague Adam Lashinsky (you can watch the whole thing here), Cook offered a carefully reasoned defense of Apple’s expansive business relationship with China and marveled at how much the country had developed and opened up to foreign firms since he first began visiting in the 1990s.

“It’s like a different country,” Cook said. “If you were to come in when I did and you went to sleep for the 25 years, and you were to be parachuted back in, it would be unrecognizable.”

In the four years since that moment, so much has changed for tech companies in the world’s second-largest economy, it feels (to me, at least) like China has become a different country yet again. Emulating Apple’s diplomatic maneuvering may still be possible in China, but doing so successfully has gotten trickier than ever.

More Eastworld news below.

Clay Chandler
[email protected]

EASTWORLD NEWS

Cold shoulder

More countries have joined the U.S. And Lithuania in boycotting the Winter Olympics in Beijing next February, citing human rights issues, although China’s tough COVID-era travel restrictions likely would have stopped most diplomats from attending anyway. Australia, Canada and the U.K. Have all said their governments (but not athletes) will boycott the game. Leaders of Australia and Canada said the boycotts were due to concerns over China's human right violations. The British government was less clear about its motives. Prime Minister Boris Johnson said there will be "effectively a diplomatic boycott" because no government ministers "are expected" to attend, but the prime minister didn't say why. NYT

Xinjiang boycott

Meanwhile, the U.S. House of Representatives passed a bill Wednesday that would restrict the imports of goods from China’s Xinjiang province, where Washington says Beijing is engaged in a genocide of the local ethnic minority population. The Senate introduced and passed a similar bill months ago. The Senate must now pass the House or settle on a compromise of the two bills before the measure is sent to President Joe Biden to be signed into law. Bloomberg

1MDB upheld

Malaysia’s Court of Appeal upheld a conviction against former prime minister Najib Razak on Wednesday, maintaining a 12-year prison sentence handed down to Razak for corruption and money laundering in relation to the 1MDB scandal that rocked Malaysia’s political scene five years ago. A judge at the court called Razak and the 1MDB scandal, in which financiers embezzled billions of dollars of taxpayer money, a “national embarrassment.” Bloomberg

Controlled demolition

The slow collapse of China's indebted property developer Evergrande is ongoing, as Chinese regulators have erected close guardrails to prevent the real estate developer's default from infecting the rest of China's economy. On Monday, Evergrande passed a 30-day grace period for $82.5 million of unpaid interest owed to overseas bond holders. No payments were made. Think tank Macro Polo says China's historically hot property sector is coming to an overdue correction, but predicts the downturn will be a "soft landing" rather than a burst bubble—"so long as Beijing manages this process well." Coins2Day

India's top general dies

India’s top military commander, General Bipin Rawat, died in a helicopter crash on Wednesday, along with his wife and 11 others. Rawat was appointed as India’s first chief of defense staff in 2019, taking on a role that brought oversight of the army, navy, and air force together under one body. Authorities are investigating the crash, which occurred in foggy weather. BBC

MARKETS AND MOVERS

iQiyi — Video streaming site iQiyi is laying off hundreds of workers, cutting head count roughly 20%, Caixin reports, as losses mount at the Baidu-backed company. IQiyi reported a net loss of $270 million in the third quarter, a 41.6% increase on the year before.

Weibo — Hong Kong-listed shares in China’s Weibo, which has a primary listing in the U.S., fell 7.18% in their Hong Kong debut on Wednesday. The company, which runs China’s dominant Twitter-like messaging board, raised $385 million in the secondary listing. Shares rebounded above their debut price on Thursday.

Lego — The world’s largest toymaker, Lego, is investing $1 billion in a factory in Vietnam to bolster regional and global supply lines. Vietnam has emerged as a popular alternative for toy manufacturers migrating out of China, due to the latter’s increased labor costs. Lego’s new factory, outside Ho Chi Minh, will create 4,000 jobs over 15 years.

Omicron, Fosun — China’s Fosun group said it is working with partner BioNTech to produce a COVID-19 vaccine that will specifically target the Omicron variant, although it warned that regulatory approval could take several months. Fosun has exclusive distribution rights for the BioNTech vaccine in mainland China, Hong Kong and Taiwan. But, two years in, Beijing still hasn’t approved the BioNTech vaccine for distribution in mainland China.

Countdown — Brian Gu, the president of China EV maker Xpeng, said the risk of his company being delisted from the U.S. Remains “several years away,” although the group holds a secondary listing in Hong Kong, in preparation for being forced off the U.S. Markets. Last year, the U.S. Passed a law that will delist foreign companies that fail to comply with SEC audit regulations within three years. Most Chinese companies are in violation.

Lithium — China’s Ganfeng Lithium plans to double production by 2025, as sales of electric vehicles push demand for lithium to new highs. Ganfeng produced 24% of the world’s lithium hydroxide supply last year, landing at second place behind U.S. Based Albemarle.

FINAL FIGURE

5.9 million

The number of new marriages in China fell to a 13-year low in the first three quarters of 2021, topping out at 5.9 million registrations, continuing an eight-year streak of declining marriage rates. Beijing worries a fall in marriages will exacerbate its waning population growth. In some areas, local governments have launched campaigns to encourage weddings—including running counseling services as well as propaganda campaigns advocating cheaper bridal dowries (a practice still common in China.) But China’s gender imbalance, ranging from 4% to 12% more men than women, is harder to resolve. Many men will inevitably go unmarried.