Apple's China sales will soar past US - can it last?

Apple is cracking the Chinese market but protectionism could be its Nemesis

Apple’s China earnings will soon overtake those from the United States. As the firm’s second quarter financials proved on Monday, it’s not a question of “if” any longer but “when”. In fact, iPhone sales became the first to hit that milestone during the quarter, while total sales from greater China exceeded those from Europe for the first time.

But will the shifting balance of profits towards the East be sustainable for Apple in the long run, given the Middle Kingdom’s rapidly maturing smartphone market and Beijing’s growing reluctance to tolerate foreign tech players on its turf?

Well, the stats certainly don’t lie. Sales from China, Hong Kong and Taiwan grew a staggering 71% year-on-year to reach $16.8bn for the quarter. This is compared to an overall revenue growth figure of 27% to $58bn during the period. It even prompted a normally guarded Tim Cook to exclaim: “Everything you look at in China was extremely good.”

Status symbol

In status-obsessed China, the firm has long tapped the locals’ love of luxury, and especially foreign luxury, brands to flog expensive, highly desirable mobile devices. The allure was all the greater a few years back when there were virtually no physical Apple Stores in the country and demand massively outstripped supply.

Things have changed somewhat now, i-devices are available everywhere and the prestige once associated with them has gradually waned. Meanwhile, rivals like home-grown Xiaomi – which limits production volumes to deliberately stoke demand – are beginning to steal Apple’s thunder. But as these Q2 sales figures suggest, there are still enough consumers emerging into the rapidly expanding Chinese middle class who want to get their hands on an Apple device.

“Apple is still a very popular brand in China,” IDC analyst Xiohan Tay tells me. “It is seen as a premium brand and even those less well to do would be willing to save and spend a few months of their salary on an iPhone. The growth will definitely still continue in China, though perhaps at a slower momentum.”

Over the two years I lived in Hong Kong there were forever stories about Apple’s impending China implosion. There were the numerous lawsuits filed by local firms who felt they’d been trodden over by the big, ‘bullying’ US giant; the head to head with Samsung for the high-end market; the complaints over the price of its handsets; the shocking revelations about labour abuses at contract manufacturer Foxconn; and even an embarrassing ‘expose’ over customer service in which state media branded the firm “incomparably arrogant.”

Can it last?

But Apple survived all of these set-backs. Tim Cook apologised profusely for the customer service debacle; the firm pacified government censors by removing controversial apps from its online store; it took action against Foxconn; it produced (slightly) cheaper handsets; and more importantly, it produced devices that appealed to the local market – that is, the larger screened iPhone 6 and 6 Plus.

It seems to be doing the trick. Forrester’s Gene Cao tells me the Apple Watch looks like another winner in this all-important market. Even the pricey Apple Watch Edition sold out there in less than hour, making a mockery of the arguments that the firm’s products are too expensive for the locals.

“Price is never an issue that Apple faced in China. We see many iPhone owners with middle level incomes or even behind the average salary in China,” Cao explains.

But as more of its revenue comes from China, there will be a residue of concern in the Cupertino boardroom at the way geopolitical events are moving. Beijing has always been protectionist at heart, it just didn’t have the home-grown technology and the excuse to introduce such policies on a large scale before. Now it has the Edward Snowden revelations, some of which point to NSA interference in US hardware and software bound for export, and it has a growing raft of domestic providers.

This has emboldened the Chinese government to remove many foreign providers from its procurement lists of late including, reportedly, Apple. There are proposed new cyber security rules for the finance industry threatening to do the same, but they have been suspended for now, probably after an outcry from the banks themselves.

Apple might be doing better than most US firms in China at the moment. In fact, Tim Cook has done his best to allay concerns, reportedly agreeing in January to allow government security experts to pick over the firm’s source code. But the fact remains that Google, Qualcomm, Amazon and Microsoft have all either been banned outright or investigated for anti-trust violations.

Most US tech firms know in their heart of hearts that they’re on borrowed time in China – it’s just a question of “when”, not “if”, that time runs out.