Why China and Apple Are a Match Made In Hell

Wednesday Feb 15th 2012 by Mike Elgan
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Despite Apple's popularity in China, it's time for the company to move its factories out of the country.

Four years ago, I wrote a column in this space about the incompatibility between Apple and China . And four years later, that observation is proving to be truer than ever.

What do I mean by "incompatible"?

Countries have cultures. And companies have cultures, too. And the cultures of China and Apple are diametrically opposed to each other.

Here's what I mean.

China’s Incompatible Business Culture

In my column four years ago, I pointed out how hard it was for Apple to make a deal with China's two top mobile carriers, China Mobile and China Telecom, to carry the iPhone. At the time, Apple had been unable to reach an agreement with any Chinese carrier.

Since then Apple has signed with a relatively insignificant player in the market, China Unicom. But after five years of trying, the company still can't come to an agreement with giants China Mobile or China Telecom.

With 628 million subscribers, China Mobile is the world's largest carrier by far. Apple is the world's largest mobile handset vendor.

There are an incredible 10 million unauthorized iPhones on the China Mobile system, which have access to only 2G data connection speeds because Apple hasn't built a China Mobile-compatible handset. So demand is very high.

You'd think Apple and China Mobile would be able to overcome their differences in the interest of mutual profiteering. But you’d be wrong.

The problem with a China Mobile deal is that the carrier insists on a cut of Apple's app revenue as a condition for the iPhone to be approved. Apple insists that it not share app revenue with carriers. So after five years of trying, the two companies are simply too incompatible to reach a deal.

China’s Incompatible Legal System

As Apple's actions in the patent wars demonstrate, Apple loves doing business in countries with reliable, independent and fair legal systems. And nobody would describe China's legal system that way.

Rather than being independent, the courts in China are agencies of the Chinese Communist Party, and can be manipulated by Chinese business interests and public opinion to advantage Chinese companies over foreign ones.

Some 12 years ago, a Hong Kong-based company called Proview trademarked the name IPAD for a product idea that was abandoned. The company itself has failed, and was delisted from the Hong Kong stock exchange in 2010.

But before that delisting, Apple purchased the rights to the IPAD name from the company (in 2009) for $55,000. During the negotiations for the rights, Apple concealed its identity so it wouldn't be gouged. And Apple bought the rights to the name in Taiwan, but not in Mainland China.

So Proview saw its chance to cash in, and now wants $1.6 billion from Apple. In order to squeeze Apple, the company has convinced authorities in several cities to send police into stores to confiscate iPads. So merchants are taking iPads off the shelves preemptively. The company is trying to do so in more than a dozen other major cities as well.

This leads to a strange reality in those cities: Police are cracking down on the sale of legitimate iPads, while counterfeit iPads based on Apple's stolen intellectual property are sold freely in the same stores.

Welcome to China.

Worse, the Proview is trying to prevent iPads manufactured in China from leaving the country for sale around the world.

Legal experts say the company is unlikely to succeed in blocking exports. But the reason is unsettling: it’s because Apple is popular in China.

Government authorities said that it "will be difficult to implement a ban because many Chinese consumers love Apple products," Proview's chief told the Reuters news agency.

In other words, legal rulings in China are arbitrary, and subject to fickle and unpredictable factors.

Today, Apple is popular in China. But if some future scandal makes them unpopular, the company could be blackmailed and its manufactured goods held hostage.

China’s Incompatible Worker Culture

Apple is currently being raked over the coals about worker abuse in Chinese factories by human rights organizations like New York-based China Labor Watch.

In fact, factory conditions can be very rough. Some workers have committed suicide, and Apple itself has discovered the employment of child laborers.

Apple recently launched what CEO Tim Cook called "probably the most detailed factory audit in the history of mass manufacturing."

Critics like to pretend that Apple is some evil overlord abusing Chinese workers. The truth is that Apple has simply failed to overcome pre-existing worker conditions in that country.

The only way Apple is going to be let off the hook for abusing factory workers is to become the first company ever to create a bubble of humanity in a culture that abuses workers as just a normal part of every day business.

In fact, worker abuse is one of the key benefits to companies like Apple to manufacture in China. Apple can make a last-minute change to one of its products mere days before the scheduled manufacturing begins, and bosses roust already-exhausted workers from their beds in the middle of the night to start working round-the-clock to effect the change.

Contract manufacturers are willing to expose workers to dangerous conditions and chemicals, work them double shifts without overtime pay, and fire them if they don't devote their lives to the cause.

Chinese worker culture is simply incompatible with Apple's need to avoid association with worker abuse. Sure, if Apple spends enough money, slows down production enough, and micromanages everything, it might be able to protect its reputation. But all that kills the value of manufacturing in China in the first place.

Apple might as well move their factories to other countries. And that’s exactly what Apple should do.

The bottom line is that although China is a huge market where Apple products are very popular, the country is simply incompatible with Apple's needs.

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