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Apple’s China problem

Good morning from San Francisco. I’ve been here all week, partly to join Thursday night’s dinner spotlighting this year’s Fortune Global Forum in Guangzhou, and partly to recruit speakers for our inaugural Brainstorm Design conference in Singapore. As I scurry back and forth to meetings here and in Palo Alto, I’ve been struck by the ubiquity of Apple products.

In the lobby of my hotel, on the streets, in coffee shops and restaurants, in offices—everywhere I go it seems like everyone in the Bay Area is jacked into some kind of Apple device all the time. On the Embarcadero yesterday afternoon, I was nearly run over by a skateboarder listening to his iPhone on Apple earbuds threaded through quarter-sized holes in his earlobes that were secured by earrings made of Apple’s signature white plastic and brushed aluminum.

Apple’s omnipresence feels odd to me because in China, where I spend most of my time, Apple is just one species in a far more diverse gadget ecosystem that includes brands like Samsung, Huawei, Oppo, Vivo and Xiaomi. I live in a small beachside village on the far southeastern tip of Hong Kong island where every morning tour buses disgorge hundreds of selfie-mad mainland tourists. My totally unscientific observations of these throngs suggest that fewer than one in 20 is using an iPhone. That’s about the same ratio I’ve seen on recent trips to Shanghai, Shenzhen and Guangzhou.

It was not always thus. As recently as 2015, Apple was—by far—the hottest brand in China. But this week, when Apple rolled out its new iPhone 8 and iPhone 8 Plus in China, Middle Kingdom consumers stayed home in droves. The Chinese consider eight a lucky number. But a host of reports confirm that, for Apple, it is proving anything but auspicious. At Apple’s mainland stores, queues have been so short that staff have had to remove crowd control barriers. In Hong Kong, the story is much the same. Demand is so weak that even scalpers are complaining.

The lack of enthusiasm in stores may reflect the fact that more Chinese consumers are purchasing phones online. Or it may be that many are just waiting for the release of the iPhone X, which won’t go on sale in China until November 3. But there’s no denying that Chinese-made phones are getting better and better, and offer functions comparable to Apple at a fraction of the price.

China is still Apple’s most important market. As I noted in last week’s CEO Daily, Apple’s market share in China has slumped to 7%, down from 16.5% in 2014. The current issue of The Week in China offers a detailed examination of why Apple’s China sales have faltered. The conclusion: specs of Chinese handsets now rival that of Apple’s phones, and Chinese consumers—who prefer the online services of China’s two tech giants, Tencent and Alibaba—are far less wedded to Apple’s operating system than their American counterparts.

Apple’s travails are just one example of how it’s getting tougher and tougher for foreign firms to compete in China’s vast and still rapidly growing market. In many cases, foreign firms are stymied in China because of unfair government rules that tilt the playing field in favor of local challengers. But Apple’s China slump highlights the fact that Chinese firms can be formidable competitors. For now, that’s mostly a problem inside China. But inevitably Chinese firms who win their home market will challenge Western, Japanese and Korean incumbents around the world.

Enjoy the weekend!

Clay Chandler

Politics and Policy

China detects an ‘earthquake’ in North Korea. Chinese government seismologists said Saturday they had detected a magnitude 3.4 earthquake in North Korea which they considered a “suspected explosion.” Their statements suggested has conducted another nuclear bomb test weeks after its last one. The earthquake was detected in Kilju county in North Hamgyong Province, close to a known nuclear site. Reuters

China curbs oil sales to North Korea. China will sharply curtail oil exports to North Korea and will stop buying textiles from the country, according to a statement issued by China’s commerce ministry on Saturday. China is North Korea’s main energy supplier, most important trading partner and only source of hard currency. Restrictions on refined petroleum products would take effect from October 1. The ban follows the adoption of a  UN security council agreement imposing sanctions on North Korea after Pyongyang conducted its sixth nuclear test on September 3rd. BBC

Bannon in secret talks with Wang Qishan. Ousted White House adviser Steve Bannon visited Hong Kong earlier this week to expand upon his assertion that the U.S. is locked in “economic warfare” with China. After his speech, delivered to clients of a Chinese-owned bank, he flew to Beijing where he held secret talks with Wang Qishang, the man many believe to be Chinese president Xi Jinping’s most powerful political ally. Reports of the meeting fueled speculation in Washington that Bannon, despite being pushed out of the White House by Trump chief of staff John Kelly, still has the president’s ear. In China, however, it was interpreted as a sign that Wang, who is nearing customary retirement age, is likely to remain in power after the leadership reshuffle at the 19th Communist Party Congress in October.   Financial Times

“World class hard” workThe endless battle to rid corruption in China’s ruling Communist Party is “world class hard”, Wang Qishan said in a rare meeting with the prime minister of Singapore this week. Wang leads the CCP’s discipline and has been at the center of Xi Jinping’s campaign to root out corruption at the highest party ranks. Reuters

Trade and Economy

Raters gonna rate. China’s finance ministry has called S&P’s downgrade of China’s long-term sovereign rating “perplexing” and a “wrong decision”. Citing financial risks from years of built-up debt, S&P on Thursday downgraded China’ from AA- to A+, just a month before the country’s most sensitive political gathering. South China Morning Post

Trump seeks trade allies. After launching an investigation into intellectual property theft and technology transfer forced upon foreign businesses operating in China, the Trump administration is now trying to persuade traditional trade allies, the European Union and Japan, to jointly curb Beijing’s intellectual property regime. Financial Times

E-commerce tax delayed. China’s commerce ministry has held off the introduction of higher taxes on imported consumer goods bought online for one more year to encourage consumption. The plan was first announced in April 2016 has since been postponed twice as the e-commerce imports have helped to encourage Chinese consumers to spend their money at home instead of abroad. Caixin

Tech and taxes. Tech giant Tencent has invested US$372m for a 5% stake in China International Capital Corporation (CICC), one of the country’s most prominent investment banks. The deal will allow CICC to grow its wealth management businesses through the use of Tencent’s technological reach and expertise, while helping Tencent stay apace with competitor Ant Financial, which has been aggressively pushing its wealth management programs. Euromoney

In Case You Missed It

China vs US: who is copying whom? Financial Times

China’s about to get its first new central bank head in 15 years CNBC

Facial recognition debuts at China’s banks Xinhua

China’s bitcoin miners in limbo after Beijing shuts down exchanges South China Morning Post

Made-to-Order Medicine: China, U.S. Race to Decode Your Genes TechNode

Alibaba-backed Best seeks last-mile logistics growth after IPO: CEO Reuters

JD vs Alibaba: The war for China’s fresh food TechNode

Boeing 747s offered for public auction in China BBC

What Fallen Officials Did To Get Ahead and Avoid Getting Caught Caixin

Technology and Innovation

Danger in the echo chamber. The official newspaper of the Chinese Communist Party, People’s Daily, has criticized algorithm-driven news distribution platforms for their potential to create echo chambers. The op-ed piece specifically named as an example Jinri Toutiao, a 5-year-old news aggregator start-up that made headlines recently for its rapid growth. It is now valued at over $22bn. TechNode

Ready for liftoff. Chinese search engine giant Baidu has launched a 10bn yuan ($1.5bn) fund to be spent on new driverless car projects over the next three years. The “Apollo Fund” coincides with the launch of the latest version of Apollo 1.5, Baidu’s open-source autonomous vehicle software. The cars are set to hit Chinese roads by 2020. BBC

On a roll. Chinese bicycle rental unicorn Mobike made its American debut in Washington, D.C. with a pilot batch of 180 bicycles that can be rented for $1 per half hour. City governments across China have started putting curbs on further bike placements as the domestic market reaches saturation, spurring more Chinese bike-sharing companies to vie for global market share instead. TechNode

The web of WeChat. Tencent-backed messaging app WeChat has launched a new ads platform that would allow American brands and their agency partners to directly reach WeChat’s 963 million monthly active users. The ads will facilitate sophisticated targeting of Chinese consumers, not just in China but also when app users travel to the U.S. Digital News Daily

Summaries by Debbie Yong. @debyong

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