In August, the U.S. may have delivered a ‘death sentence’ to Chinese tech giant Huawei, potentially starving the phone and 5G equipment manufacturer of access to critical semiconductor chips. The eye-for-an-eye nature of the feud between the two superpowers begs the question: If U.S. does in fact kill or at least severely injure Huawei, how will China retaliate?
The U.S. does not have a global 5G equipment maker like Huawei that would give China a natural target for reprisal. But analysts trying to map out China’s alternatives have focused on a certain Cupertino-based giant.
“If the U.S. sucker-punches Huawei, Apple would be the obvious choice for retaliation,” Susquehanna semiconductor analyst Mehdi Hosseini recently told Barron’s.
That possibility looms as the U.S. government decides how severely it will enforce its August order, which bans any foreign chipmaker using American technology from supplying Huawei with semiconductors without getting a special license from the U.S. first. The order goes into effect Tuesday.
The ban poses an existential threat to Huawei. If the U.S. refuses to grant licenses to chipmakers, Huawei could run out of the advanced semiconductors it needs for its smartphones and 5G equipment by early 2021. Already, Huawei suppliers are bailing. South Korean media this week reported that South Korean technology firms Samsung, LG Display, and SK Hynix will stop supplying components to Huawei on Tuesday.
Apple’s vulnerability to Chinese retaliation for the U.S.’s Huawei actions is due to its exposure in China, which is unique among its American tech peers. China already has blocked many U.S. technology companies from operating on the mainland. Apple is an exception; it sells its products in China and heavily depends on the country for manufacturing. Chinese factories make an overwhelming majority of Apple’s iPhones, computers, and other products, and some 75% of Apple suppliers have at least one production site in China.
Apple is the one “global brand name” that China could retaliate against in the tit-for-tat manner that has guided U.S.-China relations for months, Hosseini said in a follow up note to Fortune. Apple did not respond to request for comment.
Apple’s reliance on China indeed makes it an obvious target for Beijing, but, experts say, that doesn’t mean China is interested in taking action against a company that it sees as an asset, one that has long played by its rules.
Unreliable entity list
Officially, China has never threatened Apple as a way to retaliate against the U.S. over Huawei. But reports in state media and a long-floated ‘unreliable entity list’ suggest the Chinese government is prepared to take action against the company.
On June 1, 2019, China’s Ministry of Commerce announced in a press conference that it was preparing a list of unreliable companies that cause “serious damages” to the rights and interests of Chinese companies. The ministry held the press conference just weeks after the U.S. added Huawei to the American government’s own Entity List, which banned Huawei from purchasing components from U.S. companies.
More than a year later, the Chinese government still has not released the list. But in May this year, Chinese state tabloid the Global Times singled out Apple, Cisco, Qualcomm, and Boeing as companies that may be subject to reprisal.
After the U.S. announced its latest Huawei order, the Global Times reiterated on Aug. 18 that China “was ready to retaliate” against those same firms if the U.S. cuts off Huawei’s chip supply.
In official statements, China’s ministry of foreign affairs has defended Huawei without making specific threats against Apple or other U.S. companies. “The Chinese government will continue to take necessary measures to safeguard Chinese companies’ legitimate rights and interests,” China’s foreign ministry spokesperson Zhao Lijian said in a press conference on Aug. 18 about the U.S. Huawei order.
Official threats or not, experts say Apple is exposed if China is looking for ways to retaliate.
“Apple is definitely a discussed target for a China response,” said Jeffrey Towson, a private equity investor in Beijing and former professor at Peking University. “And they are vulnerable.”
Towson says the company’s susceptibility is a result of Apple CEO Tim Cook going “all in” on China, especially in manufacturing.
Apple employs roughly 3 million people in China, either directly or through contractors like Foxconn, a workforce that produces the vast majority of its products, according to the Wall Street Journal. In recent years, Apple’s dependence on China has become more pronounced. Last year, Reuters found that between 2015 and 2019 Apple opened more assembly facilities in China than the rest of the world combined and that Apple now sources nearly half of its materials from Chinese companies.
What’s holding China back?
Still, China is unlikely to take the extreme measure of shutting down Apple’s supply chain because the repercussions would be too severe for China itself, analysts say.
China could restrict Apple from assembling phones at factories like Foxconn’s Zhengzhou plant, which constructs roughly half of the world’s iPhones, says Mauro Guillen, professor of international management at the University of Pennsylvania’s Wharton business school. It could also cut off to the Chinese companies that represent 48% of Apple’s component suppliers, said Guillen, who stresses that Apple also has suppliers in places like South Korea, Germany, and Taiwan.
In any case, such steps are unlikely in the view of Steve Tsang, director of the SOAS China Institute at the University of London. Cutting off Apple, he said, would “wreak huge damage to China as a reliable partner for the global supply chain.”
China prizes the jobs and the high-tech manufacturing ecosystem that Apple brings to the country, says John Zhang, director of the University of Pennsylvania’s Wharton China Center. And shutting down Apple’s assembly plants and cutting it off from Chinese suppliers would only encourage Apple and other foreign businesses to look elsewhere, thwarting China’s efforts to bolster its high-tech manufacturing capabilities.
A range of threats
Apple’s supply chain may be safe from reprisal, but China has a large “tool box” of other, less potent options that could hurt the company, Towson says.
He explained that China may increase Apple’s licensing requirements for factories and stores, or promote consumer boycotts similar to one the Chinese government orchestrated against South Korean automaker Hyundai in 2017 following a political spat between Seoul and Beijing.
In a piece for Wired last May, investor and president of River Twice Research Zachary Karabell suggested that China could enact more restrictions on Apple’s app store in China, force Apple to delete more apps, or place restraints on where Apple can open retail outlets.
If the U.S. follows through on denying Huawei its chips, Towson said he expects China to increase “regulatory requirements and investigations” of Apple’s China operations, which may include probes into senior, China-based managers at the company.
Such measures may limit Apple’s ability to grow sales in China by making iPhones and Apple products less attractive to Chinese consumers, Towson says. Apple’s iPhone currently owns 8.5% of China’s smartphone market compared to Huawei’s roughly 45% share, and sales in Greater China make up a significant portion of Apple’s global revenues; in the most recent quarter it accounted for 15%.
“Apple needs to be in China,” says Towson. “China is the [world’s] most dynamic consumer market, the manufacturing base for [Apple’s] electronics…and the global epicenter for innovation in smart devices and mobile apps.”
Pulled in two directions
Another reason Beijing may be hesitant to hit Apple is that the company has long accommodated Beijing’s demands. “If such an exemplary Western company cannot survive in China, does any other western company have a chance?” Zhang asked.
In February, Cook said Apple had deleted over 1,000 apps from its app store to comply with Chinese censorship requests. Earlier it had accommodated Beijing’s demand to remove the New York Times app from its mainland app store shortly after the newspaper published an investigation into China’s relationship with Foxconn, Apple’s largest contract manufacturer.
Last October, Apple took down an app called HKmap.live, which tracked movements of protesters and police during the 2019 Hong Kong anti-government protests. Critics argued that the app helped keep Hong Kong citizens safe by helping them avoid protests, but Chinese state media claimed protesters used it to target police.
But in recent weeks, Apple has signaled that it’s under pressure to take a stand against Chinese censorship.
Earlier this month, Apple released its first ever human rights policy that pledges to uphold values like free speech after shareholders pushed the company to answer for its censorship in China. In the policy, Apple states that it will still “respect national law” when such laws conflict with its principles. Nevertheless, activists called the policy groundbreaking since, at the very least, it seemed to acknowledge mounting shareholder pressure on the issue.
Zhang says that for now he doesn’t expect Beijing to retaliate against Apple for U.S. actions against Huawei given the value Apple brings to the country.
But the truce may hold only as long as Apple continues to play by Beijing’s rules.
