China Fires Overwhelm Apple’s Cook

Apple’s Cook back in China to put out latest fires

The US may be one of the world’s most competitive markets, but tech giant Apple (Nasdaq: AAPL) is quickly discovering that fast-growing China is far more complex for a wide range of reasons that are often more political than economic. CEO Tim Cook was in Beijing this week to address some of those issues, in what looks like a hastily arranged trip to put out a growing number of fires facing his firm in the world’s largest smartphone market.

The trip is just the latest to China for Cook, who was just there in January and is probably wishing the country would simply disappear to end his steady string of nonstop headaches from the lucrative but difficult market. Cook’s 2 latest China headaches stem from negative publicity, including a critical editorial in the Chinese media last week and a report this week accusing one of Apple’s manufacturing partners of abusive labor practices.

Those headaches follow a similar publicity nightmare earlier this year, when local media reports on problems with Apple’s after-sales policy led the company to issue a rare apology to Chinese consumers. (previous post) While all of those items will probably be on Cook’s agenda during this current trip, I’m fairly certain his main concern will be reversing the sudden slide in Apple’s sales in China, the company’s  second largest market after the US.

All the latest media reports are quite vague, saying only that Cook has been spotted in Beijing making calls on 2 of China’s 3 major telcos, industry leader China Mobile (HKEx: 941; NYSE: CHL) and smaller rival China Telecom (HKEx: 728; NYSE: CHA). (Chinese article) I’m fairly certain that Cook will also meet with the third telco, China Unicom (HKEx: 763; NYSE: CHU), which is Apple’s oldest iPhone partner in the market.

One of Cook’s top priorities will be to ensure that the road to China is smoother for Apple’s newest iPhone than past launches. Despite the growing importance of China to its worldwide sales, Apple has yet to include the market in any of its global iPhone or iPad launches to date. That often means big lost sales opportunities, since much of the buzz from such launches is usually gone by the time the latest iPhones officially arrive in China, often 2-3 months after their global debuts.

The delays are mostly the result of China’s massive bureaucracy, which requires lengthy validation testing by the nation’s telecoms regulator before any new cellphone can  be sold in the market. Thus one of Cook’s main goals this trip will probably be working with the telcos to ensure a more efficient approval for the iPhone 6, which could come out later this year. I expect he will also pay a visit to the regulator itself, the Ministry of Information and Industry Technology (MIIT), to try and expedite the approval process.

Cook’s seemingly desperate trip comes just a week after Apple reported its Greater China sales totaled $5 billion in its latest reporting quarter, down 14 percent from a year earlier and a whopping 43 percent drop from the previous quarter. (English article) Adding to Cook’s headaches is a newly released report accusing Apple manufacturing partner Pegatron (Taipei: 4938) of labor violations at its China factories. (English article) That comes after a report last week in the People’s Daily, the official paper of the Communist Party, criticized Apple for failing to confirm whether it provided all of its promised donations after a major earthquake struck in Sichuan province earlier this year. (previous post)

All the negative publicity comes as Apple’s high-end smartphones face a more market-oriented assault from a booming wave in lower-end models being pumped out by Chinese firms like Huawei and Lenovo (HKEx: 992). With so many fires facing him, Cook must surely be feeling a growing heat to quickly turn the tables for his company in China. That could be difficult, but I would expect we may finally see China included in the next global iPhone launch. We may also see another major announcement from Apple in the next few months, perhaps in the form of a major new China investment, as it seeks to bolster its image in the difficult market.

Bottom line: Tim Cook’s second visit to China this year highlights difficulties the company is facing in the market from slowing sales and negative publicity.

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