sponsored by curiosity stream together
with my streaming service nebula a few
weeks ago counterpoint research
published this graph it shows apple
climbing to the number one spot in china
for the month of october overtaking all
local brands for a brief moment
including oppo vivo xiaomi huawei and
more of course apple's sales are highly
cyclical with peaks around late fall as
unlike all other companies they release
all of their phones at once so the
number one spot is a bit temporary but
still that's an incredible achievement
there are no foreign companies other
than apple on the top 5 top 10 or top
anything lists in the country and china
is a notoriously tough market for
outsiders to conquer for contrast
samsung dropped to only one percent
market share in the country and there
are no other foreign players left so how
did apple manage to do what no other
brand could and will they be able to
maintain their position let's find out
in the 82nd episode of the story behind
series
[Music]
for understanding any major business
story in china we of course have to
start with politics after all there is
no major business in the country without
the express approval of the government
and apple's relationship with that
government is uniquely and almost
suspiciously good with both parties
doing a lot to maintain it the chinese
government is notorious for squeezing
tech companies out of business including
throwing lots of foreign players out of
the country completely or even pounding
a whole host of their own homegrown tech
giants into the ground if it deems them
as undesirable but notably apple has
been remarkably unharmed by them so far
if anything the chinese government has
actively helped them on many occasions
for example by essentially building an
entire city with 300 000 employees for
them out of government subsidies to help
their manufacturing business if you'd
like to see a deeper dive on that watch
my video about apple's manufacturing
partner foxconn next and while the
government is courting apple they too
are surprisingly friendly in return the
company that fiercely stands for human
rights lgbt issues privacy etc and
routinely opposes agencies like the fbi
to limit government overreach in the
west is overwhelmingly cooperative in
china apple handed over the operation of
its icloud servers to a chinese
state-owned firm by the name of guijo
cloud big data industry development
recently and moved its encryption keys
to china as well which gives the
government at least indirect access to
the most sensitive data of chinese apple
customers like their contacts
communications photos etc similarly
apple quite obediently follows
censorship requests on its app store
taking down tens of thousands of
sensitive apps on the mainland and even
a few in hong kong during the protests a
recent investigation by the information
also claims that apple specifically
agreed to spend 275
billion dollars in the country over five
years across things like investments
business deals and worker training which
i have calculated to be about 26 billion
dollars more than the entire chinese
revenue of the company over 5 years and
another recent piece claims that apple
even made backroom deals to move as much
of their manufacturing supply chain over
to chinese suppliers as possible with
taiwanese foxconn apple's long-standing
manufacturing partner apparently being
traded for chinese rival locks share
over time and many others as well these
last two reports are very recent so the
exact details are a little bit hard to
pin down but the general message of them
certainly seems to line up with what
we're seeing on the surface the
overwhelming story of the last few years
has been a growing number of electronics
companies moving their manufacturing out
of china due to both the increased
political tensions and rising labor
costs with samsung for example moving
their entire phone pc and tv assembly
out of the country and over to places
like vietnam for example and even local
chinese brands moving much of their
production over to india for example as
a result of the makin india plan but
apple meanwhile has done quite the
opposite sure they have moved iphone
production for the indian market over to
india due to government pressure there
but that is a tiny portion of their
sales and meanwhile apple has only
increased their reliance on china even
more over time the main manufacturing
bases for apple all remain inside china
chinese luxury already took over
manufacturing airpods and is
increasingly getting iphone contracts
from rivals like foxconn wing tech
builds mac minis and apple tvs on behalf
of apple and apple is also swapping over
to buying more and more components from
chinese suppliers too even threatening
to swap samsung and lg for china's
display champion boe in the next
generation of iphones for oled panels
apple supply chain is increasingly all
in on china and it is very hard for me
to say from here how much of that
exactly is just a prudent business
decision versus
backroom deals but given the recent
reports it seems that more and more of
it is related at least partially to
backroom deals and it is not hard to
understand why apple and the chinese
government are so fond of each other
china is incredibly valuable to apple as
a market making up almost 20 of its
global revenues plus it is still one of
the only places in the world that can
meet the global manufacturing
requirements in scale quality and
flexibility for a company the size of
apple but at the same time apple is also
uniquely valuable to china not only does
the company create millions of jobs in
the country from manufacturing to sales
and as the recent reports indicate is
also spending heavily to do r d in the
country as well but apple is also by far
the most important client in the
electronics industry apple is the
largest customer by far of the world's
largest chip maker tsmc the world's
largest manufacturing company foxconn
the world's largest memory and display
maker samsung the world's largest camera
sensor maker sony and the list goes on
with many of these giants having their
fate tied to apple so closely their
share prices simply follow the latest
iphone sales figures apple's insane size
coupled with their high margin products
make it a king maker of the industry
with incredible downstream impacts on
supply chains that china desperately
wants to capture for itself besides that
apple exporting all of their finished
goods out of china for most of the world
gives the country a massive trade
surplus and for years the government has
also held the company up as a shining
example to show that hey they are super
fair if you play by the rules you can
totally make it in china look the most
iconic american tech company made it
here it's a great story so this amicable
relationship is what creates the
groundwork for apple in china it removes
all political barriers of course not
having political barriers is not enough
for success yet so let's move on to the
next factor which is consumer
preferences the latest figures i could
find show that the average selling price
of a phone in china is 310 us dollars
higher than in europe second only to the
us and also growing faster than any
other major region meaning chinese
consumers spend a disproportionately
high amount on their phones compared to
their income levels and this figure
being an average is even kind of
misleading instead of people across the
country all buying 300 mid-range phones
china really is actually more like two
markets combined into one where rural
populations tend to buy budget phones
and urbanites in big cities where
disposable income levels are way higher
almost exclusively by very expensive
flagships that second group consists of
hundreds of millions of people and is of
course a massive market for iphones i
couldn't find any good data on this big
split between the two markets but i can
tell you from my analog observations
that in the big top tier cities you
almost never find anyone who doesn't
have a new flagship even people you
wouldn't expect like street vendors or a
shop assistant maybe they very often
have the latest iphone or the latest
huawei flagship or something like that
this disproportionately high average
selling price is driven by a few factors
china is a mobile first market where the
pc never really established itself as a
crucial machine beyond office work so
people rely on their phones to do
everything and are therefore willing to
spend way more on it but besides that
too prestige and face are a massive
cultural factor leading to chinese
consumers really preferring fancy
branded products and gifting culture is
a huge component too i have personally
witnessed a surprising amount of friends
and colleagues by phones and maybe even
tablets as gifts very often adult
children will buy their parents or their
grandparents a new phone or a new tablet
as a gift or a boss will buy their
employees a phone or a tablet for
example as a year-end bonus or something
of course gifts are supposed to be
prestigious so people buy them often
from luxurious brands and all of that
drives the average selling price in the
country up apple of course does well in
all markets with high effort selling
prices including the us japan the uk
western europe and even south korea to
some degree so it is unsurprising that
they would have a great market with
wealthy urban chinese consumers as well
of course we can't talk about the
chinese full market in the last few
years without also addressing the
elephant in the room huawei's sudden and
violent collapse falling from 40 plus
percent to 8
in just a few months that collapse
created room for all major smartphone
brands to flourish in the country but i
think apple got particularly lucky
huawei was especially strong in the
premium flagship category in china and
with them gone apple had most of the
massive flagship market that we've just
described for itself other competitors
have of course jumped headfirst into
improving their flagship offerings with
xiaomi releasing a gajillion flagships
last year oppo releasing defined n and
pushing the oneplus flagships harder
domestically and vivo doubling their
premium market share in china last year
but all of these players were previously
focusing mostly on low end and mid-range
phones in china and of course it takes
time for brands to establish themselves
as premium which leaves apple with a big
opportunity standing kind of alone on
the top for a while and finally the
major advantage that apple had in the
country was that of an ecosystem see
china of course blocks google services
on android phones meaning that android
filemakers each have to create their
entire software ecosystem stem cells
just for china app stores email clients
virtual assistants cloud storage you
name it this has historically been one
of the toughest things for foreign
android filemakers to do well who both
have very little software expertise as
they typically rely on google to do the
heavy lifting abroad and also have a
hard time making their stuff relevant to
consumers in china when they don't
really know the market well they
typically get out-competed by the local
players so foreign android brands are
typically at a disadvantage in china and
it is no wonder that companies like
xiaomi with their mobile internet
business model came out of this market
specifically but it also means that
apple is kind of at an advantage here
unlike in the rest of the world where
they compete against a unified google
for services in china apple competes
against a messy hodgepodge of home-grown
services made by the phone companies and
they are the only ones that can more or
less just drop their global services
portfolio into the country and have it
work they can leverage their global
apple tv catalog apple health icloud the
app store etc always just minor tweaks
all of which they're building with a
global budget and they're the only ones
that can offer chinese consumers a
global experience that means their
software and services are often both
better and cheaper to make than that of
other companies who have to split their
markets into two so those are the
country specific advantages apple has
and it's not hard to see why they would
help them stand out from the crowd
especially when apple of course is
already an incredibly competent company
to begin with when you combine
attractive products and incredibly
successful retail business and perhaps
the world's most valuable brand with
apple's china strength it makes sense
that they would do really well in their
country now believe it or not 2021 is
not actually the first time apple
managed to reach the number one spot in
china you might not remember this but it
happened once before in 2015 and if
you'd like to hear more about that story
i've made a whole bonus video explaining
just that that you can watch exclusively
over at nebula beside this specific one
nebula is also host to four other bonus
videos that i've made for previous
videos the entire first season of my
nebula original series technorama that
we have just wrapped up more nebula
originals from a host of other great
creators ad-free access and more the
platform is creator-owned and controlled
it lets us experiment with new topics
without tempting the youtube algorithm
and it lets you get more content from
the creators that you love the most you
can get both nebula and curiosity stream
in a bundle for just 15 for an entire
year which is about as much as other
streaming services cost in a month and
curiosity stream is of course the
premier place on the internet to watch
professionally produced documentaries i
have just finished this one which was a
fascinating look at how the world's
first published computer program and a
plan for a computer made of cogs and
wheels was born in 1843 by countess ada
lovelace i think my audience would enjoy
watching it quite a bit and curiosity
stream is full of other great
documentaries spending history nature
science and more get access to both
services with the link in the
description don't forget to watch the
bonus video and i'll see you in the next
one
[Music]
you