C is for Compromise
A common view is that US tech companies tend not to do very well in China, especially in the consumer market (‘2C市场’) . To be sure, for companies that deal exclusively in information/bits (e.g. Google, Facebook), the Great Firewall is probably the overriding explanation. There are also significant protectionist impulses at each level of the Chinese state too.[1]
However, there is arguably a fairer playing field for companies whose services involve atoms and it is a widely shared sentiment among Chinese tech/VC circles that US companies’ lackluster performance is due to out-execution by their Chinese competitors. A classic example is eBay vs Alibaba in the latter’s early years. (A counter-example is probably Uber, whose aggressive execution earned it a sizable stake in Didi despite its eventual withdrawal from the Chinese market.)
The purpose of this post is to briefly discuss US tech companies that have a significant presence in China: Microsoft, Amazon, and particularly with an emphasis on Apple.
Two Titans from Seattle
Microsoft comes to mind, along with Bill Gates’ remarkable quote from 2006:
“Although about 3 million computers get sold every year in China, people don't pay for the software. Someday they will, though,” Gates told an audience at the University of Washington. “And as long as they're going to steal [software], we want them to steal ours. They'll get sort of addicted, and then we'll somehow figure out how to collect sometime in the next decade.”
And he would have been right too, if Microsoft had not missed mobile. (Less facetiously, its Office suite remains widely used in China.) Microsoft does have consumer offerings in China (Bing, Surface etc.), but in line with its broader shift, Microsoft is better understood as a decidedly cross-platform enterprise software company.[2]
Amazon’s Kindle line of business has also done relatively well (though it is now winding down its core marketplace/e-commerce business in China, much to the chagrin of Chinese foreign-books collectors). I was struck by how frequently I see Kindles on the Beijing metro - though I wonder how much ebook content is actually purchased from Amazon, as opposed to merely using Kindle as a vessel for reading digital content downloaded elsewhere (*cough* piracy *cough*). As an aside, informally, I understand that AWS China, while not formally prohibited, faces a great deal of protectionist obstacles typical of US tech companies dealing in bits.
But the king of US consumer tech in China is most certainly Apple, the subject of the remainder this post, with an emphasis on the measures Apple has taken to succeed in the Chinese market.
An Apple a Day
Apple’s business model — premium hardware differentiated by software — allows it to succeed in the Chinese consumer market to a far larger extent than is possible for other tech companies. To quote Ben Thompson: “[S]ervices can be blocked, and software can be pirated, but Apple devices can only be bought and sold as an integrated unit, with a healthy profit margin of course.”
Its success in the Chinese market is undisputed. It derives ~20% of its revenue is from the Greater China region, the second largest after its US market. iPhone users in China (like those everywhere else), while a minority (~10% market share of the vast Chinese smartphone market, but certainly much higher in first-tier Chinese cities), dominate in terms of willingness to pay for apps and services, obliging developers to come onto the platform and allowing Apple to extract rent through ‘services’ like the 30% App Store tax and iCloud.[3]
I highly recommend Ben Thompson’s analyses of Apple and China (links: 1, 2, 3), which gives a good overview of:
Why iPhone users in China are less locked in than in other markets. (The short answer is: WeChat.)[4]
iPhone’s brand as a status symbol means demand by Chinese consumers is far more sensitive to changes in the iPhone’s industrial design. (NB Apple’s products are significantly more expensive in China compared to other geographies.)
Apple’s vulnerabilities in the still-looming US-China trade war. (Re: supply chain, this is a point that I have always wanted to learn more. I vaguely remember reading that Apple manages its Chinese supply chain in a manner that minimizes trust in its partners and maximizes protection of the security/IP of its products.)
Apple has made its fair share of compromises to maintain its access to the Chinese market. The following are relatively well-known:
Taking down VPN apps from its China mainland App Stores.[5] It is still possible (though not trivial) to switch App Stores, but the added friction is the point. Something that confuses me is that apps that are blocked by the Great Firewall are typically still available within the Mainland Chinese app stores (e.g. Instagram, WhatsApp etc.). I wonder if this is just a natural consequence of regulatory neglect (‘the CAC ordered us to take down those VPN apps, but not these apps’), or if there is a more sophisticated strategy here to lessen the motivation of Chinese users to switch App Stores when they are overseas.
Complying with data localization requirements imposed by Chinese cybersecurity laws. Most publicly, its Chinese iCloud service has to be provided through Guizhou-Cloud Big Data (GCBD), a division of China Telecom, a state-owned telco. (Impressionistically, Chinese netizens are very aware of the fact that their iCloud data is now stored by and hence accessible to 云上贵州, and by extension the government.) This probably explains why iMessage is the only end-to-end encryption messaging service that works in China without VPN (another saving grace is there are virtually no Chinese users who use iMessage regularly).
Other (perhaps lesser known) measures to cater to the Chinese market include:
Offering exclusive dual SIM models of iPhones in Greater China. To be honest, I don’t really understand the value proposition of dual SIM in China. Unlike in some countries where telcos are not truly interoperable (e.g. users are charged more for calling someone from another network), state-owned telcos in China do not have such restrictions and, indeed, are trending towards removing such restrictions. (Data usage used to be separated into ‘national’ and ‘regional’ allowances, so that ‘roaming’ costs might be on imposed on, say, using a Beijing SIM card in Shanghai, until Premier Li Keqiang mandated its removal and lower telco fees in general.)[6]
iPhones purchased in Mainland China are incapable of FaceTime Audio (FaceTime Video works fine though), as I discovered firsthand. The best explanation I found on the interwebs was that this is due to pressure by Chinese telcos, who already see WeChat (which offers voice and video calls) reducing its users reliance on their voice calls and SMS services. (I briefly considered that FaceTime’s end-to-end encryption might be a factor too, but that (1) FaceTime Video is usable; and (2) like iMessage, basically no one uses FaceTime in China, militates against control over information flow as a rationale.)
Downplaying its (PRODUCT)RED branding in China when marketing red iPhones.
I’m not sure if I have missed other more/equally significant measures and would be pleased if readers could point them out. As an aside, taking points 1 and 2 together, this means purchasing an iPhone in Hong Kong is an exceptional deal: you enjoy the threefold benefits of low taxes, dual SIM, and a functional FaceTime Audio.
Others Companies?
The discussion above mostly focuses on consumer tech companies. In my brief (and unrepresentative) encounters at Chinese companies, all seem to use Atlassian products (always Confluence, sometimes Jira). Admittedly, this is an area where I know much less but I intend to write another post specifically on the enterprise software market in China at some point, which is arguably the next trend (风口) in the Chinese tech space, as the consumer market has seemingly become saturated.
Currently, my half-baked one-line take is: Chinese companies exhibit a tendency to build rather than to buy enterprise software, which is the result of distrust in placing corporate data in the hands of another company and the cause of significant workplace inefficiency. Stay tuned.
P.S. I guess that’s technically my first post. I welcome any comments and suggestions!
[1] An interesting aside: I understand that there is (was?) a great deal of intra-China protectionism at the provincial, city, and sometimes even district level, at least in the early years of reform and opening (改革开放). So a technically private company headquartered in, say, Nanshan District of Shenzhen, might receive a great deal of state support from their local officials (taxes, office space, etc.) but conversely, when expanding to other cities/provinces, might actually face significant protectionist hurdles from those local officials seeking to support their own companies. This explains (1) why it is so difficult to cleanly classify a Chinese company as public/private (see the current Huawei fiasco); (2) the Chinese economy could develop despite not having a ‘night-watchman state’ that enforces contractual and property rights impartially - basically, local governments and companies ‘in their jurisdiction’ share skin in the game (‘利益绑定’?). I am no longer certain how much this explanation still applies today, where many industries are already genuinely national in scope.
[2] Microsoft is somewhat known for coping (?) with the realities of operating in China. Not only does it run the last non-Chinese search engine still accessible without scaling the Firewall (cf. the blowback Google received for Project Dragonfly), its Microsoft Research Asia is highly reputable and its alumni — Lee Kai-fu and Lu Qi —went on to shape the Chinese tech landscape.
[3] An app developer for a camera filter app told me that the ratio of revenue from iOS users vs Android users is roughly 10:1, notwithstanding that iOS users are a minority.
[4] As a WeChat user, this also explains why WeChat no longer provides cloud backup, despite this being obviously good for consumers. If I am not wrong, iOS requires that backups be made to iCloud, which would diminish the cross-platform nature of WeChat. So as users, we are stuck with having to backup onto our PCs, which rarely works as intended. (Open question: does the iPhone Backup on iCloud contains WeChat data anyway? So while I cannot backup WeChat messages to iCloud directly, I notice that WeChat takes up a disproportionate part of my phone’s ‘Documents & Data’ Backup - 8GB out of 11GB .)
[5] The vacuum left by these apps has been filled by other VPN apps with similar names that somehow remain on the App Store. A Chinese friend once showed me such an app, which is (1) free; (2) requires the user to trust its enterprise app certificate. Either alone would already be very dodgy and the potential mischief enabled by the latter was brought into stark relief by Apple’s recent kerfuffle with Facebook (and Google). There are rumors that free VPN apps are really run by the Chinese government and (I’m speculating) there is probably a scoop to be written by a sufficiently brave investigative journalist on how Apple’s enterprise app certificate program is abused by Chinese app developers.
[6] Given that the vibrant Chinese consumer Internet sector is built on the infrastructure laid down by the state-controlled telecommunications sector (which often has to build base stations even in rural regions where it is unprofitable to do so; cf. the perennial problem of high-speed broadband access in rural America), there is a view that the former is effectively indirectly subsidized by the state. Huawei probably owes its rise to become a frontrunner in 5G in part to such subsidies. Depending on your commitments, you could construe this as either a misallocation of resources or a strength of Chinese model of state capitalism.