Apple in China Case Study Analysis

Apple was facing the classical dilemma about how to seek a balance between the core values

and market opportunities. China represents huge opportunity for the company as the mobile market in

China is growing at rapid pace and Apple can’t leave it to its international competitors. On the other

hand the Chinese market is prevalent with – counterfeit products, leakages of intellectual property

rights, fake stores, and communist party regime’s dictum regarding features in products and data

sharing.

The need for organizational change at Apple is driven by the market needs. These needs can be

explained through the analysis of nature and size of Chinese market and other macro factors.

Competition among existing players

 Apple is directly competing against Samsung in the global mobile market. The competition in the

mobile market can be explained in two spheres – competition between operating platforms IOS

and Android, and competition between handset makers. Apple is producing both while Samsung

is only focusing on handset while Android is provided by Google’s holding company Alphabet for

free to handset developers.

 The competition between Apple and Samsung is intense even though how both companies

approaching this competition are vastly different. Samsung is competing using the market share

strategy while Apple is competing using profitability strategy. Samsung is catering to each market

segment while Apple is just focused on the premium end of the segment.

 Implications of Apple not entering into Chinese market – Apple dominates US market. Samsung

is the biggest players in the fastest growing and biggest telecommunication market. By not

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 entering Chinese market, Apple will give easy opportunity to Samsung to generate revenue that

can enable it to innovate and close the technology gap. So it has to enter the Chinese market

both to protect US market and to generate revenue in the fastest growing and biggest mobile

market.

Bargaining power of buyers

 One of the reasons why 5C flopped in the Chinese market was – it didn’t meet the premium

brand expectations of the consumers. The consumer voted with their wallet – they preferred the

expensive version 5S rather than cheaper phone with compromised features such as low quality

camera.

 As Apple is an aspirational product which is considered as a status symbol or sign of success, the

buyers are willing to pay a premium for the brand.

Bargaining power of suppliers

 The bargaining power of the suppliers is very low as consumers buy the products based on

brands. Secondly the suppliers can’t drive up the prices because they don’t have intellectual

property rights vis a vis the companies such as Apple & Samsung.

 Secondly Apple demand is pull demand so intermediaries such as China Mobile, China Telecom,

and China Unicom has limited bargaining power. In fact these companies end up subsidizing

Apple’s products to increase their ARPU.

Threat of new entrants

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  The threat of local champions such as Huawei, Xiaomi, and Lenovo is more geared towards the

middle market and lower middle market. In this segment these players have driven out

profitability by competing both on price and features. According to industry analysts – even

though Apple market share in volume terms is close to 12-13%, its market share of profit is

higher than 85% in 2014 (Liam Tung, 2015).

Threat of substitutes & dangers to complimentary sales

 One of the critical reasons that Apple had to enter the Chinese market is that the sales of its

other products are also driven by the sales of iPhone. iPhone users are more likely to buy Mac,

iPod and other Apple ecosystem products. The strategic goal of being an integrated consumer

electronic ecosystem is highly dependent upon the penetration of hardware products such as

iPhone, Mac, and iPod.

 Apple negotiated almost 2-3 years with local telecom players for entering the Chinese market

while local players like Xiaomi innovated with its flash sales and entered the market directly

using e-commerce channel. This distribution strategy enabled Xiaomi to compete with other

players who are subsidized by the telecom players.

Big Strategic Shift – Moving from Factories in US to Contract Manufacturing

This big strategic shift happened because of two core reasons –

 Competing firms such as Samsung, HTC, Lenovo and other has created a manufacturing

ecosystem where complex supply chains can be managed in a relatively small region in East Asia.

 Secondly the lax labor norms, scale of engineering workforce, and the capabilities of players such

as Foxconn enabled Apple to contract manufacturing with relatively low risk.

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 Impact of the strategic shift to contract manufacturing

 It has enabled Apple to scale the business without incurring huge investments in the

manufacturing facilities.

 Secondly it has provided Apple easier access to the Chinese market. When it needed to make

products without the wifi features for Chinese market, it easily able to achieve it.

 It has enabled Apple to increase the profitability. Apple has steadily increased its prices in the

retail market while at the same time reduced its costs through contract manufacturing. This has

enabled Apple to have profits in range of 31 billion USD in 2014.

 It is spending just 3.5% of its total revenue of 233 billion USD, while companies such as Facebook

are spending 21% on R&D, and Google is spending 15% of its 66 billion USD revenue.

 It enabled Apple to respond to events faster than what it could have done by having factories in

United States. The example such as supervisors waking up staff in compound for 12 hours shifts

with basic food could only take place in developing markets.

Negative Impact of the Contract Manufacturing & Chinese Market Experience

 It exposed the company to intellectual property rights leakages especially in cases where both

Apple and Xiaomi products are produced by Foxconn. This may not have directly challenged the

position of Apple as a luxury brand but it has certainly enabled local players to get access to

technology and manufacture highly competitive middle range phones.

 Secondly the incidents of suicides of workers at Foxconn dented the overall brand of Apple in the

western markets where the consumers expected higher standards from the company. Apple

tried to white wash events through some peripheral initiatives but it can’t able to wash its hands

off regarding the working conditions prevalent at the contract manufacturers it is working with.

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  The Chinese market has little protections in terms of intellectual property rights and image

rights. By manufacturing products in China, Apple couldn’t able to stop the proliferation of

counterfeit and products manufactured in the same line in the local markets. More than 30 fake

stores had popped up in the country, that are either selling counterfeit products or Apple

products without any agreement with the company.

 Increased the dependence upon supplier generated innovations in both manufacturing

processes and product development. For example the glass technology of Apple is totally

dependent upon Samsung which is the world’s leading mobile screen glass manufacturer and

also the main competitor of the company.

Alternative Approaches to Tackle the Organizational Change Challenges

 Contract manufacturing to captive manufacturing – To reduce the technology leakages, product

designs and other intellectual property rights features, Apple can opt for captive manufacturing

where suppliers only manufacture Apple products. The present scale of the company should

enable it to demand it from its suppliers.

 Moving beyond the telecom firms based distribution network – Apple should strive to build an e-

commerce oriented distribution network to reduce its reliance on the telecom partners.

Secondly it will enable the buyers, who are living away from the major cities, to safely buy Apple

products directly from the company rather than succumbing to fake stores and counterfeit

products.

 Setting up independent audits and safe work environment standards by working with

international organizations. Apple should be the leader in promoting safe working environment

in the Chinese factories. It will not only help in protecting its brand but also help it in reducing

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 the competition. As the cost of manufacturing goes up, Apple with its higher margins can sustain

it but the local champions which are operating on very things margins will find it extremely

difficult to do so.

Recommendations to Manage Organizational Change

 Establishing a sense of urgency regarding protecting the brand – Counterfeit, leakages, and

suicide incidents are maligning the brand it should actively take steps to rectify them.

Secondly it should position itself in the local market that clearly differentiates it from other

players. One of the key areas could be – security and privacy, which the local players can’t

match because they are required to share information with communist regime. (Kotter,

1998)

 Forming a powerful coalition (Kotter, 1998) – This coalition should analyze the situation

holistically – contract manufacturing, supply chain necessities, market penetration

advantages and profitability requirements.

 Creating a vision and communicating the vision – Even though Chinese revenue is growing by

100% in the 4th quarter of 2014, it shouldn’t let Apple to discard its core values. The core

values of the company are – innovation and business with integrity. All the three activities –

offshoring of manufacturing, management of supply chain, and business into Chinese

markets should be consistent with these core values. At present the company is facing these

challenges because it sacrificed the core values in quest of faster growth.

 Empower others to act and create small wins – Apple should partner with international

agencies to develop better manufacturing and working conditions norms. Secondly it should

proactively work with partners to segregate its manufacturing from other competitors. In the

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 retail business it should enter the market directly through its own stores and e-commerce

operations. In a market where counterfeit are extremely common, direct interactions with

customers can provide small wins and be consistent with the overall culture of the

organization.

 Institutionalize change and building for future – By aligning the Chinese strategy with the

global strategy, Apple can institutionalize the global best practices in its Chinese business. It

will help it in creating a sustainable competitive advantage, increase the cost of doing

business for local players, and help it in managing the dynamic mobile market in China.

References

Kotter (1998) “Leading Change - Why Transformation Efforts Fail”, published by HBR publication in 1998.

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 Liam Tung (2015) "Apple takes 89 percent of all smartphone profits worldwide", retrieved from

https://www.zdnet.com/article/apple-takes-89-percent-of-all-smartphone-profits-

worldwide/#:~:text=With%20a%2020%20percent%20share,could%20spell%20trouble%20for

%20Google.

Michael Porter (2004) “Five Forces that shapes the Strategy”, re-published by HBR publication in 2004

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