Apple unlikely to face backlash from China over U.S. Huawei chip rule

People wearing face masks walk past an Apple store in Beijing on March 17, 2020 in Beijing, China.

Fred Lee | Getty Images

Apple is unlikely to face a reaction from the Chinese government over a new U.S. rule designed to target Huawei, experts told CNBC, despite threats from state-backed media.

The iPhone maker maintains good relations with Beijing and, indirectly through its industrial partners, employs hundreds of thousands of workers in the world’s second largest economy, factors that could deter China from taking action against the company.

On Friday, the United States decided to cut the supply of chips to Huawei with a rule that requires foreign companies using US software or equipment to make chips to sell to the Chinese giant, to obtain a license. It will hit TSMC of Taiwan, Huawei’s main supplier of chips, and it could be a major blow to the network equipment manufacturer, experts told CNBC.

In response, China is ready to take “countermeasures,” according to the state-backed Global Times, citing a “source close to the Chinese government.”

The publication, which is often considered to be close to the Chinese Communist Party, said that these measures could include putting certain companies on a so-called “list of unreliable entities”. We do not know what this list implies because it was not published. But it was something that China launched last year after Huawei was put on an American blacklist known as the entity list.

Other measures could include “imposing restrictions or launching investigations into US companies like Qualcomm, Cisco and Apple in accordance with Chinese laws and regulations such as cybersecurity review measures and anti-monopoly law” said the Global Times.

Apple and Cisco declined to comment. Qualcomm was not immediately available for comment when contacted by CNBC.

Risks to the supply chain and jobs in China

The iPhone maker is one of the few U.S. tech companies to have had success in China in recent years, with sales in the Greater China region accounting for about 16% of sales in the March quarter.

But China is not only critical for income. It is also where most iPhones are assembled by its manufacturing partner Foxconn and the country is a vital part of Apple’s supply chain. Foxconn employs hundreds of thousands of people in China.

While moving production out of China is not an easy task, U.S. tech companies, including Apple, are considering other countries like India and Vietnam. Last year, Apple was apparently looking to launch a trial for production of its AirPods in Vietnam and asked suppliers to consider shifting 15% to 30% of production from China to Southeast Asia. .

China may not want to risk accelerating this decision.

“China is already facing headwinds as companies like Apple seek to diversify their manufacturing base,” Neil Shah, research director at Counterpoint Research, told CNBC. “So it could be a double blow if China targets Apple in China and indirectly Foxconn, it would further accelerate manufacturing outside of China.”

Meanwhile, Apple has 42 stores in China and several partners who distribute its product. On top of that, Apple said last year that it has 2.5 million developers on its platform. Since the launch of the App Store in China in 2010, developers have earned more than 200 billion yuan (28.1 billion US dollars).

“Apple has a huge direct and indirect contribution to the Chinese economy, so Beijing will have to think twice before targeting Apple,” said Shah.

Relation with Beijing

Apple has also established good relations with the authorities in Beijing, according to Paul Triolo, head of geotechnical practice for the Eurasia group.

“We don’t think Beijing will sue Apple. There could be brand boycott efforts, but no major moves against leading companies like Apple who have very good relationships with local governments and Beijing,” said Triolo at CNBC.

It is not the first time that Apple has been caught in the middle of a battle between Washington and Huawei. Last year, after Huawei was put on the list of U.S. entities in May, some social media citizens in China joined the company and said they would no longer buy Apple products. But this reaction from social media didn’t seem to have a huge effect on the business.

Indeed, Apple must be very careful with its operation in China, where censorship is heavy. Authorities often ask businesses to comply with requests to remove content that the government does not like.

Last year, Apple deleted a mapping app from its App Store that was used by anti-government protesters in Hong Kong after Chinese state media published an article titled: “Does Apple Help the Hong Kong rioters to engage in more violence? ” The protest movement in Hong Kong aims to repel China’s growing perceived influence on the special administrative region.

Apple said at the time that it had deleted the mapping application because it “was used in a way that endangers law enforcement and Hong Kong residents” and was “used to target and ambush the police. “

And in 2017, the company deleted several Virtual Private Network (VPN) apps from its Chinese App Store. VPNs are required to access blocked websites in China such as Google and Facebook.

The company has been criticized in the past for some of these actions. Last year, a group of bipartisan American lawmakers wrote an open letter expressing concern about Apple’s removal of the Hong Kong app.

So what will China do?

Instead of going after Apple to a large extent, Beijing could target other companies.

“Based on what the Chinese authorities have said, there will likely be at least investigations into American companies for anti-monopoly behavior and for complying with the provisions of cybersecurity law. But that gives Beijing a lot of flexibility in terms of responding to Chinese social media activists demanding a firm response, but not further poisoning the business environment in China for foreign companies, especially American ones, “said Triolo.

“The companies most likely to be included in the list of unreliable and targeted entities for certain actions are those that are already subject to certain market access restrictions and that Beijing considers symbolic enough to show strong anger at this decision, without generating a major response from the company. community, continuation of the supply chain movement outside of China, etc. ”

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