The Cult of Apple in China

Monday, Jul. 02, 2012
By Hannah Beech / Chengdu
The eggs started smashing against the Apple Store windows just before dawn. Most of the hundreds of people who swarmed the swank plaza adjacent to the glowing, glass-cube outlet had huddled all night long in Beijing's frigid January temperatures. But these weren't early adopters desperate for the newly released iPhone 4S. Nor were they citizens outraged at the labor conditions inside the Chinese factories that churn out Apple gadgets. Instead, most were rural migrants who had been paid about $15 each to purchase iPhones and then hand them over to scalpers who would sell them at inflated prices. (Each buyer was limited to two iPhones per day.) As light began streaking across the morning sky, tempers frayed. Some in the cold, tired crowd were desperate for cash to buy themselves another few days in the big city or, at the very least, a steaming bun for breakfast. A few scuffled with security guards. Eventually, an Apple employee emerged from the store and told the hordes of people that it would remain closed for fear of more violence. Fists flew. So did the eggs--duck and chicken alike. "It makes me really angry that they canceled the sale," said a thick-necked scalper with a shaved head who had loitered in front of the Apple Store for 24 hours and paid a couple hundred migrants to queue for him. "How am I supposed to make money?"
The Chinese scalper may have lost out, but Apple hasn't. In its latest quarterly earnings statement, released in April, the company reported a staggering $39.2 billion in revenue. It was a new record, and the surge was based in large part on a fivefold increase in iPhone sales in China, Taiwan and Hong Kong over the past year. (By contrast, iPhone sales dipped in the U.S. from January to March compared with the previous quarter.) Revenue for Greater China, as this market is called, tripled over the same period to $7.9 billion--about 20% of global sales, compared with just 2% in 2009. A market that three years ago was an afterthought for Apple could soon overtake the U.S. market, the company's longtime consumer base. Credit Suisse estimates that China alone could generate almost $30 billion in sales for Apple by 2015. "Apple fans in China have an almost religious passion," says Sun Chonghui, an analyst with Shanghai-based iResearch Consulting Group. "It's hard to analyze this phenomenon rationally." Sure enough, in April, Chinese state media reported breathlessly about a teenager from eastern China who sold his kidney for about $3,500 to buy an iPad and an iPhone.
Apple symbolizes the best of American Big Business--its innovative drive, its stylish flair, its advertising acumen. The company has also succeeded because of its deep and complex relationship with a country halfway around the world, where nearly all its gadgets are assembled. Labor violations within the tech firm's China supply chain--Apple has no factories of its own and instead contracts assembly out to a vast supplier network--have grabbed headlines in recent months.
But the supply-side problems are only part of the Apple story. The American company is thriving in China, even as other Western tech firms struggle with local competition and communications restrictions imposed by the authoritarian state. Apple products now serve as the ultimate totem of upward mobility in a country with a fast-growing middle class. "There's tremendous opportunity for companies that understand China, and we are doing everything we can to understand it," said Timothy Cook, Apple's chief executive, during an April earnings conference call. "It was an incredible quarter [for Apple] in China. It is mind-boggling that we could do this well."
Apple's relationship with the People's Republic embodies some of the global economy's brightest opportunities but also its thorniest dilemmas. An American tech giant must decide how much to adapt its practices in a faraway land. Should Apple represent the best of the West in the Middle Kingdom, or must it conform to the less salubrious way China Inc. operates? From China's side, how much longer will an increasingly nationalistic government allow foreign companies like Apple to profit so handsomely on its shores? Caught in the middle are 1.3 billion Chinese whose toil in factories and taste for luxury products will dictate the future of the world's marketplace.
American Icon
The cult of Apple is booming in china. An iPhone, the most popular Apple product by far, isn't just a cool gadget; it's a signifier of success. "Apple in China is a vanity product, not so much about functionality," says Alan Guo, chairman of LightInTheBox.com a China-based online retailer. "Because money was made so fast in China, rich people aren't very secure, so they want an easy status symbol to show they've made it." The number of potential Apple customers is growing each day. "China has an enormous number of people moving into higher-income groups," noted Cook in April.
So far, much of Apple's growth in China has been a lesson in how to prosper without really trying. Apple has only six stores in Greater China; four of those are its most profitable stores worldwide. The pervasive Apple billboards and marketing campaigns in the U.S. have no Chinese analogue. The iPhone was introduced in China in 2009, two years after it went on sale in the U.S. The latest iPad model, released in March, is still not available in mainland China--even though it is made in the southwestern city of Chengdu, where Apple's biggest supplier, Foxconn, has a major base. Until last year, the company's App Store didn't accept Chinese yuan. Apple has yet to sign a full agreement with the world's largest cell-phone carrier, China Mobile, which boasts 672 million subscribers, to support the iPhone.
Other Western companies are trying to increase market share in China by catering to local customers' preferences, whether by introducing skin-whitening creams for young women who long for pale complexions or by expanding the backseat legroom in the sedans that are often driven by chauffeurs. But Apple is selling the unique, or at least uniquely American, appeal of its products in China. The company's emphasis on endless iPhone personalization--download this app, snap that photo, make your phone an extension of yourself--works. "People in China buy Apple because it symbolizes an individualistic Western lifestyle," says Yang Xi, a 29-year-old in Beijing who owns two Apple laptops, seven different iPods, an iPhone and an iPad. "In China, there are so many people. We like the idea of something that makes you special, that you can make your own."
Still, Apple is beginning to recognize the power of the localized pitch. As popular as Apple is, cheaper smart-phone brands like Samsung sell better in China. Local Apple clones that rip off iPhone styling have also captured a chunk of the market. Part of this is simply a matter of price. In a country where an urban Chinese person's annual income averages less than $3,500, an iPhone is a luxury product that costs more to buy in China than in the U.S. To compete, Apple in mid-June at long last unveiled targeted features to woo Chinese consumers. Updated software makes it easier to use Chinese Web offerings like Weibo, a microblogging service; video site Youku; and search engine Baidu. (Twitter, YouTube and normal Google searches are banned in China.) In the fall, Siri, Apple's artificial-intelligence software, will begin speaking Mandarin and Cantonese. Apple has also received local approval to open two more stores in Chinese cities.
These Apple stores will face fierce competition from unauthorized outlets, which have proliferated across the country and sell products for up to 50% more than officially sanctioned prices. Fake Apple stores rip off the detailing of real ones, from the giant, glowing Apple icons and minimalist wooden furniture to the signature blue T-shirts worn by staff. Last year, authorities in one southwestern city, Kunming, closed 22 stores that were illegally using the Apple logo, an icon so alluring in China that it sometimes is used on products beyond what the American company has dreamed up. Knockoffs of the iPhone 5 (some marketed as "hiPhone 5") are widely available in Chinese computer malls, even though the iPhone 5 does not yet exist. In February, police in the central city of Wuhan seized, for safety reasons, nearly 700 gas stoves that mysteriously had been branded with iPhone logos.
Coming Clean
Apple will also have to win over the Chinese by convincing them that the company has the best interests of the People's Republic at heart. The vast majority of Chinese aren't up in arms about labor conditions at Apple's supplier factories. A cluster of suicides by Foxconn workers a couple of years ago elicited much more coverage in the West than in China. (Another Foxconn employee jumped to his death in June.)
China, however, is no longer a Wild East where foreign companies can act with impunity. Yes, the pervasiveness of corruption in China can make it difficult for American firms to operate without violating the U.S.'s Foreign Corrupt Practices Act. But multinationals, whose labor or environmental records may be less egregious than those of domestic manufacturers, are becoming riper targets for sanctions by the Chinese government. In recent months, American companies like Walmart have been slapped by Beijing for allegedly violating food safety standards. In March, when Tim Cook met with China's presumptive Premier, Li Keqiang, the Apple CEO enjoyed a reception akin to that of a visiting head of state. But Cook also got a lecture from the Chinese leader on how Apple, like other international firms operating in China, needed to "pay more attention to caring for workers and share development opportunities with the Chinese side," according to state news agency Xinhua. China's message was clear: We're rolling out the red carpet, but mind your manners.
Apple is changing in China--and the shift in attitude has to do with the new man in charge. Cook took over last year from Steve Jobs, the visionary Apple CEO who died of cancer in October. Under Jobs' leadership, the company embraced a culture of corporate secrecy that protected its technological innovations. The element of surprise ensured that each product launch would come with buzz--and a stock boost. Yet the obsession with privacy also made its China operations frustratingly opaque. For years, Apple refused to make its supply network public, a lack of transparency that gave the company a convenient way to dissociate itself from violations committed by its contract manufacturers in China. Jobs never visited China on official business.
By contrast, Cook, when he served as the company's chief operating officer, led Apple's efforts to streamline its operations and maximize profits by sending most of its supply chain overseas. He toured China to inspect the plants where labor violations were occurring. This year, when he made his first trip to China as Apple's CEO, Cook copped to the company's supply-chain problems. In January, Apple finally released a list of its leading suppliers. In its 2012 progress report, the company admitted that more than 60% of 229 audited suppliers failed to comply with a 60-hour maximum workweek and said 112 suppliers failed to deal properly with hazardous chemicals. Cook then authorized an independent audit of the company's Chinese suppliers, making Apple the first electronics firm to undergo such an investigation. The day after he toured a Foxconn plant that makes iPhones in central China, the audit was released, detailing wage, overtime and safety violations throughout Apple's China network. In response, Foxconn has promised to boost salaries and cut back hours without penalizing employees. Apple says it will share some of the costs to improve working conditions.
Not everything is transparent. Apple's catalog of suppliers doesn't include all the companies that manufacture components for the main suppliers. And even though Apple acknowledged in its annual progress report that violations occurred in its supply chain, the company did not specify which manufacturers were guilty of those misdeeds. In May the Hong Kong--based labor watchdog Students and Scholars Against Corporate Misbehavior (SACOM) issued a report alleging that abuses like long hours and reliance on forced internships continued at Foxconn factories making Apple products. (In monthly updates, Apple now tracks working hours in China and says compliance has increased to around 90%.) "The kind of people who like Apple products tend to think of themselves as socially responsible," says Debby Chan, SACOM's project officer, "but their favorite company is failing them."
Apple declined to talk to TIME on the record about the specifics of its China operations. But as the world's leading electronics brand, Apple will set a precedent with its conduct in China for other foreign firms and even local manufacturers who need a business model to follow. "Foreign-invested companies have made great contributions to China's economic development," said Labor Minister Yin Weimin in March. "Of course, we have also noticed that problems exist at some companies, for example excessive overtime, too-low pay for some workers and a lack of concern for people." As a global arbiter of cool, Apple may have a greater responsibility to bear. "Because Apple is so big and respected, if the company were to set the bar high in China, hundreds of other companies would follow in their path," says Ma Jun, a respected local environmentalist.
A Chinese Dream
As dusk falls, the exodus begins. Thousands of workers have just finished their shift at Foxconn's Chengdu plant. Though they have spent at least eight hours on the job, an energetic thrum courses through the waves of laborers emerging from the gates. As they skip toward the bus that will take them to their cramped dormitories, gaggles of young women link arms and apply lipstick. Others tap messages into cell phones, arranging dinner dates or karaoke sessions. I spot a fair number of Foxconn couples. Given the hours they work, it's almost impossible for them to meet anyone outside the factory.
Foxconn, a Taiwanese-owned partsmaker, employs about 1 million people in China. In 2010 it transformed a swathe of fallow land and a complex of empty buildings in Chengdu into its iPad-manufacturing nerve center. Some parts of the $2 billion Foxconn compound were constructed in just a few months. In May 2011, four workers were killed when a buildup of aluminum dust exploded in a poorly ventilated room. "How can you build something in such a short time and not expect there to be problems?" asks SACOM's Chan. (The independent audit of Apple earlier this year by the Fair Labor Association found that about 54% of the 16,648 or so workers in Chengdu that it surveyed had witnessed or been involved in an accident.) Foxconn says the criticism is not totally fair. "It's understandable why Foxconn is a ready-made target," says Louis Woo, a special assistant to Foxconn CEO Terry Gou. "Since we are the largest consumer-electronics maker in the world and probably the largest private employer in China, this position carries a certain social responsibility. Foxconn is not perfect--there is no such thing as a perfect factory--but we aspire to be a better company every day."
The sad truth is that Foxconn's plants are a better work environment than many other Chinese factories. Some of the workers I spoke with said they took a job at the company's Chengdu base because it beat working in a small sweatshop with fly-by-night owners. The tales that formed the crux of American dramatist Mike Daisey's discredited monologue--meeting a 14-year-old Foxconn employee, watching an assembly-line worker with a maimed hand caress an iPad--turned out to be figments of his imagination, although media exposs in recent months have documented labor abuses at Foxconn. None of the workers I spoke to were shy in their criticisms of their workplace. There were complaints about Foxconn's reliance on interns, some of whom were ordered by their vocational institutes into factory work even though they were studying unrelated majors like tourism. Long hours and boredom were the most common grievances. This is, after all, a factory job. Others said salary deductions cut into their take-home pay far more than they had expected. A few complained about acrid chemical smells that triggered headaches, as well as failing eyesight and cramped muscles from standing for hours at a time.
Yet Foxconn keeps signing on new workers, even though many other companies complain of labor shortages as Chinese youth increasingly eschew factory work. (Apple runs educational programs for workers in supplier factories.) Earlier this year, Foxconn announced that it would be adding 100,000 laborers to its payroll in Zhengzhou, where Cook visited in March. Starting salaries of $260 a month were advertised. The line of job seekers reached half a mile. Even after all the criticism of Foxconn--the suicides, the industrial accidents, the punishing hours--young Chinese still want a job making Apple devices. "Our challenge is that we have to turn away good workers," says Foxconn's Woo.
It is late in the evening, and Liang Li has finished her shift on the production line at Foxconn Chengdu. The 23-year-old strolls hand in hand with her boyfriend, also a Foxconn employee. The pair walk past hot-pot restaurants teeming with Foxconn workers and enter a fluorescent-lit store. Liang is excited. She is about to plunk down $430 for something she has coveted for months: an iPod Touch outfitted with a special box that allows it to work as a phone. (The phone adapter is not an official Apple device but a product of Chinese ingenuity.) The iPod Touch does not remind Li of long hours at the factory. Instead, the sleek Apple machine--designed in America, made in China--reflects what everyone in China and the U.S. dreams of: a better life.