How Apple Won In China

  • Devices give much more revenue and profit to the brand than to the OEM.
  • Apple has even managed to get Chinese to pay up for their own chips.
  • It’s all about the software, and software is all about design.
Apple wins in China

Intellectual property. It’s not real. It’s a government allowance of a patent or a copyright. It’s not land, it’s not a building. It disappears. Yet over the last decade, Apple (NASDAQ:AAPL) has used this to absolutely kill China’s tech sector, making it subservient to the US.

It wasn’t supposed to be this way. There was an assumption, a decade ago, that Chinese companies could easily copy American designs, then undercut the U.S. on costs, on prices, and in global tech markets. This was behind the rise of companies like Lenovo (OTC:LNVGY), which bought the PC and then server operations of IBM (NYSE:IBM).

What China underestimated was the power of marketing, of branding, and of Apple’s ability to convince consumers that its product deserved an enormous premium because of the intellectual property in Apple-controlled software. Software, marketing, and control of the brand have made the iPhone, in particular, among the most sought-after consumer goods in the entire Chinese market.

The Wintel Way is Gone

In the old Wintel (Windows-Intel) world, even if Chinese OEMs depended upon Intel (NASDAQ:INTC)  chips and Microsoft (NASDAQ:MSFT) software for the heart of their designs, they still had a lot of control over, and a stake in, the finished product. Companies like MSI and Acer, based in Taiwan, put their own names on Chinese-made gear, and were able to compete as brands in global markets thanks to the Wintel endorsement.

This is not true in the Apple world. Apple controls the branding, the advertising, and the marketing of its products. Apple has complete vertical integration on the iPhone. Thus a company like Hon Hai Precision Instrument, known to Americans as Foxconn, is almost completely dependent on Apple. Its margins are wafer-thin, it lacks capital to do anything but serve Apple, and it takes the hit for all the labor or environmental problems inherent in high-volume manufacturing. What Apple sees is finished product that it can sell at enormous mark-ups leading to high profits, often at its own stores, even in China itself.

This allows Apple to bring $1 in every $4 of sales to its bottom line, and to grow that top line toward $200 billion, while its “partners” just scrape by.

Apple’s success, moreover, has destroyed the old Wintel ecosystem and forced those companies to seek an emulation of its model in order to compete. Thus Microsoft has its Surface and now Intel itself is releasing consumer products under its own brand name, taking on marketing and channel risks it never took on before.

Here is Where Google Lags and Why

There is risk in a manufacturer taking on the risks of running a sales channel, of advertising a new product, and of trying to build a brand. This is why Intel and Microsoft never took those chores on “back in the day” and why Google (NASDAQ:GOOGL)  is still reluctant to do so. But this is where more than half the money in technology has always been made – in the channel.

By taking control of this channel – everything from design to the in-store experience, Apple has shown how U.S. companies can dominate their Chinese “partners.” It is not only the biggest tech story of the last decade, but one of the biggest business and economic policy stories as well.

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