Apple’s relationship with China has never been an easy one. Indeed, I wrote a piece a couple of years ago arguing that the company was in a no-win position in the country.

Apple’s only option of taking the moral high ground would be to pull out of the country altogether – as Google did for a time, after refusing to allow its search results to be censored by the government.

But Apple is in a very different position today than was Google in 2010. While Google had big ambitions within the country, it was not dependent on the market. Apple very much is. Not just because China is the largest smartphone market in the world – and as important to Apple as the whole of Europe – but because it is the iPhone maker’s key manufacturing base. Without China, it literally couldn’t make its products.

Things today are even worse…

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There’s the tariff mess. Apple is already absorbing the cost of tariffs on desktop Macs, AirPods, Watch and more, but virtually all the company’s products will be hit when the next round is applied in December.

Negotiations are ongoing, but they are not going well, as Reuters reports today.

Surprised and upset by the U.S. blacklisting of Chinese companies, China has lowered expectations for significant progress from this week’s trade talks with the United States, Chinese government officials told Reuters, even as President Donald Trump on Wednesday expressed fresh optimism […]

Without significant progress, Trump is set to hike the tariff rate on $250 billion worth of Chinese goods to 30% from 25% next Tuesday […]

Based on the current situation, there is a possibility that this week’s talks between the world’s two largest economies could end in a deadlock, according to a Chinese official briefed on preparations for the talks who spoke on condition of anonymity. Asked about the probability of reaching an agreement, the official said, “This is not an easy task. It requires a lot of preparation work and consensus on both sides.”

Right now, the best hope for an end to the trade war appears to be a distant one – in November of next year. Until then, the smart money is probably on things getting worse rather than better.

The tariff situation is the very definition of unstable. Trump started with a 10% threat, then increased it to 15%, then 25% and finally – for now – 30%. With major economic policy at the mercy of a tweet, and China ready to respond in kind for every move by the White House, there is simply no telling how bad things could get for Apple.

Apple’s relationship with China isn’t just about money

But it’s not just about money: it’s also about reputation.

Apple has always presented itself as the good guy. The company that does the right thing, even when it doesn’t make financial sense. And in many ways, it lives up to that image.

On accessibility, for example, Apple devotes huge resources to making its products usable by as many people as possible. That includes people with no vision, impaired motor skills, those only able to control devices by voice, and so on. It’s extremely unlikely all that work can be justified on a purely cost-benefit analysis, but Apple does it because the board considers it the right thing to do.

The same is true of Apple’s stance on the environment. The company has invested huge sums of money in ensuring that 100% of its global operations are powered by renewable energy. It is assisting its suppliers in doing the same. It is making massive investments in recycling. It carries out audits to ensure that raw materials are sourced responsibly, and so on.

But in China, it’s a very different story.

Back in 2017, the Chinese government asked Apple to remove the New York Times app from the Chinese App Store; Apple complied.

Later the same year, China insisted that Apple remove more than 400 VPN apps from the App Store; Apple did so.

Again in 2017, the Chinese Ministry of Public Security asked Apple to remove Skype; the Cupertino company again did as requested.

Yesterday, it removed access to the Quartz news app; and today we’ve learned that it has, with a second U-turn, banned a Hong Kong protest app.

Even more controversially, China introduced a new law in 2017 which required foreign companies to use Chinese companies to store user data. That meant Apple had to partner with a local company for the storage of iCloud data. Apple insists that data is encrypted and only it holds the keys, but there is understandable skepticism about this. And even if it’s true that Apple will require a court order before permitting Chinese law enforcement to access user data, that’s a mere formality in China.

For a company that claims to do the right thing, none of these things are a great look.

Laws and ‘requests’ aren’t so different in China

In some cases, Apple has had no choice but to comply. In the case of VPN apps, for example, the Chinese government made them illegal. Apple naturally has to comply with the laws of the land in each of the countries in which it operates.

That did not, however, stop people from criticizing the company for the move, because the public doesn’t necessarily see the difference between a clearly unreasonable legal requirement and a request.

The converse is also true. China might sometimes phrase these things as a polite request, but Apple will be left in no doubt what is expected of it. We saw that only yesterday when state-owned media effectively turned up on Apple’s doorstep with gentlemen in ill-fitting suits suggesting that cooperation would be in the best interests of the company’s health.

So China poses a triple threat to Apple

The risks of Apple’s relationship with China are thus threefold.

First, the escalating trade war between the US and China means that its operating margins or even operational plans could at any moment be further damaged by the latest 280-character message from a certain amber-hued person.

Second, China could, at the stroke of a pen, announce changes that hurt Apple’s sales in the country or impair its manufacturing operations. Just ask the NBA.

Third, even if neither of these things come to pass, the PR hit Apple is taking from being seen to surrender to unreasonable demands from a country with a poor record on human rights is only going to get worse. Sure, many customers won’t care – they just want the shiny new toys. But lots of companies make shiny toys, and a certain percentage of Apple’s demographic likes the brand in part, at least, because it thinks the company is a decent one.

Reputational damage is a very dangerous thing: just ask Activision Blizzard, which is coming under huge fire right now for actions it took against a player who supported the Hong Kong protests.

The decision to suspend Chung Ng Wai, a professional Hearthstone player in Hong Kong, for a year, while forcing him to forfeit a reported $10,000 in prize money, prompted a backlash in the United States […] Gamers posted angrily on social media and in forums, while politicians saw it as another troubling sign of China’s chilling clampdown on speech worldwide.

“Recognize what’s happening here. People who don’t live in #China must either self censor or face dismissal & suspensions,” Senator Marco Rubio, Republican of Florida, wrote on Twitter. “China using access to market as leverage to crush free speech globally.”

Senator Ron Wyden of Oregon, a Democrat, concurred, saying on Twitter that Activision Blizzard showed “it is willing to humiliate itself to please the Chinese Communist Party.”

Apple can’t act overnight. As we’ve noted before, moving production out of China would be a Herculean undertaking.

It’s no accident that much of Apple’s manufacturing happens in and around Shenzhen. First, the city is strategically-placed, serving as the gateway between mainland China and Hong Kong. It is one of the largest shipping centers in the world, with a massive container port.

Second, the Chinese government established Shenzhen as the first Special Economic Zone in the country. SEZs are designed to encourage enterprise through relaxed planning regulations and generous tax incentives – and, crucially, to facilitate foreign investment in local companies. It is this, as much as its geographical advantages, which has enabled it to grow at such a pace.

Third, that SEZ was established way back in 1980, meaning that the city has had 37 years to grow into the manufacturing center of the tech world. Apple relies on a huge network of suppliers and sub-contractors, some of which may make just a single tiny component. The majority of them are based in Shenzhen and its immediate surrounds, so the logistics of bringing everything together in one place for assembly are straightforward.

Apple is working on this, with new manufacturing plants in India, Vietnam, Indonesia and elsewhere. But my view is that it probably needs to accelerate these efforts such that it could, if necessary, abandon China as a manufacturing base altogether.

Anything could happen, but right now the smart money isn’t on Apple’s relationship with China getting better. The company needs to be prepared for the worst – even if that means sacrificing sales there.

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