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Apple in the crosshairs as Beijing plots its tech war retaliation

Apple CEO Tim Cook
It seems that the Donald Trump isn’t listening to the advice of Tim Cook, or “Tim Apple” as he referred to him during a meeting at the White House in March

These terse words written by China’s Qianlong Emperor in a letter to King George III before a 1793 British diplomatic mission were not, it is fair to say,  a startling success.

“Our Celestial Empire possesses all things in prolific abundance and lacks no product within its borders. There is therefore no need to import the manufactures of outside barbarians in exchange for our own produce.”

Circumstances may have changed and it is America not Britain which is furrowing brows in Beijing these days.

But very similar sentiments were expressed this week by the founder of China’s biggest private company, Huawei, in a response to Donald Trump’s latest foray - to blacklist the company in an escalating US-China trade war.

Ren Zhengfei said the US government’s actions to stop American companies from doing business with Huawei "underestimate our capabilities" to go it alone and would have “no impact”.

As President Trump ratchets up the pressure, many things are in flux.

Some are wondering whether the world may be stumbling into a new cold war over access to emerging new technologies. Others are asking how Huawei, the world’s biggest manufacturer of telecoms equipment and second largest producer of smartphones, will be able to source crucial components and software - from advanced US chipsets produced by Qualcomm and Intel to licenses for Google’s Android operating system installed on its devices.

Whether or not Huawei’s founder is right, one thing is clear. As President Trump takes a wrecking ball to years of carefully nurtured US-China trade relations, Huawei won’t be the only victim.

Retaliation looks inevitable and for Beijing, the biggest and juiciest target appears obvious.

Apple products are famously emblazoned with a simple phrase: “designed in California assembled in China”.

For how much longer?

Huawei’s rapid growth has been causing Apple a headache for years. The Chinese company shipped over 59m smartphones in the first quarter of 2019, up 50pc on the same period last year and handing the group a 19pc market share globally. Over the same period Apple suffered a 30pc slide to just over 36m units.

But Apple’s Chinese problems may be about to get a whole lot worse.

While US actions against Huawei and others are likely to damage their growth prospects overseas, the dispute cuts both ways.

Unlike Samsung, which produces smartphones around the world, the lion’s share of Apple’s supply chain sits in China, where iPhones, iPads and Macs are all assembled using both imported and locally produced components.

That system leaves it heavily exposed to the risk of stiff US tariffs on imports from the country. A 25pc tariff would force Apple to either raise prices or reduce profitability with Morgan Stanley estimating it could prompt a hike in the price of an iPhone XS by $160 (£124) from $999.

Apple has considered shifting some production to India or Brazil, but it would take years to do and would be very costly.

Just as important, China is Apple’s second biggest market after the US, generating nearly a fifth of revenue and a higher share of profits. Apple reported $51 billion in revenue in 2018 from “Greater China,” which includes Hong Kong and Taiwan, out of total annual revenue of over $265 billion.

It would of course be relatively easy for Beijing to stir up trouble for Apple by using its tax system or regime of safety inspections to hamper Apple’s manufacturing and export operations in China.

But that sort of ham-fisted approach may be unlikely.

After all, forcing Apple, the world’s second biggest company, to move its iPhone manufacturing operation away from China and to the US would be viewed by President Trump and many others as a victory.

Perhaps more effective from Beijing’s perspective would be to support an informal domestic boycott of Apple products, a measure that would be damaging to the US company but might not come at the same expense in terms of Chinese jobs and investment.

In fact, there is evidence that such steps are already being applied.

Apple’s China sales are already drooping, partly due to a weaker economy which has constrained consumer spending but partly too from a sense of national pride in opting for domestic brands including Huawei, Xiaomi and others.

That trend seems destined to grow as the trade dispute intensifies.

All of this explains why Apple has strongly opposed Donald Trump’s aggressive actions against China on trade.

It seems, however, that the President isn’t listening to the advice of Tim Cook, or “Tim Apple” as he referred to him during a meeting at the White House in March.

Like George Macartney, Britain’s first envoy to China, whose refusal to kowtow to the Emperor in the 18th century helped trigger a damaging rift, President Trump has little time for diplomatic niceties. Whether his blunderbuss approach will yield better results in redrawing global trade ties more to his liking remains to be seen. It’s unlikely to go unpunished.