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Apple Apologizes to Chinese Officials for "Misunderstanding"

Posted by Abe Sauer on April 1, 2013 04:04 PM

China's state-run media including CCTV went into the weekend bashing Apple and came out the other side doing the same. Tech writers and journalists agree China's smear campaign against Apple has backfired because the effect China's smear campaign is having on Apple's brand is worse than you think in some quarters, and not such a big deal in others (depending who you read).

China's "attack" on Apple certainly doesn't have a simple black or white outcome. The impact will be seen after the dust settles, and it will (especially now that CEO Tim Cook has reportedly apologized), with one Citi analyst projecting that the showdown could cost the company up to $13 billion in sales in the market.

A Xinhua News report on Monday continued to demand a "sincere apology" from Apple, before Cook's apology was posted on Apple's China website. It also demand the Cupertino-based titan modify its repair policies so as not to "discriminate" against Chinese consumers.

According to Reuters, Cook's apology reads, in part, "We are aware that owing to insufficient external communication, some consider Apple's attitude to be arrogant, inattentive or indifferent to consumer feedback. We express our sincere apologies for causing consumers any misgivings or misunderstanding."

Apple also evidently admitted that its iPad device is a "portable computer," which China claims means it falls under the nation's consumer laws requiring an automatic two-year warranty. (As Sinocism newsletter publisher Bill Bishop points out, "Apple appears to have similar issue, without the media mobilization, in Europe" where the brand is facing a China-like "warranty fiasco.") Monday's reports also cautiously suggested China might "limit the entry of products with incomplete after-sale system."

While some say this spells doom for Apple and others say it strengthens Apple while embarrassing China, what both camps agree on is that China is keeping the brand under its thumb "so Chinese consumers will patronize state-run companies instead."

Not so fast. While there may be a bit of truth in this motivation, the argument doesn't make a lot of sense since Apple's only main competition in China is from Samsung, in particular Samsung's galaxy line. If China was to convince users to spurn the iPhone, it's not a stretch to imagine many of them would leave for the Samsung Galaxy. The Galaxy runs on Android, a Google platform that Chinese officials have openly criticized for controlling too much of the nation's smartphone market. For that matter, HTC, one of those domestic smartphone brands ostensibly set to benefit by the anti-Apple drive, also run Google Android.

One motivation for the heat on Apple might be the brand's position as a luxury item. Numerous items perceived as luxury (e.g., high end "baijiu" liquor brands) have been the target of recent austerity campaigns. China's armed forces, reports the Wall Street Journal, just announced that auto brands like BMW and Bentley "won't receive the new military license plates unless they are registered as military property." Apple could just be one more easy luxury target.

One thing to keep in mind about Apple is just how different the characteristics of the brand's popularity are in China versus almost any other nation. And it's because of these differences that the current attacks on Apple put the brand in a dicey position.

We checked in with one professor, Nathan Washburn, who predicted in 2012 the weaknesses of Apple's China market that make its position far more precarious than it should be.

In 2012, Washburn, assistant professor at Thunderbird School of Global Management, wrote for the Harvard Business Review blog that "Chinese users are cobbling together an iPhone experience from a variety of sources, and the overall experience is not very good." One reason for the poor experience is that China's mobile internet speeds are abysmal. While there are hopes for a China Mobile 4G iPhone in 2013, currently iPhone users experience the mobile internet in a way one might call "dial-up retro."

A more important point of Washburn's argument was that iPhone users from the US, like himself, are "locked into the ecosystem." But Chinese users face no such tether. By total volume, China may have become the world's second largest app download market, but Chinese users still refuse to pay much, if at all, for apps. One study last year found that almost 40 percent of Chinese iPhone users have never bought an app. Having nothing of value invested in Apple's ecosystem frees users  to abandon the brand much more easily than a US user with, say, $250 in iPhone apps that would have to be replaced.

Washburn told brandchannel that Apple is between brand equity rock and a hard place with China's demands. "In the end, if Apple won't extend it's warrantee it is going to be in trouble. Social media in China will stoke a sense of injustice that will tarnish the brand," he said, while adding: "If it does extend the warranty it will be unable to deliver on the promise, also tarnishing the brand."

This damned-if-you-do position in which Apple finds itself is especially unenviable because, as Washburn has noted, Chinese consumers largely only buy Apple now for the brand image (its 2011 iPad commercial for China: "We Believe," above). He reiterated his original point, "Without the ecosystem, consumers are free to leave on a whim. Or at least the next time they purchase a phone."

But China is attempting to tarnish the Apple brand in ways that may have more long term damage than the warranty issue. The state press has also invested in numerous articles criticized frivolous spending by university students who are going into debt to purchase expensive iPhones. "To Buy Apple iPhones College Students Get Mortgages" read one headline. These attacks could genuinely spell trouble for Apple, as youth with iPhones may risk scorn from older parents who come to believe an iPhone is a sign of ostentatious spending.

It's not all doom and gloom for Apple though. The unending stream of Apple criticism before Cook's apology created some defenders of the brand in the Chinese press, not all of which is state run. For example, a long op-ed at news portal 163.com defended Apple, declaring that Apple is perfectly within its rights to "say no" to CCTV's demands.

It's worth remembering that Apple is by no means CCTV's first target and history suggests the results of China's anti-brand media frenzy could be temporary. After McDonald's expired food sales was the target of the 2012 CCTV 3.15 program, McDonald's saw February 2013 sales top estimates.

Finally, it's noteworthy that China's crackdown on Apple's real world "discriminatory" policies is matched by a crackdown of Apple in the hereafter. With the approach of 清明节(qīngmíng jié) or "Tomb Sweeping Festival," Chinese authors are cracking down on the joss paper goods that Chinese families traditionally burn to send to their ancestors in the afterlife. Specifically singled out are paper iPhone 5's.

So even while Apple may be experiencing a road bump in China right now, at least it's still a popular brand in the sweet hereafter.

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