Pacific Money

Will Asia Kill Apple?

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Pacific Money

Will Asia Kill Apple?

Apple may be destined to die slowly at the hands of its Asian competitors.

Will Asia Kill Apple?
Credit: Pixabay

Tech stock watchers have probably noticed Apple shedding over a quarter of its value in the last six months. Although the fall seems to have stabilized in recent weeks, there are various indications the future will continue to be marred by poor performance. In fact, we may be witnessing the slow but irreversible decline of Apple, a slide largely propelled by Asian influences.

Just a few months ago, in August, Apple became the first U.S. company to earn the distinction of being valued at over a trillion dollars. It was not the first to do so, of course, with Chinese oil giant PetroChina hitting the mark over a decade earlier, in 2007.

Ironically, it is also China that has functioned as the main impetus for Apple’s recent losses. No, I am not talking about the trade war, although that had some effects too. The bigger issue is the way Apple’s perception has undergone significant changes. Just a decade ago, iPhones, which comprise about 60 percent of Apple’s revenue, were viewed by most Chinese as a status symbol. They were considered luxury items, frequently given as gifts. Even today, some young men use them to court love interests.

With Chinese cellphone manufacturers emerging as global players, offering comparable goods at lower prices, Apple’s status has undergone gradual decline. By August of last year, Huawei had surpassed Apple to become the world’s second largest cellphone maker (Samsung remains first). Ensuing antagonism with the United States contributed to some Chinese consumers shying away from American brands while the recent arrest of Huawei executive Meng Wanzhou has sparked boycotts. In December, adding insult to injury, a Chinese court ruled a patent infringement case in favor of Qualcomm, another U.S. company, resulting in the ban of several older iPhone models.

In the last few years, Apple has bet heavily on improving its position in the Chinese market, making its app stores more compliant with Chinese regulators. Returns have, unfortunately, been underwhelming. In fact, most of Apple’s poor performance last year could be attributed, in one form or another, to poor performance in China. Although many Apple enthusiasts still exist there, one must consider the possibility that the fascination has peaked.

In the last decade, much of Apple’s profitability has depended on its strength in managing global supply chains: i.e. making parts in other countries as cheaply as possible. Apple’s CEO Tim Cook has, in fact, been referred to as a supply chain guru. The company’s heavy reliance on overseas manufacturing has, however, begun to expose certain vulnerabilities, weaknesses that other sprawling, multinational corporations would be wise to consider.

The most important is a reliance on components patented and manufactured by other companies. Many key components in a contemporary iPhone are, in fact, the patented goods of Apple’s competitors. Case in point: OLED displays.

OLED is a remarkable technology that has revolutionized mobile devices. It is cheaper, lighter, and more energy-efficient. Samsung is currently the world’s leader in OLED manufacturing, holding a global market share over 90 percent. They own most of the patents and make the displays for every new iPhone. In fact, it is estimated about $100 of every iPhone X is used to pay the cost of the display. For those interested, this is also why the latest Samsung phones always come out a few weeks before Apple’s: Samsung makes the screens for its own phones first.

In the late 2000s and early 2010s, other critical iPhone components such as processors and sensors were also outsourced in this manner. For a few of these years, Samsung was again the primary supplier, at one point building most iPhone chips. More recently, Apple has worked diligently to diversify its supply portfolio, designing its own chips and contracting smaller companies to make them. Apple’s new A11 Bionic is this kind of product: designed and patented in-house but outsourced to a Taiwanese manufacturer for production.

Apple’s recent OLED addiction has prompted Tim Cook to invest over $3 billion in the Korean company LG to design and manufacture alternative displays. Although it remains to be seen whether these investments will pay off, it is clear modern supply chain management cannot be viewed simply as a process for making manufacturing cheaper; it must also be viewed as a process for protecting and continuing the development of critical technologies. Much of Samsung’s success in recent years can be attributed directly to its ability to strike a balance between developing next generation technologies and outsourcing less critical components. If Apple doesn’t recover this kind of balance soon, it will likely die slowly at the hands of its Asian competitors.

Justin Fendos is a professor at Dongseo University in South Korea and the associate director of the Tan School at Fudan University in Shanghai.