Apple Global Strategy Case Study
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Steve Jobs, Steve Wozniak, and Ronald Wayne formed Apple in April 1976, in Cupertino, California, with Wozniak designing and hand-building the Apple I computer. Apple later introduced the first Macintosh computer in 1984. As we read in the profile of Apple at the start of this chapter, it is one of the world’s most successful companies, with extremely loyal customers.
Annual sales revenue is $274 billion, around $50 billion of which is generated in the US market. Other key markets include Europe ($69 billion), China ($40 billion), Japan ($21 billion), and the Asia Pacific ($20 billion). Although $138 billion in revenue comes from iPhone sales, around $54 billion now comes from services, including iCloud, Apple Music, Apple TV+, Apple Arcade, Apple News+, and Apple Fitness+. Around $31 billion in revenue is generated by wearables, home products, and accessories, including the Apple Watch, AirPods, HomePod, and Beats.
A theory in international business says a country should produce goods and services where it is most productive to do so, and then trade with other nations for things it needs but does not produce. For Apple and its home country, the United States, this means importing products that require labor-intensive parts and assembly (like electronics) and exporting high value-added products (like the iPhone). This theory is the bedrock of globalization and trade.
Globalization benefits Apple greatly and its business model depends on it. Apple’s parts and components come from a global manufacturing network of firms from up to 50 countries, depending on where a part is made and which company makes it. Rather than hire US workers, Apple subcontracts assembly to places where labor costs are lower, particularly China. Through Taiwanese manufacturer, Foxconn, Apple produces hundreds of thousands of devices daily at the new factory town of Zhengzhou in Henan province. The local government paid $1.5 billion to help build high-tech factories and housing for 400,000 workers and constructed a $10 billion airport. Apple could not find this scale of operations and this level of local cooperation anywhere else in the world.
Apple’s production strategy served it well for years. Labor costs in China account for only about 4 percent of the iPhone’s total cost. The greatest cost is incurred in California, where Apple performs design, engineering, and marketing tasks. Another reason Apple produces in China is alternative suppliers of some components are located nearby and parts can be obtained quickly. As Chinese incomes improved, Apple began to also sell devices in China. Sales revenue in China grew from $2.8 billion in 2010 to a peak of $59 billion 2015, then fell to around $40 billion in 2020.
Apple’s heavy dependence on China as the cornerstone of its strategy had advantages but also drawbacks. First, as factory work flooded into China, demand for labor grew and its cost rose. Apple responded by moving some product assembly to Vietnam and other nations with lower labor costs. Second, businesspeople and politicians in the United States began referring to China as a “strategic competitor.” US–China tensions grew and soon the two superpowers were in a trade war. The US government then placed sanctions on Apple’s Chinese competitor, Huawei.
Third, US–China relations soured further after the pandemic’s arrival in 2020. Nationalist sentiment increased in both countries. The US government actively encouraged a “supply chain restructuring” initiative, or “decoupling,” of the US and Chinese economies. Finally, critics pressured Apple to not subcontract work to China for several reasons, including allegations of human rights violations, poor conditions at some factories to which Apple subcontracts, and censorship of the internet there. Apple’s app store for China once even removed virtual-private-network apps, which had allowed Chinese internet users to bypass the government’s firewall and to access the uncensored internet.
Apple responded to all these events by moving some iPad production to Vietnam and India, and moved some smart speaker, earphones, and computer assembly to Malaysia. It is not abandoning China as a key production base, at least not yet, but it is diversifying production away from reliance on a single country. Apple says southeast Asia is where it plans to expand production for many core products.
When the US government sanctioned Huawei, a host of other Chinese smartphone makers rushed to offer consumers a non-US brand phone. Device makers Xiaomi, Oppo, and Vivo quickly improved their designs and cameras and went head-to-head against Apple with lower-priced phones. The trio saw double-digit growth rates and each now commands around 20 percent of China’s domestic smartphone market.
Discussion Questions
- Why should Apple purchase parts and components that are made outside the United States and subcontract assembly to China and other nations?
- Why did the Apple iPhone lose market share in China? What specific actions, if any, do you think Apple could have taken with regard to its presence in China to prevent the loss of market share?
