Apple, the most valuable company in the United States, is facing significant challenges in China. In the second quarter, Berkshire Hathaway, the major investment group led by globally renowned investor Warren Buffett, drastically sold off its stake in Apple by 49.3%. This decision is likely related to Apple’s troubles in China.
Last year, Apple saw a sharp decline in iPhone sales in China as local telecommunications companies such as Huawei, Xiaomi, Vivo, Oppo, and Honor dominated the market of 1.4 billion price-conscious and patriotic Chinese consumers. Despite launching the virtual reality headset Vision Pro in China and other Asian markets, the sales of this wearable device have not been ideal.
Apple’s sales in China have been declining for four consecutive quarters, with a staggering 6.5% drop in the latest quarter and an even more severe 8.1% decline in the previous quarter. Despite offering discounts of $300 or more on iPhones in the last quarter, sales continued to decline. Currently, Apple ranks sixth in smartphone sales in China, holding only a 14% market share.
Berkshire Hathaway’s investments in Chinese companies, including electric car manufacturer BYD, are largely based on expectations of significant growth in the coming quarters. While the US market is excited about Apple’s upcoming artificial intelligence initiatives, Apple’s market share in China is on the decline, which Berkshire Hathaway might view as a moment to cut losses.
Amid escalating geopolitical competition between China and the United States, Apple’s challenges in China may intensify over time. In September last year, the Chinese government banned government officials from using Apple phones for work, resulting in a market capitalization loss of around $200 billion for the company. Aside from government actions, online propaganda advocating purchasing cheaper Chinese smartphones as a patriotic or pro-party act is rampant. Some Chinese netizens perceive sticking to expensive previous-generation Apple phones as unpatriotic.
Others express anger over minor issues, especially when amplified by government-controlled media. For example, a photo of an Apple customer service employee with a pigtail hairstyle on Apple’s website sparked strong backlash among Chinese netizens. Pigtail hairstyles are considered insulting in China due to historical connotations from the Qing Dynasty when the Manchus forced Han Chinese men to wear queues.
As China gains much of its smartphone technology and manufacturing processes from Apple, the Chinese government’s stance towards the company has become increasingly assertive, leading to conflicts with the country’s tech competitors that the Communist Party allows to surface.
In April this year, Apple expressed discontent with the Chinese government by being forced to remove several apps from the Apple Store, including Meta’s Threads and WhatsApp, as well as two other apps from Signal and Telegram. From an investor’s perspective, these removals may not have been wise. Recently, Apple has clashed with two Chinese internet giants — ByteDance and Tencent — as these companies were accused of redirecting users to external payment systems instead of using Apple’s payment apps as mandated in the App Store.
Counterbalancing against the Chinese Communist Party and its controlled major Chinese companies poses a high-risk game for Apple. This increased risk may lead Berkshire Hathaway to sell off a substantial amount of Apple shares.
Despite the challenges in the Chinese market (which accounts for 20% of Apple’s iPhone sales), Apple’s global sales in the third quarter exceeded expectations, with a growth of 4.9%. This growth was driven by increased sales of iPads and Macs, as well as services like Apple Pay, Apple Store, and TV+. Apple plans to integrate artificial intelligence as ‘Apple Intelligence’ in future phones this fall, a move welcomed by investors and potentially bringing much-needed sales growth with the release of the iPhone 16 in September.
To offset losses in China, Apple could expand production and sales in India, where currently, iPhone sales only comprise 4% of its total sales. However, reports indicate that Apple faces production issues in India and may face competition from cheaper local models. The iPhone 15 Pro is priced at $1550 in India, around $550 higher than in the US. While unaffordable for most, the vast market size means Apple’s iPhone sales in India surpass those in any European country.
Apple’s setbacks in China serve as a canary in the coal mine, signaling impending crises that international investors should pay close attention to. Success for foreign companies in China requires technology transfer, dealing with new local competitors, and official and unofficial resistance. The lack of property rights respect among Communists leads them to cunningly seize market shares without hesitation.
Ideological barriers hinder the success of US companies in the Chinese market, and as a result, US companies engaging in excessive business activity in the world’s most powerful Communist country should adjust their current and future valuations accordingly. Apple’s lesson is clear: invest in countries with democratic values, or risk losing everything in the end.