Apple’s Cook in China: What’s The Strategy?

on March 28 2012 1:12 PM
Apple CEO Tim Cook talks to employees at an Apple store in central Beijing
Apple CEO Tim Cook talks to employees at an Apple store in central Beijing Reuters

Apple (Nasdaq: AAPL) CEO Tim Cook's visit to China isn't for sightseeing. Rather, the new boss has met Vice Premier Li Keqiang, who may be the next Premier of China, as well as other officials.

What are some of the outcomes of the Cook and trip as well as implications for the Cupertino, Calif., technology developer which at Wednesday's values, remains the world's most valuable company, with a market capitalization nearing $565 billion?

Creating Guanxi. That's Chinese for the complicated interplay of connections and interpersonal relationships so important in China and Confucian cultures in Asia. Cook, 51, is no stranger to China from his years at Apple.

This visit, though, is his first as Apple CEO, which he became only Aug. 24. Now his status has changed. Another time, Apple Chairman Arthur D. Levinson, 61, the former CEO of Genentech, could visit China in his own right for Apple as well.

Expand Apple's China retail footprint. Apple, with  331 retail stores worldwide, is expanding in China, where it has stores in Beijing, which Cook visited, as well as in Shanghai and Hong Kong. There was a small riot in Shanghai preceding the Lunar New Year when not enough iPhone 4S models were available.

Apple, like other U.S. brands such as General Motors Corp.'s (NYSE: GM) Buick has attracted enormous status in the luxury sector and is also expanding fast in China. China is also one of the few markets were demand for PCs is growing. For Apple, that translates to the Mac line. Last quarter, Asia-Pacific Mac sales surged 58 percent to 731,000 units, dramatically outpacing growth in any other region.

Smoothe manufacturing woes.  Cook also wants to smoothe manufacturing and labor issues with its biggest contractors, Hon Hai Precision Industry (TPE: 2317) of Taiwan, better-known as Foxconn, and others.

Last month, Apple commissioned the Fair Labor Association, an industry backed group, to examine issues concerning worker suicides, undue pressure and overtime at Foxconn plants.

This week, Hon Hai said it would acquire a 10 percent interest in Japan's struggling Sharp (TYO: 6753), the consumer electronics giant, for $806 million. That will bolster Hon Hai, in part, by including a TV factory in Japan that could be suitable for Apple TV manufacturing. It also gives Hon Hai some dibs to Sharp's patent portfolio, which includes many products in semiconductors and liquid-crystal displays.

Last year, Hon Hai ranked No. 9 on the U.S. of new patent grantees.

Cook may also meet with Proview Technologies, another Chinese manufacturer, which sued Apple over rights to the iPad name.

Get the iPhone onto China Mobile. A big future prize for Apple would be getting China Mobile (NYSE: CHL), China's top wireless carrier, to support the iPhone. Its customer base already exceeds 600 million.

China Mobile already supports iPhone models purchased by Chinese consumers but they don't always operate with full performance. Getting the operator to provide complete technical support would be a huge vote of confidence, as well as benefit for both parties.

Consider that when Apple introduced the iPhone in 2007, its sole initial carrier was AT&T (NYSE: T).

Barclays Capital's Ben Reitzes, who estimates as many as 189.5 million iPhones could be sold in 2012, suggests the Chinese carrier could be a major driver for sales, especially if Apple introduces an iPhone 5 or other upgrade later this year.

As well, Cook wants to ensure Chinese networks are equipped to handle the long-term evolution (LTE) capabilities designed into the new iPad, which shipped this month.

Buying companies. Cook this month announced a $45 billion plan to reinstitute an Apple dividend and buy back shares later this year. The company still has nearly $98 billion in cash and investments.

The Apple CEO might eye distribution, manufacturing or technology companies for acquisition, strengthening its China presence as an investor as well as supplier. Apple, by custom, usually makes smaller acquisitions.

Apple shares rose $3.14 to close at $617.62 in Wednesday trading.