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What's behind Apple's mea culpa in China?

Tom Kaneshige | April 4, 2013
Apple CEO Tim Cook's overboard apology to China about the company's alleged disregard of customer service highlights an East-West cultural clash about how to do business.

It's a sundry tale chock full of seedy copycats and scammers, a secretive Chinese government bent on making one of the biggest foreign companies look bad, and an all-too-apologetic American CEO. All are chasing a multi-billion-dollar market for an over-priced consumer gadget called the iPhone.

"It's about West and East cultural differences in doing business," says CEO Stanley Li of San Francisco-based Netswitch, who has worked overseas for many years and has intimate knowledge of business practices in China.

To understand this story, we'll have to start at the beginning: lines forming around the corner of Apple stores across the United States with the release of every new iPhone. Many of the people in those lines are being paid $50 to buy two iPhones that they'll never use. Instead, they hand them over to smugglers.

Smugglers bring the iPhones into China to feed a frenzy of consumers, often charging several hundred dollars above the U.S. retail price. They might even break apart the phone and sell the components to be used in fake iPhones. Simply put, the iPhone is red-hot in Greater China, a region that produced $22.5 billion in 2012 for Apple.

The sky-high demand has led to a black market of iPhone knock-offs.

More importantly, the iPhone market in China has led to a second-tier services market. When a smuggled iPhone breaks, the consumer will take it to the local vendor that sold it to them. Some shopping malls in China have floors of vendors selling fake iPhones, smuggled iPhones, unauthorized electronic parts and repair services.

In turn, second-tier vendors will take iPhones to the local Apple store for free service and perhaps get a replacement. Then they'll charge the consumer hundreds of dollars for the repair job.

Sick and tired of seeing the same group repeatedly taking advantage of Apple's warranty policies, Apple store staffers likely began rejecting requests for service, especially if the iPhone had unauthorized parts or was smuggled from the United States.

"This is where it started, when people began looking at Apple as arrogant and lacking customer skills," Li says.

This set off a two-week storm of Apple criticism led by the state-run media, which accused Apple of "unparalleled arrogance" and mistreating customers. Suspicions arose that the Chinese government was pulling the strings. Movie star Peter Ho criticized Apple in a post that included the instructions "Post Around 8:20," the slip-up clearly revealing an orchestrated campaign.

Story: Apple in China: Should We Applaud Instead of Condemn?

Of course, Chinese government involvement is mere speculation-but there is motive. It's no secret the Chinese government favors domestic products over foreign products. By making Apple look like a greedy American capitalist, the Chinese government may have been trying to drum up support for local products or at least slow down Apple's momentum.


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