China's World: China's Dream Is Apple's Nightmare

By Andrew Browne Features Dow Jones Newswires

In his 2005 book "One Billion Customers," a how-to guide for navigating the China market, James McGregor offered this advice: "Never 'tremble and obey' if doing so will damage or destroy your business in China."

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Tell that to today's American CEOs.

When authorities ordered Apple Inc. to pull unauthorized apps that help internet users get around censorship controls, it agreed. Chief Executive Tim Cook defended the move by saying the company was merely following Chinese law. His compliance, though, illustrates a challenge that the Trump administration faces as it builds a case against unfair Chinese trading practices.

Washington has a CEO problem. U.S. corporate chiefs are focused on preserving their short-term profits in China by trying to stay on the right side of a hard-line -- and increasingly antiforeign -- regulatory regime. If, as expected, the White House goes after China's rampant intellectual property abuses, the companies will be torn.

Just about everybody in the U.S. capital is complaining about how China forces foreign companies to give up technology in return for market access.

Everybody, that is, except the immediate targets of the state-directed heist -- the companies themselves.

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CEOs of U.S. high-tech companies have been notably silent. That's the case even though their operations are highly vulnerable: China makes no secret of wanting their technology so it can replace them on its way to building itself into a manufacturing superpower.

Yet, not only do they refrain from criticism, some actively cooperate.

Call it the Stockholm syndrome, whereby hostages start to identify with their captors. U.S. tech giants have invested billions of dollars in tie-ups with state entities at the forefront of projects like "Made in China 2025" aimed at gaining Chinese dominance in emerging industries from driverless cars to robotics.

Among U.S. companies that have fallen in behind China's ambitions to make leading-edge computer chips are Qualcomm, Intel and AMD.

For a long time, U.S. tech executives have been reluctant to admit the scale of their intellectual property losses in China.

In 2011, then Microsoft Chief Executive Steve Ballmer put a figure on it in comments he thought were off-the-record. That year, he predicted, China revenues would be about 5% of the U.S., even though personal-computer sales back then were almost equal in the two markets.

Why the passivity? China now owns the world's fastest-growing consumer markets by far, and U.S. CEOs believe they must be there come what may. They expect retaliation for complaining.

But there is also a psychology at work that reflects the new dynamics of power in the global economy.

A China making rapid technological strides is feeling supremely confident, and this is reflected in its attitudes toward international investors. A figure like Mr. Cook commands a great deal of respect, even deference, in Washington. In Beijing, he's treated like any other business executive -- as a supplicant, angling for favors to keep his market hopes alive.

Mr. Cook addressed the difficult business environment in China last week on an earnings call with analysts, saying: "We believe in engaging with governments even when we disagree."

In any U.S.-China trade conflict, U.S. CEOs will be caught in a tough bind between two arch-nationalists -- U.S. President Donald Trump and Chinese President Xi Jinping. And it's not at all clear how the companies will position themselves.

"Actually, you can say that Xi Jinping is more important than Trump to many U.S. CEOs," says Mr. McGregor, the book author who is also chairman for greater China of business consulting firm APCO. Previously he worked as The Wall Street Journal's bureau chief in Beijing, and later ran Dow Jones's business operations in China.

There is virtually no recent precedent for U.S. corporate resistance in China. Those who point to Google as a brave exemplar -- it exited the country in 2010 rather than censor its searches -- miss quite a bit of nuance. Google pulled its search engine only after Chinese hackers broke into its systems in search of source code. In other words, it fled an existential threat as much as an ethical dilemma.

Now Google and its parent company, Alphabet, want back in, even going so far as to holding major public events in China in efforts to endear itself with government officials, raise its public profile and attract Chinese engineering talent.

If Google gets its wish -- or Facebook Chief Executive Mark Zuckerberg makes the entry he so clearly craves -- it will be on Chinese censorship terms more onerous than ever. As Lu Wei, the former head of the Cyberspace Administration of China, once put it: "I have a choice about who comes to be a guest at my home."

And for how long they can stay: Increasingly, high-tech companies assume that, in the end, all their products are in mortal danger; once they've achieved a certain market share, and Chinese companies are strong enough to compete, the technology is liable to be nationalized in one form or another, or shoved aside.

Apple's decision to pull apps that circumvent the Great Firewall drew sharp condemnation from a key group of consumers. Research by Molly Roberts, a professor at the University of California San Diego, shows that up to 20% of Chinese internet users in their 20s rely on such devices. Many buy them from the iPhone store.

In his earnings call last week, Mr. Cook said he hoped for fewer restrictions in China in the future. Apple declined to comment further.

But obedience, in this case, has damaged Apple's public image if not its bottom line. And the rewards for compliance are far from certain.

Write to Andrew Browne at andrew.browne@wsj.com

(END) Dow Jones Newswires

August 08, 2017 14:13 ET (18:13 GMT)