Chinese propaganda campaign could sap 3 billion in sales from Apple

Since the middle of last month, the government of China has been engaged in a propaganda campaign against Apple, starting with an attack on Apple's warranty practices. Reports from state-run media outlets, including China Central Television and newspaper People's Daily, alleged that Apple's warranty and repair policies in China were unfair in comparison to other country's. Apple CEO Tim Cook issued an apology to Chinese customers and pledged that Apple's staff in China would be better trained on warranty issues.

The long-term results of what has so far been three weeks of consistent state-driven propaganda assaults haven't yet surfaced. If we let history serve as a guide, there are plenty of examples of Chinese state campaigns against foreign companies severely impacting their bottom lines in the People's Republic. Citigroup analyst Glen Yeung points out that similar allegations against Toshiba in 1999 pulled down the company's notebook sales in China down far enough that they lost their top spot in the sales charts.

In December of last year, Yum Brands - the company that owns KFC, Pizza Hut, and Taco Bell - was the target of the Chinese government. Yum operates around five thousand KFC outlets in China. Government reports alleged that chemical residues were detected in limited quantities in a small portion of KFC's chicken supply. While the government never formally fined or punished Yum, the company's sales in the first two months of this year were down 25% over the year prior.

The most damning example cited by Yeung, however, is that of HP in 2010. Following issues with faulty Nvidia GPUs, state-controlled media in China engaged in a coordinated campaign against HP, accusing the US-based tech giant of not offering the same extended warranty in China on Nvidia-toting laptops as they did for US customers. The same line of faulty chips was dispersed across many manufacturers, including Apple's MacBook Pro line. In a single quarter, HP's marketshare in China collapsed by fifty percent, knocking the company from the number two position in China to third place behind Dell. Unsurprisingly, local manufacturer Lenovo claims the top of the sales totem pole with nearly a third of PC sales in the Chinese market. Late last year, Lenovo overtook HP for the number one sales position globally.

So, why the state-coordinated assault on Apple? While the government will never comment on such matters, the nationalist attitude of the Chinese government is all the reasoning we need. Like any nation, the Chinese government would prefer to see homegrown companies flourish locally, if not globally. Unlike most developed nations, however, the Chinese government isn't afraid to be overt in steering public goodwill away from foreign companies like Toshiba, KFC, HP, and Apple. While Apple's manufacturing contracts with Foxconn have brought billions upon billions of dollars into China, the recent emergence of Apple as a consumer electronics force with which to be reckoned in the Chinese market has clearly proven worrisome to the government.

Chinese consumers have long clamored for Apple products, coveting the brand cachet that comes with owning a MacBook or iPhone or iPad. So voracious has the demand for Apple products in China been that Cook as recently as a few months ago believed that China might in the next few years become Apple's largest market. Apple has experienced incredible growth in China, with nearly a quarter of their revenue growth over the past two years coming from there. Apple's growing strength in China is a threat to Chinese companies like Lenovo and ZTE, hence the overblown warranty controversy that has consumed headlines in China.

Yeung points to HP's collapsed marketshare in China as a worst-case scenario for Apple. Sixteen percent of Apple's sales currently come from China. Yeung estimates that if similar damage were dealt to Apple's marketshare it could conceivably sap more than $13 billion from Apple's revenue over the next year. In the last quarter of 2012, Apple brought in a record $54 billion of revenue.

It's hard to judge just how successful the Chinese propaganda campaign against Apple will be in the end. Before their falls from grace, neither Toshiba nor HP enjoyed the same level of extreme consumer demand as Apple does today. While a public apology from a high profile CEO like Tim Cook is evidence that Apple too fears the backlash that might come from this campaign, Apple's brand power is likely strong enough to persist through the resolution of this campaign, especially with Apple taking steps to address the legitimate concerns raised. If Apple does come through relatively unscathed as we expect, it'll only be a matter of time before the next state media trains its sights again on Cupertino.

Source: CNN Money