The Compromises American Companies Make to Doing Business in China

Doug Guthrie spent 1994 cycling at one speed between factories in Shanghai for a thesis on Chinese industry. Within a few years, he was one of America’s leading experts on China’s turn to capitalism and helping businesses venture east.

Two decades later, in 2014, Apple hired him to help it navigate perhaps its most important market. At that time, he was worried about China’s new leadership.

The new Chinese leader, Xi Jinping, was relying on Western companies to strengthen his grip on the country. Guthrie realized that few companies were bigger or more vulnerable targets than Apple. It has assembled almost all Apple devices in China and made the region its second largest selling market.

So Guthrie began touring the business with a slide show and a wake-up call. Apple, he said, did not have a plan B.

“I was going to see business leaders and I was like, ‘Do you understand who Xi Jinping is? Are you listening to what’s going on here? ‘ Guthrie said in an interview. “It was my big business card.”

His warnings were premonitory. China has taken a nationalist and authoritarian turn under Xi, and American companies like Apple, Nike and the National Basketball Association face a dilemma. While doing business in China is often lucrative, it also increasingly requires uncomfortable compromises.

This trend raises the question of whether, instead of empowering the Chinese people, American investment in the country has empowered the Chinese Communist Party.

“It has always been difficult for Western companies to do business in China, but in many ways the challenges have changed,” said Samm Sacks, China specialist at the New America Foundation, a non-partisan research center. , which consults for American companies. “The Communist Party is firmly in control, and Western and Chinese private sector companies have come under attack. ”

Guthrie’s career arc and evolving vision of China tells the story of Western industry’s complicated dance with the country over the past three decades. Guthrie and many leaders, politicians and academics had bet that Western investments in China would lead the country to liberalize. It is now clear that they miscalculated.

“We were wrong,” Guthrie said. “The wild card was Xi Jinping.”

In recent years, China has shut down Marriott’s website after listing Tibet and Taiwan as separate countries in a customer survey. He suspended LinkedIn subscriptions after the site failed to censor enough political content. And the Communist Party has called for a boycott of Western garment companies that criticize forced labor practices in Xinjiang, a region of China where the government represses Uyghurs, the country’s ethnic Muslim minority.

Apple, more than any other company, has been vulnerable to the government’s tougher line. As a result, over the past few years, Apple has made compromises in China that undermine the values ​​its executives have placed at the center of its brand. To appease authorities and maintain global operations, Apple has endangered the data of its Chinese customers and aided the Chinese government’s vast censorship operation, The New York Times reported last month.

The company said it was following the law in China and doing everything possible to secure its customers’ data.

“We have never compromised the security of our users or their data in China or wherever we operate,” said an Apple spokesperson.

He added that Guthrie had been a mid-level employee and had not set a policy at Apple.

Guthrie’s obsession with China began in 1989. He was a sophomore economics student studying Mandarin at the University of Chicago when Chinese soldiers killed hundreds of pro-democracy protesters occupying Tiananmen Square in Beijing. . Immediately, he said, “I became captivated by the idea of ​​China.”


He interrupts school, borrows money from his grandparents and spends the following year in Taiwan. An avid cyclist, he trained with the national cycling team in the morning, studied Mandarin and taught English in the afternoon.

After obtaining a doctorate from the University of California at Berkeley and a book on the emergence of capitalism in China – “Dragon in a Three-Piece Suit” – he began teaching at New York University in 1997. He has lectured on China’s economic potential, and companies have come to him for advice.

At that time, China was shifting from making toys and tennis shoes to cars and computers. The government has often asked foreign companies to share their technology with state-owned companies in exchange for access to Chinese labor and consumers. To stop this, Guthrie and others lobbied for the country’s inclusion in the World Trade Organization, which has banned such quid pro quo. In 2001, the group admitted China.

That same year, Apple started manufacturing there. The operation started small, but Apple executives quickly realized the potential.

In 2004, Apple decided to expand to China with a factory making the iPod, which was becoming a successful product. On a trip to determine the location of the plant, the head of Apple’s manufacturing partner pointed to a small mountain and told two Apple executives in attendance that the plant would be built there, according to one of the leaders. The executives were confused; the plant was to be operational in about six months.

Less than a year later, the executives returned to China. The mountain was gone and the factory was operating, the executive said. The Chinese government had moved the mountain for Apple.

Over the next two decades, the Chinese government will spend billions of dollars to help build Apple’s supply chain, pave roads, recruit workers, and build factories, power plants and employee housing. Apple now assembles almost all iPhones, iPads and Macs in China.

In 2014, shortly after Guthrie left his post as dean of the George Washington University business school, Apple hired him to train its managers and advise executives on China. He also conducted research and his first project was the company’s supply chain. Guthrie, now 52, ​​left Apple in 2019 and is a professor at the Thunderbird School of Global Management at Arizona State University.

When he started at Apple, Guthrie said, its executives knew they relied too much on China and wanted to diversify. India and Vietnam were the best candidates, but Guthrie concluded that neither was a viable replacement.

The Vietnamese government was cooperative, but the country simply did not have enough workers, he said. India had the people, but its bureaucracy made it difficult to build infrastructure and factories. Beyond these issues, most of the smaller suppliers that made Apple’s screws, circuit boards, and other components were already concentrated in China.

“When he started at Apple, Guthrie said Apple wanted to diversify. India and Vietnam were the best candidates, but he concluded that neither was a viable replacement.”

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Apple has pushed further in India and Vietnam in recent years, including building a smaller iPhone assembly plant in India, but Tim Cook, chief executive, has publicly said its supply chain will remain centered in China. .

For Guthrie, this position left Apple vulnerable, especially as the new Chinese leader looked for ways to use his influence over American companies in the country. In 2014, China’s Shipping Labor Law came into effect, limiting the share of temporary workers in a company’s workforce to 10%. From day one, Apple and its suppliers were in violation.

At a Foxconn factory in Zhengzhou, China, the world’s largest iPhone factory, temporary workers made up up to half of the workforce, according to a report by China Labor Watch, an advocacy group. rights. After the report, Apple confirmed that the factory broke the law.

Apple executives were worried and confused, Guthrie said. They knew the company couldn’t comply as it needed additional workers to meet times of high demand, such as vacations.

“‘That’s the point. You are not supposed to comply,” he said as he told them. “Not so that they can silence you, but so that you know what they want from you. do and how to do it. ”

Guthrie, who often puts his long, graying hair behind his ears, began giving his talk about Apple’s risks in China around this time. His extreme dependence on the country left him little influence to resist.

Apple continued to grapple with the government’s demands. Sometimes he was able to successfully resist them. At one point, the Chinese government requested the computer code that underpins the security of iPhones, according to a former Apple executive familiar with the request.

To comply, Apple would have had to create a so-called backdoor allowing Chinese authorities to bypass the security of an iPhone, similar to what the FBI requested in 2016 – and Apple denied the request. In China, Apple also pushed back and persuaded the government that it didn’t need the data, according to the executive.

To measure the success of their lobbying, Apple executives looked to the government’s annual corporate social responsibility scores, a proxy for the Communist Party’s vision for a company. Apple had struggled for years in the ranking.

Ahead of the scores in 2017, Apple released a report promoting the company’s contributions to China. The report was a collaboration between several Apple departments, and government praise for the report was celebrated within the company, according to Apple documents viewed by The Times.

Apple’s score is improving steadily. From 2016 to 2020, its ranking among all Chinese companies fell from 141st to 30th.

Apple has not always been able to resist government demands. During this period, Cook had agreed to store the private data of its Chinese customers – and the digital keys to unlock that data – on computer servers owned and managed by the Chinese government.


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