Haunted Empire: Apple After Steve Jobs

by Yukari Iwatani Kane

  As the president spoke, he looked up at Cook. Cameras captured the moment as they zoomed in on the Apple CEO, past Michelle Obama, who looked dazzling in her black and maroon Jason Wu dress. As Cook smiled, he emanated an aura of establishment.

  A former Apple executive watching the speech on television was appalled. Nowhere was there a trace of the subversive upstart that Jobs had founded. Though Jobs had relationships with government leaders, and Al Gore served on his board, the executive was sure that Jobs never would have attended. He didn’t have time for such pomp and circumstance.

  Having the president of the United States make the announcement in such a high-profile manner was nonetheless a coup for Apple, especially considering that the move was mostly a token public relations gesture. Cook had already told the media that he was planning to bring some of the manufacturing back.

  “We’ve been working on this for a long time, and we were getting closer to it,” he had told BloombergBusinessweek in an interview the previous December. “We could have quickly maybe done just assembly but it’s broader because we wanted to do something more substantial.”

  The reality was less grand. Apple was only investing $100 million, a pittance compared to its $137 billion cash hoard. The company wasn’t even planning to assemble the Macs themselves. The media believed Foxconn would be handling the manufacturing in the United States because the Chinese manufacturer had made suggestive comments about making more products in America. In actuality, Apple had reportedly given the business to Singapore’s Flextronics. It was telling that the job was too insignificant for Foxconn to care.

  Despite the president’s stamp of approval, the truth was that Apple’s star was falling. Scarcely more than a year after the death of Steve Jobs, his beloved creation was beset by so many challenges, emanating from so many fronts. It wasn’t just the dearth of dazzling new game-changing devices, which made so many wonder if Apple had lost its magic, or the embarrassments that had turned the iconic company into a late-night punch line. It wasn’t just the harsh attention that had been cast on the company’s aggression, its mania for control, and its struggles to redefine itself. Or the dangers inherent in Apple’s reliance on Foxconn’s factories and massive workforce. Or the reality, so clear now after Judge Koh’s denial of an injunction, that Apple’s war against Samsung was at an impasse, and Android was winning the war for dominance in the marketplace.

  Any one of these setbacks would have been enough to send tremors through a company that sought to reinvent the world. But it was all of this, coalescing at the same time, created a wave of momentum, pulling Apple down.

  The bad news kept piling up. A few months after Apple’s disastrous launch of its own maps app, Google showed up its rival with a superior new app for the iPhone. Google’s new app featured turn-by-turn navigation and schedules for more than one million public transportation stops around the world. Within forty-eight hours of its release, the app was downloaded ten million times. While the iPhone’s functionality was improved by the app, headlines proclaiming Google’s stunning achievement only highlighted Apple’s navigational failures.

  In mid-March, a U.S. district judge in Manhattan ordered Tim Cook to sit for a four-hour deposition in the e-book antitrust case that the Justice Department was still pursuing. Arguing for Cook’s deposition, the government attorneys said the CEO was likely to have relevant information about Apple’s entry into the e-book market, including conversations with Jobs. But Apple had been fighting the motion, saying that whatever Cook could share would only repeat the testimony of eleven other Apple execs who had already been deposed. The judge agreed with the Justice Department, saying that the impossibility of getting testimony from the now deceased Jobs required others to step in. The trial was set for June.

  On March 15, 2013, a day after the judge ordered Cook’s deposition, Apple was thrust back into damage control mode when a crisis erupted on the other side of the world. China Central Television, a government-controlled network, was accusing Apple of showing disrespect to Chinese customers—a serious allegation in a market of great importance to Apple’s future.

  In a glitzy two-hour prime-time show honoring World Consumer Rights Day, the network targeted Apple in an investigative report that accused the company of treating Chinese consumers as second-class citizens. Specifically, the program said Apple skirted Chinese laws by offering just one year’s warranty rather than two as was required. The show also claimed that when customers experienced problems, the company replaced phones with repaired devices instead of brand-new ones as it did in other countries.

  The annual program featured a live studio audience, musical numbers, and elaborate sets. One song was set to the tune of Journey’s “Don’t Stop Believin’.”

  Life presents problems, please don’t give up

  Let us maintain our rights

  Shed a smile and believe tomorrow will be better

  To repair life with a smile

  Known as the 315 Evening Gala, the more than two-decade-old program exposed business misconduct and celebrated consumer rights. Though local companies were also named, foreign firms were a popular target, particularly as the increasingly affluent market had risen in importance in the world. In the past, Hewlett-Packard, McDonald’s, and French retailer Carrefour had fallen under scrutiny. Companies considered the impact of the show to be so profound that some of them went out of their way to resolve known problems in advance to avoid being named.

  After the gala ran, Apple’s Chinese fans mocked the report on the Internet, criticizing the network of using the attack to divert attention from more serious problems such as pollution and more egregious violations by domestic companies. Internet users also had harsh words for celebrities who had immediately chimed in against Apple on the Twitter-like Weibo service. A Taiwanese-American entertainer, Peter Ho, was heavily criticized when it appeared he sent out a message with a note to himself that he forgot to delete.

  “#315isLive# Wow, Apple has so many tricks in its after-sales services. As an Apple fan, I’m hurt. You think this would be acceptable to Steve Jobs? Or to those young people who sold their kidneys [to buy iPads]? It’s really true that big chains treat customers poorly. Post around 8:20.”

  Ho claimed that his account had been hacked, but the speculation was that he and other stars had been asked by CCTV to post the comments at a specific time.

  Despite the outpouring of support, the controversy refused to die as other state-run media joined CCTV in their attacks. People’s Daily, the official mouthpiece of the Communist Party, published a series of articles and editorials including one titled “Defeat Apple’s Incomparable Arrogance.”

  The editorial charged that Apple had lost its integrity. Knowing that most Chinese admired Steve Jobs for his innovative spirit, the writer—a senior editor and party member—implied that Apple was neglecting the same people that held him in such high esteem.

  The article also hit on deep-rooted resentments about Western companies and their exploitation of China.

  “The profit-striving nature of capitalism has driven Apple to craziness,” said the writer. “Chinese consumers have always felt powerless when confronted by the arrogance of these big Western brands.”

  More critics emerged. China’s State Administration of Industry and Commerce called for “strengthened supervision” of Apple. Other television broadcasts followed, airing segments showing their journalists being turned away at Apple’s offices. In one, a female reporter for financial news network CCTV Channel 2 was filmed in an encounter at Apple’s Shanghai office.

  Covering the camera lens with his hand, a man tells her she must stop recording.

  “If you want an interview, you need to make an appointment.”

  “Who is available for an appointment?”

  “It’s all online. You can send an email.”

  “What if there’s no reply?”

  “That’s his business if the email isn’t answered.”

  When anothe
r staff member appeared, the female reporter tried again.

  “Who shall we make an appointment with?”

  “You need to find out the person on your own.”

  “I know that. What if my emails are not answered?”

  “If we need an interview with you, we will contact you.”

  “So we have to wait until you initiate contact?”

  A voice-over tells viewers that the network is still waiting for a response from Apple.

  Some analysts and bloggers found the orchestration of the attacks to be bizarre. Regardless, the negative coverage posed a real problem for Apple.

  Long-time China watchers believed they knew why Apple was targeted. The company had not spent enough time cultivating its relationship with the government and investing in efforts that benefited China and its people. Historically, Apple favored a one-size-fits-all approach in selling its products around the world and did little to tailor its business practices for individual countries. The company had moderated that stance in recent years, adding some customization in advertising and expanding its presence in key overseas markets. In China, Apple integrated Chinese Internet services into the iPhone and improved the way users could type in pinyin, the system used to spell Chinese words in Roman letters. But the efforts were minimal compared to other global corporations. On Apple’s App Store, for example, Apple set prices across the world by predetermined tiers. Developers could choose one, and that determined the cost of their app in each country’s currency. There was little flexibility for them to customize their pricing by market.

  That was how the company had gotten into trouble in the first place. The one-year limited warranty that Apple provided in China was the standard policy in the United States; customers had to pay $99 for a two-year extended warranty. The company hadn’t taken the country’s regulation into account. In China, there was an expectation by the people that foreign companies would behave better than everyone else. To provide a service level that was seen as worse was a double betrayal.

  Foreign businesses that had operated in China for a long time also implicitly understood that the Chinese government was happy to allow them in the country as long as these outsiders employed Chinese workers, paid Chinese taxes, and ideally shared knowledge and expertise. The one taboo was speaking publicly about the hoards of money the companies were raking in through these ventures.

  Apple had crossed that line. Quarter after quarter, the company provided detailed information about their business in Greater China. That included Hong Kong and Taiwan, but the vast majority was in mainland China. Just a couple of months earlier, Cook had spoken of how in the past quarter the company had increased its revenues in the region by more than 60 percent to $7.3 billion as iPhone sales saw triple-digit growth. He also told analysts that Apple had eleven stores in Greater China, up from six the previous year.

  “It’s already our second-largest region,” Cook said. “It’s clear there is a lot of potential there.”

  These glowing reports played well in America, especially among Apple’s stockholders. But in China, nobody wanted to hear about how much money a foreign company was making off the country. Every yuan that went into Apple’s coffers was one yuan that wasn’t going to a domestic company. China’s flagship technology companies like Huawei, Lenovo, and ZTE harbored ambitions to someday become global leaders in mobile communications. It was in China’s best interest to make sure that Apple didn’t become too powerful in its home market.

  “Apple is begging to be cut down to size as far as the government is concerned,” observed David Wolf, a market strategist with more than two decades of experience in China. He added that Apple and China’s interests had been aligned so far, but that was becoming less true. “Consumer day was the clearest signal that any of us could have been given that the balance is now tipped. . . . Had this just been CCTV and a few party interests going rogue, then it would not have intensified afterwards.”

  Apple did the only thing it could do to diffuse the crisis. On April 1, Cook apologized to the Chinese people in a lengthy open letter, written in Mandarin. In it he promised to be clearer about Apple’s after-sale service and outlined an amended warranty policy, under which damaged or defective phones would be replaced with brand-new devices rather than refurbished models. Warranties would also be renewed for a full year from the date of replacement.

  “We realize that a lack of communication in this process has led the outside to believe that Apple is arrogant and doesn’t care or value consumers’ feedback,” he wrote. “We sincerely apologize for any concern or misunderstanding this has brought to the customers.”

  Cook closed the letter by thanking everyone for the valuable feedback. “We always bear immense respect for China and the Chinese consumers are always our priority among priorities.”

  Some bloggers interpreted the apology as a token gesture, but the appropriately contrite letter was otherwise embraced. Apple’s image changed overnight at least for the moment.

  “Its reaction is worthy of respect compared with other American companies,” declared the Global Times, a tabloid published by People’s Daily. The Foreign Ministry also praised Apple for “conscientiously” responding to consumers’ demands.

  Despite the humility so effusively expressed in the letter, Apple returned to its customary haughtiness when the U.S. media asked for a translation. Apple declined. The apology was only intended for Chinese consumers. Even by Apple’s standards, the refusal was silly. Posted on Apple’s site in China, the letter had already been made available to more than a billion people. Did the PR department really think they’d be able to control who else read it?

  The pattern was the same, whether Apple was stiff-arming reporters, or squeezing its business partners until they bled, or neglecting to properly test its own products before they launched, or failing to appreciate the nuances of operating in other countries and other cultures.

  Again and again, the damage was self-inflicted.

  Nowhere was Apple’s decline more obvious than on Wall Street.

  Since Cook had taken over, Apple had continued to post strong earnings, but growth was slowing. After reaching a high of $702.41 the previous September, Apple’s shares had plunged by nearly 30 percent to $500 by mid-January 2013. Shares fell even further after Apple announced the slowest quarterly profit growth since 2003. During the holiday quarter, Apple’s profits had risen less than 1 percent to $13.1 billion. Sales rose by just 18 percent compared to the 73 percent growth recorded the previous year.

  Particularly after the news of the slashed orders for iPhone 5 parts, Wall Street worried about the intensifying competition and a maturing market. Apple had sold iPhones and iPads to almost everyone who wanted one and was finding it more difficult to increase sales. The market was also moving from high-end models to the lower end, a category in which Apple did not have a product. In tablets, Amazon came after Apple with ads that compared its $299 Kindle Fire to the $499 iPad.

  At the annual confab Cook addressed Apple’s disappointing stock performance.

  “I don’t like it, either,” he said. “And I can assure you the board doesn’t like it and the management team doesn’t like it. What we’re focused on is the long term.” Cook promised that the company was working as hard as ever on new products.

  His comments did little to appease some investors. The first question came from a shareholder who wanted to know why Apple wasn’t fighting Samsung and Android harder. “In the last few months, my shares have been down thirty percent in value,” he said. “Why hasn’t Apple used some of that huge cash to do total war for the market that we invented?”

  Cook’s response: Apple’s goal wasn’t to make the most devices, it was to make the best.

  Apple’s shares that day closed down 1 percent.

  Cook’s inability to instill confidence in the company was attracting notice. In a widely discussed article titled “The Last 6 Times Tim Cook Has Talked, Apple’s Stock Has Dropped,” Huffington Post
correlated Apple’s stock decline with Cook’s public comments. The article was somewhat misleading because Apple’s shares had been on a downward trajectory since September. The declines were also not always significant. But the article was yet another sign that Apple was losing its public relations campaign.

  A couple of months later Apple reported its first profit decline in a decade. Particularly worrisome was the declining market share of the iPhone business. Many customers who had purchased an iPhone that quarter bought the older iPhone 4 models, which were considerably less profitable for Apple because they were cheaper.

  Cook sought to placate investors by announcing plans to return another $100 billion to shareholders through higher dividends and stock buybacks, more than twice as much cash as he had announced the previous year. The news bumped Apple’s stock up 5 percent briefly, but shares soon fell again. The stock was down more than 40 percent from its September high. A company that was once bullishly projected to hit $1,000 a share or more was trading at around $400.

  The root all of the anxiety was that three years after the iPad’s release, there was still no sign of the next world-changing magical product. Siri was a dud and Apple Maps a flop. The iPhone 5 was hardly the brand-new, exciting upgrade that it was promised to be. The MacBook Pros were slimmer and lighter and came with a better screen than ever before, but they were too expensive for most consumers. The latest iPod touches and nanos came in multiple colors with advanced features, but the business was increasingly insignificant to Apple’s growth. iPods contributed no more than 5 percent of the company’s overall revenues.