Apple Apology in China a Rite of Passage for Foreign Brands

Apple Inc (AAPL). Chief Executive Officer Tim Cook apologized to Chinese consumers after two weeks of being lambasted by state-run media for arrogance and poor customer service. The company’s offense? It failed to replace the back covers of iPhones after repairing electronics inside.

Corporate mea culpas have become a rite of passage for international companies criticized by China Central Television, including Volkswagen AG, Carrefour SA (CA) and Yum! Brands Inc (YUM).

The network beamed its program on Apple to more than 1 billion people just hours after Li Keqiang, who has pledged to root out consumer abuses, was named premier. The state-run People’s Daily followed with more than a dozen articles at a time when China struggles to cope with poisonous food, air pollution, government corruption and thousands of dead pigs floating in Shanghai’s drinking water.

“The state media has been picking on foreign companies really too much lately,” said Shaun Rein, managing director of China Market Research Group in Shanghai. “The government should ensure that companies treat Chinese consumers fairly. They also have to make sure when they do it that it’s clear it’s for the protection of consumers rather than where it’s becoming to seem a political issue.”

Photographer: David Paul Morris/Bloomberg

Tim Cook, chief executive officer of Apple Inc., speaks at the Apple Worldwide Developers Conference in San Francisco. Close

Tim Cook, chief executive officer of Apple Inc., speaks at the Apple Worldwide... Read More

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Photographer: David Paul Morris/Bloomberg

Tim Cook, chief executive officer of Apple Inc., speaks at the Apple Worldwide Developers Conference in San Francisco.

Government Supervision

The attacks on Apple come five months after sales of Japanese-brand cars plummeted due to a territorial dispute over uninhabited islands.

After the March 15 report on CCTV, China’s commerce market watchdog pledged to strengthen regulations concerning infringements of customer’s rights. The State Administration for Industry and Commerce asked local authorities to increase their supervision of clauses in Apple’s warranty policies.

An official in the administration’s news office who declined to be identified wouldn’t comment on whether Apple’s warranty policies broke any laws.

“It is completely normal for the Apple company to apologize to Chinese consumers, and I think such action is commendable,” Hong Lei, a spokesman for China’s Foreign Ministry, said during a briefing in Beijing yesterday.

In a change, Apple will now offer full replacements of iPhone 4 and 4S models, and the warranty will be reset to one year at that point, Cook said in a letter posted on the company’s Chinese website. Previously, the company provided new parts attached to the back of the customer’s existing iPhone, and didn’t extend the warranty.

Cook Apology

Samsung Electronics Co. (005930), the world’s largest maker of smartphones, repairs or replaces individual parts and will reset the warranty if it replaces the entire device within the initial one-year period, said Chris Jung, a Seoul-based spokesman.

Apple also vowed to improve training, customer service and monitoring of stores authorized to sell its products in China. The stock rose 0.2 percent to close at $429.79 in New York yesterday. The shares have dropped 19 percent this year.

“In the process of studying the issues, we recognize that some people may have viewed our lack of communication as arrogant, or as a sign that we didn’t care about or value their feedback,” Cook said. “We sincerely apologize to our customers for any concern or confusion we may have caused.”

Yin Wen, producer of the CCTV show, said the network wasn’t told by the government to target Apple, and the reason why People’s Daily, the official newspaper of the ruling Chinese Communist Party, published several follow-up articles on the issue was because “Apple has stirred public anger.”

Pollution ‘Irrelevant’

China is Apple’s biggest market outside the U.S., accounting for $22.8 billion in sales in fiscal 2012. The Cupertino, California-based company sold more than 2 million iPhone 5 models the first weekend they went on sale there.

“We don’t differentiate between foreign and Chinese enterprises when picking which companies to expose,” Yin said. “We picked Apple because we received a lot of consumer complaints, so we sent reporters to investigate the issue.”

Yin said the show’s focus is consumer protection, so issues such as pollution are “irrelevant.”

Since the day of the broadcast, the People’s Daily website has published about the same number of articles on Apple as it has on the pigs found in Shanghai’s Huangpu River.

Apple needed to address the situation because the intensity of scrutiny from state media was more severe than in the cases of other foreign brands, said Mark Natkin, managing director of Marbridge Consulting Ltd., a market research firm in Beijing.

Huawei, ZTE

“There’s a larger issue when other state media jump on,” Natkin said. “It’s worth noting this criticism is coming at a time when several well-known Chinese electronics companies are having increasing difficulty accessing the U.S. market.”

The U.S. government should block acquisitions or mergers by Huawei Technologies Co. and ZTE Corp (763)., China’s two largest phone-equipment makers, a congressional panel said in a report in October. The companies’ equipment can provide an opening for Chinese intelligence services to use U.S. telecommunications networks for spying, according to the report.

The CCTV show last month also targeted Volkswagen AG (VOW), saying customers reported abnormal vibrations, loss of power and sudden acceleration in models fitted with a direct-shift gearbox. Europe’s largest automaker subsequently announced a recall of 380,000 cars.

That may cost the company more than $600 million, based on estimates from research firm LMC Automotive.

Carrefour, Yum

Last year, Carrefour apologized and shut an outlet in central Henan province after CCTV reported it altered labels for meat production dates. Yum, owner of the KFC food chain, apologized in January after the state broadcaster said a supplier provided chicken meat with too much antibiotics. Unilever, the world’s second-largest consumer-goods maker, was fined 2 million yuan ($322,600) in 2011 for telling the media about plans to raise prices, which the Chinese government said led to hoarding of consumer goods in some cities.

Apple’s attempt to placate China consumers will be costly because extending the warranty period by a year may triple calls for service and force the company to hire more people, said Nathan Washburn, a professor of business strategy at Thunderbird School of Global Management now teaching at Peking University.

Worst of all for Apple, the apology and increased costs for still may not get the company off the hook, Rein said.

“No matter what Apple does, the state media is going to continue to criticize them,” Rein said. “They are in the cross hairs and the government wants to make an example of them for whatever reason -- whether that’s about censorship on iTunes, about trying to support the domestic telecom sector, or trying to divert attention away from the real problems in the country like pollution.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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