Why So Siri-ous? Apple vs. China Mobile by Alexander Vagg

The days of the United States as the world’s center of manufacturing and assembly, most will agree, are over. There is little doubt that the incredibly low cost of manufacturing, labor and assembly in East and Southeast Asia will continue to shift the world’s assembly plants from Detroit to Shenzhen. Technological innovation is now the key to America’s economic future. However, US dominance, even in Silicon Valley, may not last forever as China has begun to address its problems in innovation. Apple is well known for being one of the most innovative telecommunications companies in the world. Its powerful corporate leadership is able to quickly implement new business strategies that are carried out by the entire organization. For example, just six weeks before the release of the original iPhone in 2007, Apple co-founder Steve Jobs demanded that the device be upgraded with an unscratchable glass screen. While the innovation for creating the glass came from an American company, Corning Inc, the incredible manufacturing and assembly of the new screen takes place in the giant plants of Shenzhen. Recognizing it cannot compete with the supply chains of Asia, Apple has wisely focused on innovation. Leading the way in this regard, Apple has released redesigns of the iPhone every year, and it recently built a $500 million data center in North Carolina. Crucial semiconductors inside the iPhone 4 and 4S are manufactured in Austin, Texas, not Shanghai, China.

In contrast, China Mobile has been content to parrot the innovations of Apple and other telecommunications giants. Knockoff iPhones of reduced quality are common throughout China, and the lack of innovation by China Mobile has led some to argue that the firm is extremely vulnerable to foreign competition. The company also experiences frequent government intervention into its business affairs. The Chinese government, as China Mobile’s biggest investor and regulator, has repeatedly limited the firm’s competition, reducing incentives for improved efficiency and stifling the creation of innovative telecommunications technology.

The modern Chinese approach to innovation, as Willy Lam of the Jamestown Foundation sees it, is “reminiscent of the Soviet Union.” He points out that while China boasts the world’s largest number of scientists and engineers—more than 53 million—most of the core technologies used in China still have to be imported from the United States. The Beijing-based Unirule Institute of Economics suggests that between 2001 and 2009 the average real return for state-owned Chinese companies was -1.47 percent. The limited protection of intellectual property in China also discourages domestic innovation. Despite new patent laws allowing China to replace the US as the top patent filer in 2011, experts in Thomson Reuters remain convinced the quality does not match the quantity.

While the US may be king of creativity today, this might not always be true. China is catching up on innovation, and sound technology choices by China Mobile and others working in 3G technology may begin to counteract current restrictions by the Chinese government. Just last week, Vice-Premier Li Keqiang reiterated the need for independent innovation, calling it the “lifeblood” of enterprise.

Furthermore, the link between innovation and profits is not entirely clear. As of 2010 China Mobile controlled the vast majority of its domestic mobile services market with a 70 percent market share, and it provides service to 655 million subscribers. Along with China National Petroleum Corporation, China Mobile made greater profits than China’s 500 most profitable private organizations combined. Apple’s innovations have provided a surge of jobs not to the United States, but to China. While Silicon Valley remains the world’s center of technological innovation, whether it transfers those profits to the entire country or to only a few CEOs is unclear.

Most recently, in a move that may forever transform the relationship between the two tech giants, Apple announced that it was planning an iPhone 5 launch with China Mobile sometime in 2012. Apple launched the iPhone 4S earlier this month in China with China Unicom and China Telecom. However, without access to China Mobile’s huge network, experts predict that Samsung will rule the smart-phone wars in China. If Apple can finally tap into the world’s largest mobile phone network, it will have enormous consequences.

China’s path on the other hand is straightforward. If China can continue to parrot innovative American products, employ millions of its workers to assemble those items and expand its capacity to innovate through enhanced intellectual property rights and technological development, then China may one day rival the US in technological breakthroughs. Even Apple may not have an app for that.

Alexander Vagg is a masters student in the Government Department's International Law and Global Security program at Georgetown University.