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Posted at 10:44 AM ET, 01/25/2013

Apple: Designed in California, made in China?


People line up to enter a newly-opened Apple Store in Wangfujing shopping district in Beijing on Oct. 20, 2012. (Andy Wong - AP)

Despite reporting one of the best quarters ever in the history of the company, despite Tim Cook claiming that the company is experiencing “one of the most prolific periods of innovation in its history”, despite all-time record sales for the iPad and iPhone, Apple still saw nearly $60 billion in market capitalization erased in a single day. The company’s stock, which once traded as high as $705, is , as of the writing of this post, trading near $450, down more than 30 percent for the year. Apple is caught in the classic Wall Street expectations trap, where the company is being asked to chase future revenue and profits in order to outpace investor expectations.

What’s striking is how much of the future narrative about Apple — arguably America’s most innovative company — revolves around China. China is such an important part of the company’s narrative that Apple is now nicely breaking out the company's numbers for Greater China (China, Hong Kong, and Taiwan) and keeping investors updated with the pace of the opening of new Apple stores in China. Apple also appears more willing to share details about its relationships with Chinese mobile carriers. At a time when U.S. sales are slowing, Apple notes that it still has triple-digit growth in China. It’s almost as if to say, Ok, well, our U.S. numbers may have dried up, but just look at what we’re doing in China these days.

As a result, it’s no longer about Apple convincing us that it’s still innovative, rolling out new products for early-adopter technologists, or continuing to amaze us with new products such as the iPad, which are truly breakthrough offerings. It’s now all about future growth, about grinding out sales at a faster and faster rate. This time around, roughly $60 billion just disappeared into the ether because Wall Street investors no longer have confidence that the company can continue to churn out blockbuster sales of its pricey phones and tablets for the next quarter.

From here on out, it almost doesn’t matter what earnings number Apple posts for the current quarter. It only matters what numbers investors think the company will post in successive quarters down the line. As a result, Apple is facing a new urgency to update its “China strategy” for the new global economic reality. Having a “China strategy” is no longer about competing with low-cost imports, dealing with cheap (and illegal) knock-offs or hunting for low-cost labor overseas. It’s now all about viewing China as your primary market. For Apple, that means figuring out how to be a “Chinese company” as much as an “American company” and sell to the Chinese.

Apple is not the only major U.S. company with its future now hitched to the fate of the China economy. Starbucks, another company that reported earnings this week, has also hitched its coffee wagon to the Asian market. Starbucks now expects China to become its second-largest coffee market by 2014, reports Advertising Age’s Anita Chang Beattie. The Starbucks strategy was to open “roughly one store every day for three years”.

Not that there’s anything wrong with having access to the world’s biggest market and billions of potential consumers. However, there is a warning here. Consider how the U.S. government is caught in a dangerous dance with China, dependent on the nation to finance its burgeoning deficits. Push too hard, and China knows exactly which buttons to press in response to keep the U.S. government at bay.

Will the same thing happen with our nation’s most innovative companies — companies such as Apple and Starbucks — that are now growing increasingly dependent on the Chinese consumer to maintain their earnings momentum? All of a sudden, it seems that Apple has a much higher incentive to see that business-as-usual continues in China.

Apple can’t let investors get a whiff of fear again about those future earnings expectations, so they need to guarantee that its China earnings are rock-solid. It’s no longer about creating innovative products for the high-end American tech consumer — it’s now about providing the mid-market Chinese consumer with iPhones and iPads. Stability is what brings profits, not volatility. Stability, unfortunately, also has a side effect in that it is also what keeps companies from asking too many questions about censorship, sweatshop labor conditions, or a host of other troubling issues.

Due to a system error the byline on this story appeared incorrectly. It has since been corrected. We regret the error.

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By  |  10:44 AM ET, 01/25/2013

 
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