Apple's Supply Chain and China: Why the Tech Giant Will Likely Be a Frequent Defendant in Patent Litigation in China

Anyone involved in the technology space should understand Apple's supply chain.  A friend of mine, Professor Seamus Grimes, has co-authored an excellent paper on the position of China in Apple's supply chain.  The reason why this is on my blog is that because China is so important to and intertwined with Apple's product ecosystem.  The paper shows how difficult it would be for Apple (and likely most tech companies that use China as a manufacturing base) to extricate itself from the Middle Kingdom.  

Given that they Apple be staying in China for the long haul, Apple will have to change its relationship with China.  Apple has not been the best friend to China.  Sure, they use the country for manufacturing, which has led to hiring a lot of Chinese workers -- some by Apple directly and more by suppliers such as Foxconn.  But just because have directly and indirectly led to employment for tens of thousands of Chinese workers does not mean they are really helping China.  If Apple were to be on the losing end of a patent lawsuit in China and enjoined from selling mobile devices in the country and from exporting them from China (yes, Chinese patent injunctions affect exports in addition to imports) then lots of workers would be out of work.  For three weeks.  And then they would go across the street or even to another part of the same factory and do the same work, but for one of the many Chinese mobile champions such as Xiaomi, Huawei, Lenovo, and ZTE.  ​

And this would be a net positive for China because Chinese companies are easier to control and contribute more money to China.  Currently the vast majority of Apple's revenue stream runs through Ireland in order to avoid taxes.  This means that a very small amount of Apple's income flows to China.  Chinese competitors, however, do not have the option to avoid Chinese taxes.  So at the end of the day, China benefits from Apple losing market share to domestic competitors.  

The reason that Apple recently invested $1 Billion in Chinese ride-hailing  app company Didi Chuxing was not because it loves taxis, but rather because it needs to curry favor with the Chinese government.  But this investment is just a drop in the bucket, and will be replenished in the coming months and years.  The reason that Apple needs to have a good relationship with China is not just because they use China to produce their products, but also because at least 25% of Apple's revenue comes from China:

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All of this is to say that Apple cannot leave China, but is not China's favorite son (see, e.g., how Apple's iTunes movies and iBooks were blocked in China).  This -- and Apple's huge profits -- leaves the company open for patent lawsuits by both Chinese and foreign companies, including licensing companies.  Stay tuned over the next year or so to see how this evolves.