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China's middle class can finally afford iPhones

While skeptics question whether the company's future is

While skeptics question whether the company's future is tied too much to one product, the iPhone's popularity was the reason Apple turned in another blowout financial report Monday. Photo Credit: Bloomberg News / Lisa Maree Williams

The most obvious way to read Apple's latest quarterly earnings report -- which revealed that iPhone sales in China had surpassed those in the U.S. for the first time -- is as a compilation of great news about the company's bottom line. But it's also a sign that China's consumer market is finally starting to come into its own. It might even mark China's so-called "Henry Ford moment," when a sizable portion of the country's workers can finally afford to buy the things they're manufacturing.

It's still a bit too early to definitively draw that conclusion. Apple's statistics may have been skewed by the post- Christmas lull in the U.S., which coincides with the peak Lunar New Year shopping season in mainland China.

But there's no reason to think the upward trends for China's middle class will reverse anytime soon. Apple's sales figures seem to confirm recent studies by the Asia Society Policy Institute and the Rhodium Group, which showed that Chinese incomes are rising faster than official data indicate.

As Apple CEO Tim Cook has pointed out, "I've never seen as many people coming into the middle class as they are in China and that's where the bulk of our sales are going." What's clear is that the spending power of Chinese consumers will eventually catch up with the country's industrial capacity -- and when it does, the global marketplace will be changed forever.

China will start to become the world's new center of gravity for corporate executives and world leaders alike. "Thirty years ago, the West wanted nothing more than for China to become a capitalist economy," Harvard University's Jeffrey Frankel writes in a Project Syndicate op-ed. "The rules of the game now require that China be given a bigger share in the governance of international institutions." Consider how this shift is already affecting trade dynamics between the U.S. and China. The steady rise of the Chinese consumer clearly weakened Washington's negotiating position as it tried to convince other countries not to support the Asian Infrastructure Investment Bank. Silicon Valley, for its part, has also had to navigate a power dynamic that is constantly shifting eastward. Beijing is well aware that U.S. companies like Apple increasingly depend on Chinese consumers for growth, which has made it harder for them to push back on China's loose protections for intellectual property rights.

Apple's strategy so far has been to try endearing itself with both the Chinese masses and the Chinese government. It has nudged its factories there to pay more than competitors, while also offering free education to workers. It has also agreed to cooperate with state-owned China Telecom in hosting data. By introducing a firewall in China for its iCloud, Apple has found a way to give Chinese consumers access services that are similar to those it offers in the West, while also placating Chinese authorities.

To be sure, the rapid expansion of China's consumer market will also pose problems for China. In recent years, the public's anger over pollution has been the primary cause of protests and social unrest. But as China's consumption patterns start resembling those in the United States, the problem is sure to get worse. Chinese residents might have gotten used to reaching for their iPhones for air-safety updates, but Apple's many factories are themselves responsible for a significant share of China's air pollution. One need only imagine what China's skies will look like when the average Chinese owns a car -- or two.

China is now entering a new stage of its growth. In many ways, it resembles the industrial and consumer revolutions that upended the United States' political and economic order at the turn of the previous century. There are significant differences, of course -- including that contemporary China has a population 17 times larger than that of the U.S. in 1900. To that extent, it's safe to say China's current revolution will be significantly more disruptive for the world than America's earlier rendition.

William Pesek, a Bloomberg View columnist based in Tokyo, writes on economics, markets and politics in the Asia-Pacific region.


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