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Search for new ideas, new image sparked Apple to plan second China R&D center

Apple's decision to open a second research and development center in China will help the Silicon Valley icon find suppliers and compete against increasingly savvy local rivals while improving its image among Chinese consumers.

The company announced in October it would site an R&D center in the strategically important southern city of Shenzhen next year. That site will complement 200,000 Shenzhen jobs that Apple now supports and follow its first China R&D center, a US$45 million project being built in Beijing.

Apple said in a statement Nov. 1 it would open the Shenzhen center so its "engineering team can work even more closely and collaboratively with our manufacturing partners" and to build relations with "local partners and universities as we work to support talent development across the country."

The hardware-software developer known worldwide for iPhones and iPads probably decided on the second China R&D center to keep up with shifting demands in the ominously large market that has its own ideas about technology.

China leads other countries in smartphone ownership, with about 563 million users now on the way to 687 million by 2019.

But Apple saw China iPhone sales fall 33 percent last quarter over the same period of 2015 as consumers went instead for cheaper domestically produced Android brands -- many designed in Shenzhen by local engineers.

"Apple's sales have been slipping in China, and the company needs all the help it can get," said Danny Levinson, an early-stage tech investor with Matoka Capital in Beijing. "Shenzhen is a great choice because of close proximity to OEM factories and a decent pool of local tech talent."

STRATEGIC LOCALE

Shenzhen may also offer Apple a friendly tax scheme, while its coastal location near other major cities lets any manufacturer easily move products into, out of, and around China by air or sea. The transport advantage could reduce freight costs, says Angela Hsieh, an economist with Barclays in Singapore.
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Shenzhen, a 10 million-population city just north of Hong Kong, is home to Apple’s smartphone-developer rivals Huawei and ZTE. Flagship Internet content firm Tencent Holdings is there too. Some Shenzhen companies already work with Apple to make its gear.

Apple will poke into the universities for ideas about new apps, perhaps, and try to hire people from other companies in Shenzhen, analysts guess. CEO Tim Cook said in early October he hoped to attract talented software developers in Shenzhen.

Apple will probably pick local firms for iPhone battery cells and sound components, then move on to printed circuit boards and glass chassis, said Eddie Han, an analyst with the Marketing Intelligence & Consulting Institute in Taipei. Chinese firms do relatively little for the iPhone now, he said.

"I think Apple is to pay increasing attention to supply chain management in the Chinese industry through its Shenzhen R&D center in anticipation of more Chinese partners to come in the future," Han said.

Apple might learn from its Shenzhen connections what Chinese prefer in an app. Tencent, a profitable company with 2015 revenues of US$15.8 billion, has built a nationwide following for its WeChat mobile messaging app and an online payment plan, for example.

Apple is trying to expand Apple Pay and, through the iOS 10 operating system, iMessage.

Local parts sourcing and use of Chinese R&D talent would improve Apple's reputation in China, which in turn could raise iPhone sales, analysts expect.

Like other foreign vendors, Apple gets criticized in China for using China for sales income without investing in it.

"Foreign companies in the past have been accused of capitalistic carpet-bagging in China, so R&D is a good public relations move to show commitment to Chinese consumers," Levinson says.