Apple Inc (AAPL). Chief Executive Officer Tim Cook apologized for the company’s iPhone warranty and repair policies in China after receiving criticism from state-run media over customer service in its second-largest market.
Apple, in a change in practice, will offer full replacements of older iPhones experiencing problems, Cook said in a letter posted on the company’s Chinese website. Apple also vowed to improve training, customer service and monitoring of stores authorized to sell its products in China. The stock fell 3.1 percent yesterday, its biggest decline since Jan. 24.
“In the process of studying the issues, we recognize that some people may have viewed our lack of communication as arrogant, or as a sign that we didn’t care about or value their feedback,” Cook said. “We sincerely apologize to our customers for any concern or confusion we may have caused.”
The letter underscores China’s importance to Apple, whose stock has fallen in the past six months amid concerns about slowing sales and profit growth. The country, which is Apple’s biggest market after the U.S., accounted for $22.8 billion in sales in fiscal 2012, and the company sold more than 2 million iPhone 5 models in the first weekend it went on sale there.
“We have tremendous respect for China,” Cook said. “Our customers here will always be central to our thoughts.”
Apple (AAPL) fell to $428.91 at the close in New York yesterday. The shares have dropped 19 percent this year, compared with a 9.5 percent gain for the Standard & Poor’s 500 Index.

‘Apple’s Arrogance’

The apology follows criticism from Chinese media outlets of Apple’s customer service and warranty policies. State broadcaster China Central Television criticized the company’s practices on Consumer Rights Day. The People’s Daily, the official newspaper of the Chinese Communist Party, followed with articles, including a March 27 commentary that said “Destroy Apple’s ‘Incomparable’ Arrogance.’” The central government also said it planned to increase scrutiny of contracts with electronics makers, the official Xinhua News Agency reported.
“I want to say that it is completely normal for the Apple company to apologize to Chinese consumers, and I think such act is commendable,” Hong Lei, a spokesman for China’s Foreign Ministry, said during a briefing in Beijing today.

‘Deep Commitment’

The negative reports focused on complaints that Apple repaired broken iPhones instead of replacing them and that warranties weren’t sufficiently long. While Apple said 90 percent of customers had been satisfied by fixes it had been making, the company also said it would replace those handsets with new ones and offer extended warranties.
“We recognize that we have much to learn about operating and communicating in China, but we want to assure everyone that we bring the same deep commitment and passion to China as we do to any other part of the world,” Cook said.
The same CCTV report also targeted Volkswagen AG, saying customers reported abnormal vibrations, loss of power and sudden acceleration in models fitted with a direct-shift gearbox. Europe’s largest automaker subsequently announced a recall.
Last year, France’s Carrefour SA shut an outlet in central China after CCTV reported it had falsely labeled meat sold at the store. The world’s second-largest retailer sold regular chicken as premium for higher prices, according to the report.
“State media has been picking on foreign companies really too much lately,” said Shaun Rein, managing director of China Market Research Group in Shanghai. “This isn’t good for foreign investment.”

HP’s Lesson

While Apple’s sales have been growing in China, it still lags behind smartphone competitors in the country, where the average consumer earns less than $600 a month.
The company is in sixth place, according to market researcher IDC, trailing competitors including Samsung Electronics Co. and Lenovo Group Ltd. (992), which offer devices in a range of styles and prices. The iPhone also isn’t being sold by the country’s largest wireless carrier, China Mobile Ltd. (941)
“At a minimum, these attacks put a wrench into Apple’s ability to strike a deal with China Mobile to open opportunities further in China,” Glen Yeung, an analyst at Citigroup Global Markets Inc., wrote in a research report. He has a neutral rating on the shares with a $480 target price.
Apple is trying to avoid the fate of Hewlett-Packard Co. (HPQ), which saw its share of the personal computer market drop by 50 percent in China after it was the subject of media criticism, according to Yeung. If Apple’s market share fell by that much, it could result in $13.1 billion in lost sales, Yeung said.

Jobs Apology

Cook’s letter marks his second public effort to make amends with customers. He also apologized for the company’s mapping software in September after it was faulted for misguided directions and inaccurate landmark locations.
Apple has apologized for policies related to the iPhone before. Following the first iPhone release in 2007, co-founder Steve Jobs offered users rebates and an apology because early customers complained about a price cut two months after it went on sale.
In 2010, Jobs apologized and gave out free cases to customers because of antenna defects for the iPhone 4. After Consumer Reports and other publications showed the device would lose its signal if held a certain way, Jobs called a rare press conference to explain the issue.