AAPL Apple Inc

BEIJING—For Apple Inc. Chief Executive Tim Cook, the demands from China are growing and his bargaining chips are dwindling.

Beijing is pushing western technology companies like Apple to meet increasingly stringent regulations for data storage and information sharing, while falling iPhone production means the U.S. tech giant's suppliers and contract manufacturers aren't the employment drivers they used to be.

With Apple's sales tumbling, the Chinese government's support waning and a new iPhone coming out, Mr. Cook is on a goodwill mission: meeting with government officials, touring Chinese Apple stores and speaking with local residents. Mr. Cook pledged to increase investment in China in a meeting with Vice Premier Zhang Gaoli in Beijing on Tuesday. He continued to the central Chinese city Chongqing on Wednesday, where he toured an Apple store with the mayor.

An Apple spokeswoman didn't reply to requests for comment on Mr. Cook's trip to China.

"He has to be really friendly with the government," said Chris DeAngelis, general manager of tech consultancy ADG, noting Apple's efforts to expand in Chinese sectors such as mobile payments, that are difficult for foreign companies to enter.

Mr. Cook's latest investment pledge is a reminder of China's longstanding expectations for foreign companies. In exchange for access to China's vast customer base—the country is the world's biggest smartphone market and internet market by users—foreign enterprises are expected to help the local economy through investment and technology transfer.

"He is trying to show he is learning and appreciates the local culture," said Kitty Fok, China research director for market research firm IDC. "This kind of investment will help build up a better relationship with the government."

This trade off isn't new for Apple, nor for any major western technology company. Apple has consistently made investments in China, including pledging $1 billion for Chinese ride-hailing champion Didi Chuxing Technology Co. in May.

But Apple is now at a challenging juncture: Beijing is making increasingly forceful regulatory demands, while Apple's biggest bargaining chip—its contribution to China's economy through the manufacturing of iPhones—is shrinking.

Apple posted a 14.9% drop in global iPhone sales for the quarter ended in June to 40.4 million units, its second consecutive quarter of decline. Apple's sales for all products in China, Taiwan and Hong Kong fell 33% in the quarter to $8.8 billion, the steepest regional drop. Greater China fell to Apple's No. 3 sales region behind the Americas and Europe in the quarter. It was previously the No. 2 region.

Top Chinese leaders have expressed concern over declining iPhone sales. At a meeting in May between Chinese Premier Li Keqiang and technology executives in the southern Guizhou province, Mr. Li had only one question for Terry Gou, the chairman of Apple's main contract manufacturer Foxconn Technology Group, according to people who attended the meeting.

The premier asked Mr. Gou if production this year would decline. After trying to deflect the question, Mr. Gou confirmed that "the general trend" was downward, the people said.

A Foxconn spokesman didn't immediately reply to a request for comment.

Foxconn reported last week that its second-quarter net profit fell 31% from a year earlier to 17.7 billion New Taiwan dollars (US$566 million).

Amid falling global iPhone sales, Mr. Cook's charm offensive in India in May ruffled feathers in China, state media reported, prompting some Chinese commentators to urge a shift to supporting domestic manufacturers.

"Encouraging the development of native manufacturers in western China is better than contending with India to host multinational giants like Apple," China's state-owned Global Times newspaper wrote.

Meanwhile, Apple is contending with multiple regulatory challenges in China. Its online movies and books services were shut down in China in April, with authorities telling the company it lacked the needed licenses, according to people familiar with the matter.

Apple also revealed that month that it had refused requests from Chinese authorities to share proprietary code for some of the company's products.

China has enacted several new cybersecurity laws over the past year that put pressure on foreign companies to store their data locally in China and share information with the government upon request.

Analysts point out that despite recent headwinds, Apple still is one of the biggest success stories among foreign companies in China.

"They are pretty much the only ones able to play in some of these sensitive industries" such as running its own app store and mobile payments, Mr. DeAngelis said.

Apple's next iPhone model recently began production at Foxconn's manufacturing center in central Zhengzhou after months of trial runs, people familiar with the matter said. This year's model isn't expected to have as many major changes as previous years', with Apple saving larger changes for the 10th anniversary of the iPhone next year.

Yang Jie contributed to this article.

Write to Eva Dou at eva.dou@wsj.com

(END) Dow Jones Newswires

August 17, 2016 08:35 ET (12:35 GMT)

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