Will Apple Get Hurt in Tensions Between the U.S. and China?

A man uses a mobile phone as he walks past an Apple store in Beijing on April 14, 2014.

Source: Wang Zhao/ AFP/ Getty Images

Amid growing political tension over accusations of cyberspying traded by the U.S. and China, Apple (NASDAQ:AAPL) is learning that Chinese state media is a force to be reckoned with. In a Wells Fargo (NYSE:WFC) Securities report, analyst Maynard Um maintained a Market Perform rating on Apple’s stock, evaluating the risks posed by claims made by China Central TV.

The state-run media outlet claimed that Apple’s iPhone is a “national security concern,” citing the Frequent Locations function that tracks users’ movements to learn which are significant. The broadcast quoted researchers who claimed that the collection of such location data could reveal “state secrets” or information on the country’s economic condition.

As Um notes, Apple responded to the claims by the state-run media outlet with a statement titled “Your Location Privacy,” assuring Chinese users that the data gathered is only stored locally on the device, not backed up to iTunes or iCloud, encrypted with the user’s passcode, and not accessed by Apple. The feature is intended as a secure convenience for users; “Unlike many companies, our business does not depend on collecting large amounts of personal data about our customers,” Apple notes.

The company also notes that it hasn’t implemented a government “backdoor,” and doesn’t intend to: “As we have stated before, Apple has never worked with any government agency from any country to create a backdoor in any of our products or services. We have also never allowed access to our servers. And we never will. It’s something we feel very strongly about.”

Apple iOS 7 Frequent Locations feature

Source: Support.apple.com

Apple’s iOS 7 support site also describes the Frequent Locations feature: “Your iPhone will keep track of places you have recently been, as well as how often and when you visited them, in order to learn places that are significant to you. This data is kept solely on your device and won’t be sent to Apple without your consent. It will be used to provide you with personalized services, such as predictive traffic routing.”

However, Um notes that China Central TV’s claims could still affect Apple, despite the company’s efforts to defuse the controversy. “This is not AAPL’s first run-in with China Central TV,” Um notes, referring to the outlet’s criticism of Apple’s warranty and repair policies. That led to Apple extending warranty plans, which negatively affected gross margins. Um writes that “the situation bears watching as China Central TV has had significant influence on a number of companies previously.” He listed a series of companies that have been criticized by the outlet, noting the adverse effects that the controversy set off:

“Some companies previously mentioned on China Central TV have faced headwinds resulting from the bad PR. In our coverage universe, HP faced accusations in 2010 around the quality of its notebook PCs sold in China. After the broadcast, HP’s share in China dropped nearly in half on a yr/yr basis according to IDC. More recently (earlier this year), Nikon faced controversy around claims of its D600 being dust-proof and had sales halted and then ultimately replaced it with the D610 (with reports that consumers demanded a free upgrade). Within a month after the broadcast, Nikon lost floor space to rival Canon at a Beijing electronics retailer…While the impact of China Central TV’s comments are obviously unknown, it’s worth monitoring as they have negatively affected other multinational names. “

Um maintained a neutral Market Perform rating for Apple’s stock, noting that improved gross margin and the introduction of new products are balanced against potential pressures, such as potential gross margin pressure, limited market cap in existing segments, and a potential “power shift” from handset vendors to wireless operators.

Some have noted the possibility that the China Central TV broadcast was produced in retaliation against a report by American officials that Chinese hackers accessed a U.S. government network to access personal information on federal employees. China and the U.S. have repeatedly accused each other of cyber spying, and BBC News reported at the time that “Beijing typically shrugs accusations off as a smear motivated by those who find its growing technological might hard to bear.”

As CNET reported in June, Chinese media outlets have accused U.S. tech companies, like Apple, Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and Facebook (NASDAQ:FB), of monitoring China and stealing secrets. The state-run People’s Daily called for the country to “severely punish the pawns of the villain,” threatening punishment for “anyone who steals our information.” The country has also warned that it would favor domestic tech firms over U.S. companies.

Gone is the era of China embracing U.S. tech innovations with open arms. That enthusiasm was predicated on China’s belief that tech companies were free of oversight or agency of the U.S. government — a belief that was shattered by revelation of NSA surveillance programs. The country no longer sees an advantage in importing U.S. companies’ technology, as Chinese companies are now able to develop innovations of their own.

While it’s not clear how much of the country actually believes that companies like Apple are spying on Chinese citizens — location tracking is, after all, a feature that comes standard with any GPS-equipped smartphone — it’s not out of the question that repeated sensationalized accusations could hurt the operations of Apple and other American companies in China.

In the past, Apple has changed policies and made apologies to appease China and its state-run media outlets, and its current response and explanation of the Frequent Locations feature is in keeping with its past strategy. As Wells Fargo’s Um points out, the effects of Chinese media claims aren’t clear, and it remains to be seen what kind of measurable fallout, if any, Apple suffers as a result of China Central TV’s claims.

In the meantime, Apple is one (very visible) target for the official media of a government that’s long grown uneasy with the idea of depending on U.S. tech companies. Apple’s ability to defuse the political tension between the U.S. and China is limited, and it will be more beneficial for the company to focus on growing or maintaining market share by appealing to consumers, whose opinions, after all, are influenced to varying degrees by what many realize are exaggerated claims by the media.

Apple, in its “Your Location Privacy” statement, seemed to appeal to consumers who may not feel that Chinese media speaks for them as it explained that neither Frequent Locations nor any of iOS 7′s other features allow Apple to gather information on China, its citizens, or its “state secrets.”

“We appreciate CCTV’s effort to help educate customers on a topic we think is very important. We want to make sure all of our customers in China are clear about what we do and we don’t do when it comes to privacy and your personal data.”

That statement seems positioned to appeal to consumers who have doubted or criticized China Central TV’s claims in the past, and also to appease those customers looking for reassurance that Apple’s Frequent Locations doesn’t do anything out of the ordinary.

While Chinese media is a force to be reckoned with, and the company may take a hit as political tensions over international cyber spying accusations escalate, for the moment Apple recognizes that it has other immediate problems to contend with. It’s more able to directly address routine concerns like strong competition from domestic companies like Xiaomi than it’s able to affect the political climate between two countries. It seems that Apple’s PR department is keeping its head as the U.S. and China enter a standoff over their surveillance programs and the future of their tech industries.

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