• Apple no longer immune to China’s scrutiny of US tech firms

    For years, there has been a limit to the success of U.S. technology companies in China. Capture too much market share or wield too much influence, and Beijing will push back.

    Apple has largely been an exception to that trend. Yet the Silicon Valley company is now facing a regulatory push against its services in China that could signal its good relations in the country may be turning.

    Last week, Apple’s iBooks Store and iTunes Movies were shut down in China, just six months after they were started there. Initially, Apple apparently had the government’s approval to introduce the services. But then a regulator, the State Administration of Press, Publication, Radio, Film and Television, asserted its authority and demanded the closings, according to two people who spoke on the condition of anonymity.

    “We hope to make books and movies available again to our customers in China as soon as possible,” an Apple spokeswoman said in a statement.

    The about-face is startling, given Apple’s record in China. Unlike many other U.S. tech companies, Apple has succeeded in introducing several new products like its mobile payments system Apple Pay in China recently. New resistance from the Chinese government to that expansion could potentially hurt the Cupertino, California, company.

    To a degree more than many tech companies, Apple relies on the smooth operation of its software including its App Store and services like iTunes, which are tightly integrated with the iPhone and iPad to keep customers coming back to its devices. Apple, which is facing a slowdown in sales of its iPhones, is also reliant on China for growth, so further moves by Beijing to curtail services could crimp sales.

    The company counts China as its second-largest market after the United States. Its China numbers will be dissected Tuesday, when it reports quarterly earnings.

    China’s pushback against Apple shows that the company may finally be vulnerable to the heightened scrutiny that other U.S. tech companies have faced in recent years. That scrutiny was spurred by revelations from the former U.S. National Security Agency contractor Edward J. Snowden in 2013 of the use of U.S. companies to conduct cyberespionage for Washington.

    China has sweeping goals in its move against Apple, said Daniel H. Rosen, founding partner of Rhodium Group, a New-York based advisory firm specializing in the Chinese economy.

    “They are interested in protecting the content that the Chinese people see, policing its national security and favoring indigenous giants such as Huawei, Alibaba and Tencent,” Rosen said. In this new era, he added, China “is strongly disinclined to accept the dominance of foreign players on the Internet, not least those from the United States.”

    After the shutdown of Apple’s services, President Xi Jinping of China, who has led a crackdown on Western ideology, conducted a meeting Tuesday in Beijing on China’s restrictive Internet policies. China’s top tech leaders, including Jack Ma, chairman of the e-commerce company Alibaba, and Ren Zhengfei, head of Huawei, were present at the meeting.

    “China must improve management of cyberspace and work to ensure high-quality content with positive voices creating a healthy, positive culture that is a force for good,” a report by the state-run news service Xinhua quoted Xi as saying.

    Since the Snowden leaks, China’s state media identified eight U.S. companies that it has labeled guardian warriors and that it has said were too deeply established in the country’s core industries such as energy, communications, education and military.

    Sales in China for those companies, including Cisco, IBM, Microsoft and Qualcomm, have slid as government oversight has increased. Some have grappled with raids, investigations and fines. Some have also been pressured to sell off holdings, hand over technology and work with local partners to expand their China businesses.

    Though Apple is one of the eight, it has had a much easier time.

    In 2013, Apple signed an agreement with China’s largest wireless carrier, China Mobile, to sell the iPhone in the country, after six years of wooing the carrier. Chinese consumers spent $59 billion on Apple’s products in the company’s last fiscal year. Timothy D. Cook, Apple’s chief executive, has made multiple visits to China. And while the company has faced occasional opposition most notably an attack by state and Communist Party media against its customer support it has largely been left alone.

    There have been some signs of trouble ahead. Xi has presided over a deep freeze on the Internet, increasing censorship and taking aim at online tools used to circumvent China’s system of online filters, known as the Great Firewall. He has also added new policy tools to keep tabs on electronic communications. Xi heads a committee of top leaders set up to streamline tech and Internet policy and turn the country into a “cyberpower.”

    In addition, the Chinese government proposed an anti-terrorism law two years ago that would require foreign companies to turn over encryption keys the codes that enable otherwise-scrambled information to be viewed for security reasons. Though the language was ultimately dropped, analysts said the government wants to have access to all communications within China.

    Apple’s recent battle with the FBI over unlocking an iPhone for a terrorism investigation is unlikely to help it in China. Chinese lawyers have pointed out that the country’s anti-terrorism law requires companies to help with decryption when the police or state security agents demand it for investigating or preventing terrorist acts.

    On Tuesday, at a congressional hearing, Apple’s general counsel, Bruce Sewell, said that the Chinese government had asked the company to share source code in the last two years, but that it had refused.

    The two Apple services that Chinese regulators shut down, iTunes Movies and the iBooks Store, compete directly with Chinese Internet companies’ products. Beijing has recently added initiatives to support a sputtering economy with new emphasis on industries that require higher skills and command better profit margins, like the Internet.

    That push may eventually trickle down to other Apple services. Apple Pay, for example, competes with mobile payments systems from some of China’s largest Internet companies: Alibaba and Tencent.

    In the longer term, China’s tough line on foreign tech companies like Apple could have heavy consequences for the Chinese economy, Rosen said.

    “As surely as the tremendous welfare gains for China and its people from deepening links to global tech production, disassembling those connections is likely to entail a heavy economic loss,” he said. Brett Hull Jersey

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