Apple and U.S. Tech, Pawns of International Diplomacy

| Analysis

Apple in ChinaApple's rocket-like ascent to become the world's most valuable company has brought with it the booby prize of being a pawn of international diplomacy. Apple and other U.S. tech giants are being targeted by China (and Russia) as tensions between all three countries rise over spying allegations.

On Wednesday, word leaked out (via Bloomberg) of China that Apple and its devices had been excluded from a government-approved procurement list. That means Apple's popular iPhones, iPads, and Macs can not be purchased by China's immense governmental and bureaucratic machine.

Ten Apple products were on a June version of the list, which is maintained by China's National Development and Reform Commission and Ministry of Finance. Those devices were removed in July's version of of the list.

It's possible Bloomberg got it wrong. A Chinese publication reported (Google Translation) on Thursday (via AppleInsider) that the initial report was based on "speculation and misunderstanding," and that the secret list in question is merely a list of energy-efficient devices for government offices. According to that report, Apple may merely have forgotten to apply for inclusion.

Sure, that's possible, but either way, but it was just in June when China Daily, a newspaper owned by the government, was demanding that Apple, Google, Microsoft and other U.S. companies be punished for being complicit in U.S. spying.

Being left off a procurement list is merely the latest in a long-running campaign against Apple by the Chinese government. Whether a deliberate exclusion, a bureaucratic mishap, or passive-aggressive intimidation, Apple has often been the subject of Chinese government interference.

Apple has been the target of government-owned television exposés, and in 2013, Apple was accused of smuggling software into China, not paying taxes, and distributing porn. In July, state-run China Central Television called the iPhone a national security threat, saying that the "frequent locations" feature in iOS 7 could potentially be used to track Chinese citizens, gain knowledge of China's economics or "even state secrets."

Apple's usual response is to patiently explain why these complaints and charges are wrong. When Apple was accused of ripping off Chinese consumers with substandard warranty practices, Apple apologized and modified its warranty to match local requirements.

The problem, however, is that none of these issues have anything to do with Apple's actual practices, business model, products, policies, or operations. The issue is politics and escalating tensions between the U.S. and China. In an era where commerce is dominated by multinational companies, especially in tech, U.S. tech giants are increasingly being made pawns of international diplomacy.

On Wednesday, it was reported that China launched an anti-monopoly probe against Microsoft in July, including raids on Microsoft offices in four Chinese cities. In addition, Windows 8, as well as products from U.S.-based companies like Kapersky Lab and Symantec have also been taken off government procurement lists. Dell and HP both remained on the list, however.

The Spy Who Complicated Apple's Business

 

The backdrop for all of this is spying. The entire planet knows that the U.S. National Security Agency (NSA) is spying on it, the entire planet. At the same time, the U.S. has accused the Chinese military of conducting industrial espionage, with an entire branch dedicated to stealing U.S. intellectual property and other corporate secrets.

Traditionally, such spying has largely remained in the realm of diplomatic channels, with one country or another occasionally complaining about another with little or no press attention. Even before Edward Snowden's revelations of U.S. spying, however, the U.S. began naming names, especially Chinese names, and that's when things started getting more serious.

The U.S. prevented two major Chinese companies—Huawei and ZTE—from selling to the U.S. government, a move echoed in other Western-aligned countries. Both companies were called a security risk citing their connections to the Chinese government.

In May, the U.S. went so far as to indict five Chinese military officers, accusing them of stealing U.S. trade secrets. The indictment has reportedly infuriated the Chinese government, and excluding Apple, Microsoft, and other U.S. firms from selling to the Chinese government is retaliation, pure and simple.

It used to be large industrial concerns like steel makers, automakers, electricity generator makers, and the like who were the instruments of war-by-other-means. Today, however, technology has become king, both in terms of economic impact and the generation, storage, and transmission of digital information.

More importantly, technology is dominated by U.S. companies. For China, it is becoming increasingly important to develop home-grown technology, even if that really means stealing it from the West. At the same time, China wants to teach the U.S. a lesson for daring to name names, and that means hurting U.S. tech giants in their pocketbooks.

The situation is vastly more complicated than that, of course. For one thing, a million or more Chinese workers are employed to make some of the very equipment being banned from government lists. Hundreds of thousands, if not millions more make many of the components that go into those devices.

Apple generates billions of dollars of economic activity in China, and Apple's is a very aspirational brand in China, and that includes the millions of people who work for the government.

Even more broadly, the economic interests of both countries are incredibly intertwined. China makes most of our stuff, we indirectly employ much of China to make that stuff, and China owns more than $1.2 trillion in U.S. government debt.

But this is the way the game of international diplomacy is played. When one country gets caught doing something, that country either exposes wrongdoing by its accusers, trumps up charges, or lashes out at economic interests. Russia is a great example of this, where Vladimir Putin's government demanded Apple's source code for iOS and OS X to look for evidence of spying*.

Apple has become so big, so profitable, and so important, it is a ready-made, go-to target. China's escalating campaign against Apple and these other U.S. companies isn't likely to simmer down while tensions between the U.S. and China creep back towards cold war levels. And those tensions aren't likely to ease while China's military is pilfering U.S. trade secrets and the U.S. is running the largest surveillance program in the world.

* #lolputin

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Comments

Lee Dronick

Check the coding on the Page 2 and NEXT, it takes me to the story about Sesame Street.

There is a lot of money to be made selling stuff in China, but ya probably could make more than enough ignoring the place. I think that Apple has medium term plans to move manufacturing out of China, staying there is quite a lever on a business. Did you all hear the recent President’s speech about business relationships with African nations?

Lee Dronick

D’oh! Not the Sesame Street story, but the index page. It was just that Sesame Street was above the fold.

Bryan Chaffin

Sorry about that. I removed the pagination—sorry about the very long page.

Lee Dronick

No problem Bryan.

wab95

Bryan:

Are you saying that the Chinese government’s exclusion of Apple products was…political? Crikey, man! What are you getting at?

Surely, this was an open, transparent, evidence-based, rational, carefully considered, publicly debated, public poll-vetted, wholly non-pressured consensus by Communist party loyalists whose only aim in life is serving the public good. You really must do something with this deepening cynicism. Next thing you know, you’ll be casting aspersions on those poor rich Nigerian widows - saints all - who only want to give their deceased husbands’ money away to deserving strangers!

Sadly, your words ring true, mate. Apple, even should it slip from its current perch atop the world’s most valuable companies and brands, Rob Frankel’s opinions aside, will continue to be hostage to international economic and propaganda warfare if no other reason than its mindshare, rooted in a deepening consumer value, which means that, whatever a government does to Apple, the world will notice, the press will cover it, and people the world-over, will feel it.

This latter part is a double-edged sword for those who would go too far. I think most informed followers of international affairs are sufficiently sophisticated in their perceptions that they realise that Apple is a sufficiently robust concern that it can take care of itself under most circumstances, with little or no help from other parties. Apple remains singularly focussed on providing products to their clients, while simultaneously engaging in popularly perceived responsible corporate behaviour and adherence to core principles that benefit and protect their customers, without meddling in the political or social affairs of state. For a company of this size, stature and mindshare, this is an art form at grand master level. For governments (and courts) that go too far in ‘punishing Apple for the sins of the USA’ (or bogieman of choice), they also risk alienating the very people they purport to protect and undermining their popular support. This requires art and mastery on their own parts.

Another thing, unlike some corporate concerns, specifically oil companies and others with fixed or site-specific assets that require them to do business in specified locations, and therefore deal with specific and troublesome governments, Apple’s assets are mobile. True, a government can prevent their staff from purchasing Apple products, but, particularly in the case of China, if they squeeze too hard, Apple can pull out not simply of the market (which I would foresee only as a last resort - the company is, after all, led by adults) but the manufacturing sector as well, displacing an enormous fraction of the labour market as well as disrupting whole sectors of the economy built around Apple’s products, with a very palpable effect on that economy. It’s not all one way.

No one wins, under that scenario, other than perhaps Apple’s competition, provided that they can capitalise on Apple’s loss (by no means certain), anymore than during Cold War times, either super power could win by violating detente and engaging in mutually assured destruction.

Rather, I see Apple’s position as one that is a dynamic negotiation for equilibrium in fluid times.

Hopefully, this will continue to be a negotiation between adult and responsible parties, where the price of crossing the line will be recognised on all sides for what it is, unacceptably high for all concerned.

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