China Digs Deep to Show Apple Can Do No Right

| Analysis

China is digging deep in its efforts to use Apple as a political and economic pawn, demonstrating that merely apologizing for mistakes and then correcting them won't keep the company out of the Chinese government's crosshairs.

Apple in China

Apple in China

In the latest maneuver in this escalating effort, a government watchdog group is doing mental gymnastics worthy of an underage Olympic gymnast to accuse Apple of smuggling software into China, not paying taxes, and distributing porn.

The China Consumer Protection Law Research Association (CCPLRA) issued a report Friday that found Apple isn't paying tarriffs on the software sold in the App Store (via The Next Web). According to the report, the software is classified as goods, and since it is sold on devices imported into China (a reality of international law that is irrespective of the fact that the devices are actually made in China), Apple should be paying import customs tarriffs on app sales.

Never mind that the software mostly originates in China and is made by Chinese developers, publishers, and authors, and that Apple is the retailer, not the seller. According to the CCPLRA, Apple should be paying import tarriffs on this software.

Because Apple is failing to do so, it's dodging taxes, according to the report, which means that Apple is smuggling the software into China. Again, never mind that the software mostly originates in China and is made by Chinese developers, publishers, and authors, and that Apple is the retailer, not the seller.

Of course, there is content being produced outside China by non-Chinese developers—and to a much lesser extent non-Chinese publishers—but most of the apps on the Chinese App Store, including most of the books-as-apps, are Chinese products.

The report also referenced past legal disputes where Apple was found to be selling pirated materials on the App Store. Never mind that this material was being produced by Chinese pirates, Apple was found to be responsible, which may be appropriate considering the reality that Apple curates the App Store.

We won't pretend to understand the complexities of Chinese law, but if Apple has a piracy problem, it's because Chinese law pays lip service to intellectual property—especially IP owned by non-Chinese companies—and piracy is the norm, not the exception in the country.

Nevertheless, the CCPLRA echoed charges raised in April that Apple is selling porn, which is illegal in China. Again, never mind that it is Chinese pornographers producing and submitting that porn to the Chinese App Store, Apple is illegally selling porn.

From a report by the Chinese site The Mirror (and Google Translate), "Consumer Law Research Association Deputy Secretary-General Li Weimin said that young people occupy a large percentage of Apple users, obscene pornographic content poison(ing) their physical or mental health is obvious."

Obvious, he tells us. Obvious! The porn is poisoning their physical and mental health! Why, they'll grow up to be pirates, or worse, pornographers!

It's all part of a campaign that began earlier this year when a government-owned TV program ran an exposé on Apple's warranty policies, which weren't in keeping with Chinese law. This was accompanied by an orchestrated campaign on Weibo (China's microblogging service) and a steady onslaught of criticism about Apple and its "unparalleled arrogance" from government-owned newspapers and even government-owned businesses.

Apple responded by modifying its warranty practices and Apple CEO Tim Cook took a very Chinese approach of apologizing for his company's mistakes. The move was praised as savvy by outside observers by taking the wind out of the sails of government critics. Consumers in China had already rallied to Apple's defense, especially after the artificial Weibo campaign was outed.

It doesn't matter though, as demonstrated by these new trumped up allegations. We have little doubt that this new banner will soon be picked up by other players and eventually escalate to legal proceedings or regulatory punishment.

To be sure, it's clear that Apple needs to do a better job of curating the Chinese App Store. One of the downsides of managing a walled garden is that you have to do the pruning yourself, and that pruning must comport to local laws. This is a genuine responsibility of Apple's.

The kicker is that it doesn't matter what Apple does. The company could develop a miraculous way of keeping Chinese pirates from selling pirated books and get all of them off of the App Store in perpetuity. The company could conceivably achieve a no-porn-here state and keep Chinese pornographers off the App Store. In fact, that one should be the easier of the two tasks.

Apple could do that, and it still won't matter. The Chinese government has picked Apple as the best pawn to fight the U.S.'s attempt keep Chinese companies like Huawei out of the U.S. carrier market out of security concerns. The government's message is loud and clear: mess with Huawei (etc.), and we'll mess with Apple. If it wasn't Apple, it would be another U.S. company.

That's because Apple is one of the largest companies in the world by revenues and profit, and Apple has publicly fingered China as a major part of its future growth. By threatening that expansion, China hopes to put pressure on Washington D.C. to back off Huawei and many other areas where the two countries are squabbling.

This is nothing new. It's how the international game of economic and intelligence thrones is played, and it's nothing specific to Apple. It was only a few months ago when Chinese authorities were cracking down on fake Apple Stores, fake Apple products, and illegal use of Apple's brand (remember those awesome Apple iPhone stoves?).

Police Seize Fake Apple-Branded Products

Police Seizure Photos - Be careful when placing a call!
Source: NetEase

Things could turn on a dime, but for now Apple is under the heavy hand of the Chinese government. That's not likely to change any time soon.

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Comments

Lee Dronick

Seems like Apple is becoming persona non grata in China.

Perhaps Apple should drop the big cat names for OS X and name them after countries. I suggest that they start with Tibet or Taiwan.

Bob

Personally, I’d be happy to see Apple finally pay more taxes. They have been dodging US taxes for years by keeping their profits off shore.

wab95

Obvious, he tells us. Obvious! The porn is poisoning their physical and mental health! Why, they’ll grow up to be pirates, or worse, pornographers!

.

Worse still, they grow up to not support the communist party and to expect unreasonable and decadent Western values and practices, like individual liberties. [Insert Mandarin expletive]!

No, this is clearly China sending a message, in my view, on two fronts:

1) to the USA to back off of Huawei;

2) To the international business community, however big you are, if you do business in China, you do it our way, or else.

Neither of these are Apple specific, but that doesn’t make it any easier on Apple.

Finally, I’d just point out to Tim Cook’s critics, if ever there were a need for a diplomatic deft touch at the helm, it is here and now in China, where not only compromise and negotiation will be critical to Apple’s success in that expanding market, but a healthy dose of humility and knowing when and how to say, ‘We’re sorry’. Tim Cook is that leader, at the right place, at the right time.

The Chinese, if they are smart, will want to make this work. In order to do so, however, they are going to require an understanding, steady, patient, long suffering and savvy partner who can play along for the duration. Fortunately for them, they’ve chosen a company that is a grand master at the long game.

ibuck

Bryan, good reporting. Thanks for getting out in front of this. Doing business in Asia seems to have a lot of obstacles, twists and turns.  Tim Cook may indeed be best suited to handle these issues, as wab95 suggests. I’m not sure how Scully, Spindler or Amelio would deal with them. The Chinese are blinded by ideology: not sure they can be smart. OTOH, many Wall Street capitalists can’t, or won’t, see any flaws in their ideology either. Cook and cohorts have to navigate through the idiosyncrasies of both systems (and others) to keep Apple successful. Kudos, which seem rare lately, to Cook & Apple.

furbies

Apple could give the the next iPhone the code name “Democracy”

vpndev

@Bob - Apple hasn’t been “dodging” U.S. taxes by keeping profits off-shore. The tax is still payable, but only when the money comes back to the U.S.

On the other hand, it has been VERY creative about avoiding tax in other countries, especially in the E.U. Other companies have noticed and followed its lead. The actions might follow the letter of the law but certainly push it to its limits. To me, this is certainly “dodging”.

Neal

One man’s “tax dodging” is another man’s “fiscal responsibility”.  Every person has the right to use the tax laws to lower their taxes.  Corporations have a fiscal responsibility to their shareholders to maximize profits by minimizing expenses.  If Apple or any company was found to be paying more money in taxes than they are obligated to pay, they would be sued by shareholders for not upholding their fiduciary responsibility to their shareholders.

If you want Apple to pay more taxes to the US (or any other) government, then the tax laws need to be changed to outlaw whatever legal tax maneuvers they are using today.  It’s not cheating, it’s the law.

Bazz

Many years ago I wrote as comment in Routhly Drafted Magazine that Apple should be wary of Totalitarian China. Well the cows have come home. The next step is to shut the factories!
Poor Apple!!

Bazz

OH AND the reason is Samsung copying now China can!!

Bazz

I’ve just read that Apple has Goldman Sachs as financial advisor.
Well Kiss Apple good by!

Goldman Sachs only makes other nations and corporations bankrupt!

You can follow Apple’s share price from 2011 when Goldman Sachs got hold of Apple’s finances.

Bazz

Goldman Sachs follows the double cross rule.
Give THIS advice.
And bets against its own advice on the derivatives market.

It wins twice from the sucker and the other suckers in derivatives.

Bazz

I will bet millions that Goldman Sachs put billions on Apple share price going down.

Look and you wil find the smoking gun!

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