Is China Sabotaging Apple Inc.'s iPhone 6?

The Chinese state-run media is at it again, attacking Apple for tracking location data. This comes just months before the iPhone 6 is expected to launch.

Jul 13, 2014 at 11:00AM


Apple Store Pudong Shanghai. Source: Apple.

Apple's (NASDAQ:AAPL) iPhone 6 is likely just over two months away, assuming that the rumored September launch dates are correct. Meanwhile, Greater China is easily one of the most important geographic segments for the Mac maker.

That's why it may be cause for concern that China's state-controlled CCTV is calling the iPhone a "national security concern." The reason behind the attack is that iOS 7 tracks and records location data, which could cause to "state secrets" to be compromised.

Should investors be concerned?

A trip down memory lane
This isn't the first time China has attacked Apple. In early 2013, the Chinese media ran a similar smear campaign that criticized Apple's warranty policies and customer service, arguing that Apple gives consumers in other countries favorable treatment. This all culminated in an apology from Tim Cook, and a vow to improve its warranty policies in the Middle Kingdom. Seeming satisfied, the Chinese media then turned its attention to bashing Microsoft's warranty policies around its Surface tablet.

But did the campaign hurt Apple's business? At first, it didn't appear so. In the earnings release immediately following, the Greater China segment seemed to hold up rather well in the face of the negativity. The retail business continued to grow, and iPhone and iPad sell-through hit new records.

Aapl Gc

Source: SEC filings and conference calls.

However, the following quarter Apple did see a troubling drop in Greater China revenue. This likely was not due to the negative publicity. On the conference call, Cook noted that Hong Kong drove the decline, falling 20% on a sell-through basis. Mainland China actually grew 5%. Cook attributed Hong Kong's weakness in part to broader macroeconomic conditions but also conceded that it wasn't "totally clear" why the region's performance was so poor.

CCTV is broadcast in Hong Kong, but if the smear campaign caused the drop in sales, then the weakness would have been broad-based throughout Greater China and not isolated to Hong Kong. Apple's Greater China sales have since recovered and then some, with last quarter hitting a fresh all-time revenue record of nearly $10 billion. 

Back to the future
With all of this is in mind, could this latest attack campaign hurt the iPhone 6's prospects?

All of the evidence suggests that the previous campaign did not directly cause a drop in sales. Additionally, the previous campaign was more focused on consumers, since it focused on service and warranty policies. The newest report's alleged national security concerns may not be as relevant to the average Chinese consumer looking to buy an iPhone.

There will always be discussion about privacy as it relates to location data, but that isn't a new conversation by any means. Location tracking also isn't specific to iOS, as all modern smartphone platforms use location data. In fact, privacy in general is a much larger concern for Google Android, which is far more dominant in China.

Just last month, a low-cost Android phone built by a Chinese OEM was discovered to have spyware and malware pre-installed out of the box. Early last year, China's Data Center of China Internet released a report that estimated that 35% of Android apps secretly steal private data.

More importantly, Chinese consumers are a large driver of global phablet adoption. The larger iPhone 6 models are very much intended to cater to the Chinese market. What will a Chinese consumer care more about: finally getting a larger iPhone 6, or revisiting an ongoing privacy debate? Probably the iPhone 6.

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Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and Google (A and C shares) and owns shares of Apple, Google (A and C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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