Is China Sabotaging Apple Inc.'s iPhone 6?

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.

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.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3026043, ~/Articles/ArticleHandler.aspx, 9/21/2014 2:28:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement