As the world's most populous country, just about all large multinational companies want a piece of China. Among the biggest tech players, Apple (NASDAQ:AAPL) is uniquely positioned for growth within the Middle Kingdom.
Microsoft faces nearly insurmountable challenges with piracy, Google constantly battles with China over censorship requirements, and the Chinese government has banned Facebook for fear of the social network catalyzing a social uprising. Apple has now confirmed that it will store Chinese users' personal data within China.
Closer to home
The Mac maker has now added China Telecom, one of Apple's iPhone carrier partners, to its list of data center providers. Like all three of the major wireless carriers, China Telecom is state-controlled. The government owns 71% of shares and exercises majority control.
The main benefit of doing so is increasing bandwidth and bolstering performance of Apple's various iCloud services to Chinese users by storing that information locally. However, storing data locally also means that the Chinese government can require Apple to disclose user data in certain circumstances as required by Chinese law.
Apple also noted that the data stored on China Telecom servers is encrypted and that the carrier has no access to the information. The Financial Times has a source that indicates that the cryptographic keys required to decode the data are stored outside of China, which would make it even trickier to decode.
Last month, Chinese state-run media outlets ran a negative campaign that called the iPhone a "national security concern" over iOS location tracking. Apple attempted to quickly head off the potential scandal by issuing a statement on its Chinese site regarding its privacy policies.
The company clarified that all location tracking is done only at the device level and that Apple does not track user location data. Apple also maintained that it has never given any government agency direct access to its servers and that it never will.
Is China Telecom just a temporary solution?
In 2012, Apple was reportedly considering building a new data center in Hong Kong, which has certain benefits. If a data center is located in Hong Kong, the region's unique legal structure makes it easier to prevent access from the Mainland Chinese government. That would also allow Apple to achieve the stated goal of keeping data closer to users for performance reasons.
The scope of the project is immense, much like Apple's other data center deployments. Construction supposedly began in early 2013 with the facility expected to be operational by 2015. If true, then Apple could potentially transition data storage to its own facilities in the near future, further alleviating privacy concerns.
Who really benefits?
Most of Apple's peers have avoided doing so due to privacy concerns as well as those pesky aforementioned censorship requirements. But again, Apple has more of a vested interest with accommodating the challenging regulatory environment, since its business has much greater potential there.
At the end of the day, Apple's move seems primarily about boosting performance of cloud services. To the extent that Apple can deliver that benefit to its customers in China, its business will also come out ahead.
Evan Niu, CFA owns shares of Apple and Facebook. Evan Niu, CFA has the following options: short January 2015 $60 puts on Facebook and long January 2015 $35 puts on Facebook. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.