Apple (NASDAQ:AAPL) was recently banned from selling its last-gen iPhone 6 and 6 Plus phones within Beijing by an intellectual property court. The ruling claims that those two models infringed on design patents for the 100C smartphone, an elusive device that doesn't seem to have been ever mass produced.
The owner of the patents, a marketing firm called Shenzhen Baili, doesn't seem to have a working phone number or email, according to CNBC, and additional details about the company are hard to find. The only publicly known clue about Shenzhen Baili, as reported by China International Capital, is that it generated 29.6 million yuan ($4.5 million) in operating income in 2013, CNBC reported.
This isn't the first odd IP lawsuit Apple has faced in Beijing. In May, the Beijing Municipal High People's Court ruled that Xintong Tiandi Technology, a company that patented the "IPHONE" brand for leather products in 2010, owned the rights to the name. Apple has challenged both rulings, and noted that all of its products, including the iPhone 6 and 6s, are still being sold in Beijing and other Chinese cities.
What does this mean for Apple?
The overall impact of an iPhone 6 and 6 Plus ban in Beijing would likely be extremely limited. Beijing residents could easily order one of these last-gen devices from a vendor in a nearby city. More importantly, the iPhone 6 and 6 Plus will likely be discontinued this fall before the launch of the iPhone 7. Therefore, halting sales of the cheaper iPhone 6 and 6 Plus could ironically boost demand for the newer 6s and 6s Plus, as well as the iPhone 7.
But if the Beijing ruling holds up after Apple's appeal, it could serve as precedent for additional challenges to the iPhone's designs. Since the iPhone 6s doesn't look that much different from the iPhone 6, and the iPhone 7 will reportedly look similar to both devices, the Beijing case might be a test run for a bigger nationwide litigation blitz against the tech giant. If that happens, Apple could lose a lot of momentum in the Greater China area, which generated 25% of its sales last quarter.
Why would China crack down on Apple?
China has grown increasingly wary of American tech firms over the past few years due to national security concerns about using U.S.-based technologies. Those concerns, combined with its desire to strengthen domestic businesses, has created a protectionist environment that makes it difficult for foreign companies to gain ground.
Microsoft (NASDAQ:MSFT) offices in China were raided in 2014 as part of an antitrust probe that still hasn't been resolved. China also banned Windows 8 on government PCs, presumably due to national security concerns. Qualcomm (NASDAQ:QCOM), the world's largest mobile chipmaker, was fined nearly a billion dollars in China and forced to reduce its wireless licensing fees. That restriction bolstered the margins for Chinese smartphone makers like Huawei, Lenovo, and Xiaomi, and gave them an edge against foreign rivals like Apple, Samsung, and LG.
Many U.S. companies have entered China through joint ventures to avoid big import taxes and stay in the government's good graces. Others, like Apple, have had to make big compromises to enter the market. Apple censored iOS apps that Chinese authorities disapproved of, moved Chinese user data to servers operated by state-owned China Telecom, and allowed the government to conduct security checks on all devices sold within the mainland.
After the state-run media criticized Apple's customer service in 2013, CEO Tim Cook publicly apologized. During its recent clash with the FBI, Cook reassured Chinese officials that the company "would never" build backdoors into its own devices.
A delicate balancing act
It's unlikely that national regulators will aggressively enforce the arguably flimsy municipal cases against Apple, but the situation highlights the delicate balancing act that the company must pull off to avoid being vilified in the country. Apple investors should constantly monitor these developments, because they might escalate into more serious attacks against the company.
Apple's revenue in China shouldn't be considered reliable over the long term. A broad protectionist attack against the company supported by regulators and the media could easily knock its second biggest market off balance.