Last week, Apple (NASDAQ:AAPL) shares got rocked by news reports that iPhone 6 and iPhone 6 Plus sales had been banned in Beijing. A regional patent tribunal granted an injunction against sales of the year-old iPhone models after finding that Apple had violated design patents from an obscure Chinese smartphone maker called Shenzhen Baili.
This incident highlights the regulatory risk faced by Apple and other Western companies by doing business in China. Nevertheless, this particular dispute isn't likely to have a significant impact on Apple's iPhone sales or its overall financial results.
iPhone sales continue
The Beijing Intellectual Property Office decided in May to halt iPhone 6 and iPhone 6 Plus sales in Beijing. While the two iPhone models don't look identical to Shenzhen Baili's 100C design, the regulator argued (somewhat bizarrely) that the two designs were similar enough to cause confusion.
However, Apple immediately appealed this ruling. The Beijing Intellectual Property Court has agreed to hear the appeal, according to China Daily. While the appeal is pending, Apple and its distributors can continue to sell the iPhone 6 and iPhone 6 Plus.
Apple is likely planning to phase out both of these models this fall. After it releases the next-generation iPhone, the iPhone 6s and 6s Plus will move down to the "mid-tier" positioning, while the lower-priced iPhone SE will remain at the bottom of the iPhone lineup.
Thus, by the time the Beijing Intellectual Property Court rules on Apple's appeal, it could be a moot point. Apple has frequently been on the other end of cases like this in the U.S., winning injunctions against rival products only after they were discontinued.
Could the sales ban widen?
A bigger risk for Apple is that the Beijing ruling could be copied by other municipalities in China (or expanded nationally) and extended to the newer iPhone 6s and iPhone 6s Plus models, which look similar to the iPhone 6 and iPhone 6 Plus. Alternatively, the recent decision could encourage other Apple rivals to become more aggressive in asserting patent claims against the iPhone maker.
That said, lower court IP rulings against foreign companies have frequently been overturned by higher courts in China. The chance that a sales injunction would be enforced in Beijing -- let alone more broadly -- is fairly minimal.
Furthermore, after the iPhone 7 is released this fall, even the iPhone 6s and iPhone 6s Plus won't be high-volume sellers in China. For comparison, Counterpoint Research estimates that the current mid-tier models (the iPhone 6 and iPhone 6 Plus) account for about 30% of Apple's iPhone sales in China. That translates to 2 million to 3 million units per quarter.
In the unlikely event the mid-tier models couldn't be sold in China, Apple's lost sales would be a fraction of that amount. Some customers would trade up to the iPhone 7-series models. Others might trade down to the iPhone SE. Still others might buy mid-tier iPhones imported through the illicit "gray market" trade.
Apple has overcome adversity in China
The slow pace of the IP litigation process makes litigation risk relatively manageable for Apple. If other companies jump on the bandwagon and try to assert patent claims against Apple, it will certainly drive up legal fees and could lead to some out-of-court settlements. The dollar figure amounts wouldn't break the bank for Apple, though.
However, the most pessimistic pundits see the recent Beijing patent ruling -- and the forced shutdown of Apple's iBooks and iTunes Movies stores in China in April -- as part of a concerted effort by China to push Apple out of the country. This may be an overreaction.
A few years ago, Chinese state-run media outlets skewered Apple, accusing it of treating Chinese customers unfairly. These negative reports were similarly seen as the beginning of a campaign to push Apple out in favor of homegrown smartphone makers.
Instead, Apple CEO Tim Cook issued a sincere apology, revised some of Apple's policies, and the 2013 incident quickly blew over. Similar attacks by Chinese state media outlets in mid-2014 didn't stop iPhone sales in China from soaring to new heights in late 2014 and early 2015.
Apple investors need to recognize that the company will probably continue to face periodic setbacks in China. However, Apple has achieved enormous success in China despite previous setbacks. In all likelihood, it will continue to overcome these periodic regulatory issues and attacks by state media, thereby profiting from the growth of China's smartphone market.