The Great Censor and Apple Inc

A huge showdown played out in front of the world some weeks ago. It was a battle between the tech giant Apple Inc [NASDAQ:AAPL] and the Federal Bureau of Investigation (FBI) of the United States. It went like a circus, with Silicon Valley on one side ‘fighting’ for privacy and the US government arguing for security.

Nobody won, in the end. The FBI was able to decrypt an iPhone that belonged to a terrorist without Apple’s help. Everyone was able to save face, and nobody had to compromise anything.

Silicon Valley companies have usually cooperated with the US government in the past. Certain data and information are passed along to the government to help with any necessary investigation. However, this time the government ‘went too far’. They basically asked Apple to create a ‘master key’ to unlock any iPhone.

Mind you, privacy protection is held in the highest importance by most Silicon Valley companies. Apple didn’t even have an immediate tool to decrypt their own security system on the phone. So the government asked Apple to create a key to access this particular phone, which belonged to a terrorist and criminal.

I’d give Apple a big thumbs up for sticking to its guns, as I believe privacy is important. National security is important too, but we need to know where to draw the line. And everyone sees that line very differently.

While I applaud Apple for its tough stance, I wonder what Apple would do in the face of its biggest challenge. No, it’s not the US government. It’s the Chinese government.

The world has changed in a big way since five years ago. China has become a key market for Silicon Valley companies. Some years ago, Alphabet Inc (Google) [NASDAQ:GOOGL] said ‘no’ to sharing data and providing a backdoor to the Chinese government. They then had to vacate from the Chinese domain. Google still operates its main search engine offshore from China, through Hong Kong. This has meant slow connection speed to access the search engine from China.

You can easily extend that same story to Youtube, which operates under Google. It is blocked in China. Facebook [NASDAQ:FB] is another company trying to crack open China’s ‘Great Wall’. For data sharing and other reasons, it is still blocked in China.

This has helped domestic tech companies such as Tencent [HK:0700] and Baidu Inc [NASDAQ:BIDU] come to dominate China’s massive market, with little foreign competition. The Chinese government has effectively helped the domestic companies to gain market share, while getting all the private information and data from these companies. Naturally, if a foreign company is willing to share data, it would find it much easier to access the Chinese market.

However, investors and analysts need to pay attention to recent developments in China. The government has passed several laws to govern foreign company activities in China. These laws affect published content, organisation registration and company operations for foreign companies. The basic idea here is that China is toughening up on controlling foreign company activities on the cyber space in China.

Firstly, this is not some open-cyber-war or retaliation against the United States; it is more a domestic affair. It tells you that China is moving towards a ‘hardened’ political environment. For the West, the old ‘cold war’ rhetoric can be recycled to tag the issue. However, in Chinese eyes, this is something very different.

What do Chinese citizens feel about this increasingly ‘hardened’ political environment in China? They don’t like it one bit. And it is not purely because they feel pressured by the government at a time of increasing environmental and economic problems. It is because it alerts the Chinese of the potential security risks domestically and internationally.

China has had a pretty relaxed, reformist government since the 80s. Of course, this motion was temporarily disrupted by the Tiananmen Square incident in 1989. However, Xi Jinping is no doubt the toughest political leader since that time. And it is natural for people to link the dots between political tension inside the party, massive crackdowns on officials through corruption charges, a tough economic transition, and a tougher stance in international territorial claims.

If you want a simpler version of all these, it basically means Xi is a very tough president who has taken aim at both domestic control and international affairs. In the first two years of his office, many watched this new president for signals of the future. Now we have that signal. We are quite-clearly on the path to greater control by the government.

In terms of Apple stocks, the billionaire and key investor Carl Icahn, who exited his position in Apple stocks recently; he told CNBC, ‘You worry a little bit — and maybe more than a little — about China’s attitude.’ Icahn added that the Chinese government could ‘come in and make it very difficult for Apple to sell there … you can do pretty much what you want there.

I am completely sympathetic to Icahn’s position on this matter. If I was him, I would have done the same.

Personally, I’m not worried about China’s economy. I think there will surely be problems with its overwhelming debt, economic restructuring and financial reforms at some point. Is it going to be tomorrow? I don’t know. But I think China’s potential is clear, and it is a good long term bet.

However, as an owner of assets in China, what makes me restless at night is the political side of things. Let’s put it this way, I am a long term investor in China, who is ready to ‘run’ any time of the day.

Trust is everything in business and relationships, and the Chinese government is not doing much to help that.

Regards,

Ken Wangdong,
Analyst, Emerging Trends Trader

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