Corporate China

Apple joins Beijing blacklist for government buying

PUBLISHED : Thursday, 07 August, 2014, 4:47pm
UPDATED : Thursday, 07 August, 2014, 4:47pm

I really didn't want to write again about another major multinational getting bashed in China, but it seems hard to ignore the latest reports that gadget giant Apple (Nasdaq: AAPL) has formally joined the list of companies being banned from selling to the government due to national security concerns. At this rate, Chinese government agencies won't be able to buy technology products from any foreign companies soon, and will be forced to do all their buying from domestic firms. That's somewhat ironic, since many of those domestic firms are far less experienced than big global names like Apple and Microsoft (Nasdaq: MSFT), and thus are far more likely to unknowingly design products with major security flaws.

In fact, this kind of sensitivity surrounding government buying certainly isn't exclusive to China. The US and Europe routinely favor domestic companies in their government purchases, partly for security reasons and also partly to support their own local economies. But the big difference is the suddenness with which China is shifting its stance, which has overtones of xenophobia and also retribution for unrelated trade disputes with the US and Europe.

This latest action against Apple isn't a complete surprise, since the company is one of the last remaining major western tech firms that has yet to get bashed by Beijing. According to the latest report, Apple's popular iPad tablet PCs and many of its computers have been formally removed from a list of products approved by Beijing for purchase by government organizations. The new list was drafted by the powerful National Development and Reform Commission and the Ministry of Finance, and was distributed last month.

It's not immediately clear how much impact the move will have on Apple, which generated about $6 billion (HK$46.5 billion) from the Greater China market in its most recent reporting quarter. I suspect that PC and tablet PC sales perhaps accounted for half of that, and that sales to government agencies were only a small portion of those PC sales. That would mean this ban would probably only affect $100 million in quarterly sales or less. Government officials are famous for their fondness of famous brands like luxury cars and expensive liquors, but frankly speaking I don't really associate such bureaucrats with Apple products that have a much younger and trendier audience.

Still, the more significant element in the story is the addition of Apple to a growing list that has seen more and more foreign technology products banned from government buying. News of the Apple ban comes just days after similar reports emerged that US security software giant Symantec (Nasdaq: SYMC) and its Russian rival Kaspersy Labs had also been banned from selling to the Chinese government. In May Microsoft's latest operating system, Windows 8, was also banned from sales to government bodies.

Other major US tech firms whose products have also reportedly been banned or discouraged for use by government agencies and state-run firms include computer hardware giant IBM (NYSE: IBM) and networking equipment leader Ciscso (Nasdaq: CSCO). I won't even start to cite names from the even bigger list of other major foreign companies that have come under attack from Beijing for alleged anti-competitive practices, which is completely different set of cases also targeted at multinationals.

Perhaps it's just a quirk of timing, but this major campaign against multinationals began almost exactly a year ago when a group of foreign milk powder makers came under attack over allegations of inflating their prices in China. That was followed by a flurry of similar activity that petered out in the fall, though most of those cases didn't involve national security issues. Perhaps this new national security campaign will follow the same pattern and also peter out by the fall. But it may not matter, since there probably won't be any major foreign tech companies selling products to Beijing by then anyways.

Bottom line: Apple's addition to a list of foreign tech firms banned from selling to the government extends an ongoing freeze-out, which could be extended to other major firms before the campaign eases in the fall.

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