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Is China Really Attempting to Extract Trade Secrets from Apple in Exchange for Market Access?

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In late April Patently Apple posted a report titled "As Promised, China begins Crackdown on Apple over Content under the Guise of Security." The report covered China's regulatory body known as the State Administration of Press, Publication, Radio, Film and Television abruptly shutting down Apple's iBooks Store and iTunes Movies. It was, in-part, the New York Times (NYTimes) first report on the new cyberspace crackdown on American tech companies led by China's President Xi Jinping. Late last night the NYTimes posted a follow-up report.


The report begins by stating that "Chinese authorities are quietly scrutinizing technology products sold in China by Apple and other big foreign companies, focusing on whether they pose potential security threats to the country and its consumers and opening up a new front in an already tense relationship with Washington over digital security.


Apple and other companies in recent months have been subjected to reviews that target encryption and the data storage of tech products. The reviews are run by a committee associated with the Cyberspace Administration of China, the country's Internet control bureau. The bureau includes experts and engineers with ties to the country's military and security agencies."


While this is certainly a serious matter and one to stay on top of, at the moment the New York Times is playing up the fear card and amplifying China's saber rattling. For instance, the NYTimes states in their report that "Ultimately, the reviews could be used to block products without explanation or to extract trade secrets in exchange for market access." That's a big leap based on "could." Once a story decides to focus on the hypothetical, it's easy to exaggerate the negativity and see boogeymen everywhere.


Apple's CEO spoke to Jim Cramer earlier this month in an interview on his CNBC TV show called Mad Money about the shut down of iTunes books and movies services. "In terms of the books and movies … what you're talking about is that we did offer books and movies, currently we're offline and we're working with the relevant agencies and other businesses and we're pretty confident and optimistic that we'll be back online offering those to our Chinese customers soon." You could review the whole interview here and the segment above begins at the 8:08 minute mark.


Yet the New York Times decided to play up the Apple iTunes crackdown. "Apple has seen new pressure in China as regulators have shut down its iBooks and iTunes Movies stores there. Last week, Apple disclosed that it was investing $1 billion in the Chinese ride-hailing app Didi Chuxing, a move that some technology experts said appeared aimed at currying favor with Beijing."


That position on Apple's investment is just pure spin. While it's unclear at present what Apple had in mind with this investment because of their never ending secrecy, the benefits are likely to include opening the door for Apple Pay and even getting a foot in the door to try out automotive technologies that Apple is working on with Project Titan. I don't think the Chinese government is going to be so impressed with a meager 1 billion dollar investment in a Chinese company that they'll reopen iTunes because of it. That's just silly. 


While the New York Times admits that "There is no indication that foreign companies have provided access to highly guarded material such as source code — the digital underpinnings of software — or other commercial secrets," they also play up that angle as being a very real possibility.


Their report noted that "tech companies are concerned that the reviews could set a precedent and that other countries will follow suit, each demanding different checks that would not only be costly but also put the companies at risk of having to hand over further secrets in exchange for market access.


In the end, the New York Times report is playing up the paranoia factor over China's latest moves towards U.S. tech companies. For the time being, there's just too much speculation in their report and too many unanswered questions. For now, Apple's CEO is positive about China and the market potential in their exploding middle class. Cook is focused on a positive future in China while keeping their politics in check. For more on this report, read the full New York Times report here.


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