Apple’s relationship with China is going south — and investors should be worried

Tim cook china mobile beijing

Apple’s iBooks and iTunes Movies stores were shut down in China last week less than six months after they were launched there.

Features and services shut down all the time, but according to a report in The New York Times, the move is a sign that Apple’s relationship with China is souring. Apparently, the stores were shut down by the Chinese government.

From the Times:

Initially, Apple apparently had the government’s approval to introduce the services. But then a regulator, the State Administration of Press, Publication, Radio, Film and Television, asserted its authority and demanded the closings, according to two people who spoke on the condition of anonymity.

“We hope to make books and movies available again to our customers in China as soon as possible,” an Apple spokeswoman said in a statement.

If Apple’s relationship with China has gone south, that is a very bad sign for the company. Over the past few years, China has been the company’s main engine of growth as it has posted several quarters with record profits. In 2015, China was responsible for more than 50% of Apple’s revenue growth.

Obviously, if growth in China slows, that would have a major impact on Apple’s stock valuation and future.

It hasn’t always been smooth sailing for Apple in China. Back in 2014, Apple’s iPhone 6 launched weeks late in China. Reports at the time indicated that the Ministry of Industry and Information Technology declined to give it a routine certification. During that year, Apple moved Chinese customer data onto servers located in China at the request of the Chinese government.

There are many different ways that Chinese officials could make conducting business difficult for Apple.

Earlier this week, Apple general counsel Bruce Sewell told Congress under oath that the Chinese government had asked for Apple’s source code — he didn’t mention for which product — but Apple had refused. That revelation could not have made Chinese officials happy.

And Apple has had warmer relations with Chinese government officials and state-owned business executives than other American tech giants. Google famously pulled its Chinese search engine in 2010. Facebook is not widely used in the world’s most populous company. Cisco, IBM, and Microsoft have seen their Chinese sales fall in recent years.

But Apple was different. CEO Tim Cook publicly met with China Mobile chairman Guohua Xi in 2014 when he visited Beijing. (China Mobile is state-owned.) Apple was seen as a fashionable brand among Communist Party members and their families. And as companies like Microsoft were forced to produce custom versions of their software, Apple was exempted.

That’s why I think China pulling two minor online media stores, neither of which likely generated a lot of sales, is just the first stage in what could be a very unfortunate turn of events for Apple in its most important market.

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