What Could Go Wrong? Apple Permits China Telecom to Host Chinese Users' Data

China has been engaged in a not-so-subtle campaign to pressure western companies doing business on the Mainland. From charges of fraud, to investigations of faulty products or produce, to allegations that obscure laws have been violated, few, if any, foreign enterprises have escaped scrutiny.

The companies, while privately seething about the expensive and seemingly trumped up charges, are loathe to complain too loudly because the size of the market is still so beguiling that it will not be until they have surrendered all their profit potential that they will begin to consider the trade-offs involved in a different light.

Apple is engaged in a particularly sensitive dance with the authorities. Not only is China a vast growth market, but most of their products are made there. What they have going for them is that iPhones, iPads and the associated add-ons are wildly popular, even, or should we say especially, by the bureaucracy.

Given the distrust with which authoritarian regimes regard freedom of information and the ability to communicate openly, the cacheing of personal user data in Apple-controlled equipment, sometimes outside of the host country, has long been an issue. Apple has now conceded that point to a 'private' company, China Telecom, and claims that the data are encrypted so the new host can not violate it. Trust based on protecting the sanctity of users' personal information is one of the most important competitive advantages that western technology companies possess, especially with regard to brand and reputation. Surrendering that reduces the competition to one of price and easily copied ancillary features.

One suspects that the Chinese authorities are mollified but far from satisfied by this capitulation. We can only imagine how the Chinese consumers whose data are now in China Telecom's possession are feeling. JL

Jing Cao reports in Bloomberg:

The data is encrypted, so state-controlled China Telecom, the country’s third-largest wireless carrier, won’t be able to access it, Apple said in an e-mailed statement.
Apple Inc. (AAPL) is shifting mainland Chinese users’ data to servers run by China Telecom (728) Corp., a move that may address concern by government officials that the information could be a security vulnerability.
The data is encrypted, so state-controlled China Telecom, the country’s third-largest wireless carrier, won’t be able to access it, Cupertino, California-based Apple said in an e-mailed statement. Apple’s iCloud service lets users store contacts, e-mails, photos and other personal information on external systems they can access virtually.
“Apple takes user security and privacy very seriously,” the company said. “We have added China Telecom to our list of data center providers to increase bandwidth and improve performance for our customers in mainland China.”
The maker of the iPhone and iPad is counting on more growth in the world’s most populous nation, even as Chinese government scrutiny of U.S. technology companies has intensified. Sales from the Chinese region, including Hong Kong and Taiwan, made up 16 percent of Apple’s $37.4 billion in revenue last quarter, according to data compiled by Bloomberg. IPad sales in the country increased by 51 percent and Mac sales by 39 percent, Chief Executive Officer Tim Cook said July 23.
Apple has joined a number of U.S. technology companies excluded from some state purchases as tensions between the countries escalated over assertions of hacking and cyberspying. State-run China Central Television last month questioned the security of Apple products, reporting that iPhone software may result in the leak of state secrets. Apple rejected those claims. The government omitted 10 Apple products, including iPads and MacBook laptops, from a procurement list distributed in July, according to people familiar with the matter. A separate procurement list includes some Apple computers that departments can continue to buy on a smaller scale, defined as purchases totaling less than 1.2 million yuan ($195,000), according to a state purchasing website.