In the immediate wake of news that Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) have finally called a truce on patent disputes - at least for those outside of the U.S. - Bloomberg has reported that a new series of Apple products has been excluded from the procurement list of the Chinese government. The move against Apple is but the latest in an overt attack from China against U.S. technology companies, using the guise of national security to cloak the move as something other than retaliatory. The problem for Apple is that roughly 16% of the company's earnings come from China, and the Chinese market is the second largest for Cupertino after the U.S.
The Latest from China
In the most recently released list of approved products for July, the MacBook Air, MacBook Pro, iPad, and iPad mini were excluded where they had been considered "approved" as recently as the June version of the list. Because of the exclusion - according to officials who commented on the non-public list created by the Chinese Nation Development and Reform Commission and the Ministry of Finance - "all central Communist Party departments, government ministries and all local governments" are banned from buying these products. It is important to note that smartphones, including the Apple iPhone, do not appear to be a part of the ban for now.
Apple has not been the only U.S. technology company targeted. Microsoft (NASDAQ:MSFT) had its offices in four cities raided by officials under the guise of an antimonopoly probe in conjunction with the State Administration for Industry and Commerce. Microsoft released a statement saying the company is "serious about complying with China's laws and committed to addressing SAIC's questions and concerns." Anti-virus software makers Symantec (NASDAQ:SYMC) and Kaspersky were also struck from the list, while Google (NASDAQ:GOOG) and (NASDAQ:GOOGL) others remain part of a smear campaign aired on Chinese TV.
The a-little-too-convenient explanation for the concerted effort to target U.S. tech companies is that due to suspected collaboration between these companies and the National Security Agency - bolstered by revelations from the Snowden situation - China is simply protecting its national security. However, given the fact that in May the U.S. Justice Department indicted five Chinese military officials for cyber hacking, the move is hard not to see as retaliatory.
With Chinese tech companies on the rise, and China representing a vast market, the government bans are significant. Mark Po of UOB Kay Hiam Ltd. told Bloomberg: "When the government stops the procurement of products, it sends a signal to corporates and semi-government bodies. The Chinese government wants to make sure that overseas companies shouldn't have too much influence in China." All the same, the move sets the stage for a protectionist battle between the two largest markets for technology on the planet.
The Impact on Apple
At Apple's most recent earnings release, it appears that roughly $6 billion of revenue is attributable to China. CEO Tim Cook commented that MacBook sales climbed by 39%, while iPad sales rose 51%. These are important sales, but an even more important source of growth for Apple, particularly as the U.S. market saturates and the replacement cycle potentially slows. Apple and Cook have made much of the company's China potential, so how this story plays out will be significant.
With the numbers in mind, however, there are some positives for Apple. The ban does not cover the iPhone, which remains Apple's most important product. Additionally, the ban is on a limited segment of the population, and may not slow sales dramatically, despite the message it sends to corporate entities. Apple has huge consumer appeal, so it may see less of an impact that companies like Microsoft that are more reliant on enterprise business.
In the short-term, Apple's momentum into the fall release of the iPhone 6 should keep shares strong and heading higher. The potentially weakness this could cause in earnings will be hard to measure until we have seen the next few quarterly reports and can analyze how, if at all, the ban is impacting both sales and growth. Therefore, while I remain bullish on Apple, the China question is getting more complex and is something Apple shareholders will need to monitor looking forward.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.