Apple will have to toe govt line to overcome increased competition and dropping revenues in China

Apple CEO Tim Cook has come out in defence of the company’s stand on removing major virtual private network (VPN) apps from its App Store in China. The Chinese government has made it mandatory for VPN apps to have a license to be operational. VPNs let you circumvent the Great Firewall of China, to access apps and services that are banned within China. Think apps such as Facebook or Twitter or Google services or sites that are banned in China. It is a tool used not just by regular citizens, but also by human rights activists.

Apple CEO Tim Cook. Reuters

In his statement, Cook said, “We were required by the government to remove some of the VPN apps from the app store that don’t meet these new regulations... Today there’s still hundreds of VPN apps on the app store, including hundreds by developers outside China. We would obviously rather not remove the apps, but like we do in other countries we follow the law wherever we do business. We strongly believe participating in markets and bringing benefits to customers is in the best interest of the folks there and in other countries as well.”

While the VPN app makers are not pleased with this decision, for Apple it just makes business sense to toe the line of the Chinese government.

Apple revenues in China are dropping

As far as Apple is concerned, China is one of its major markets. The higher disposable incomes of people, the popularity of the brand and quick adoption of its latest products is proof enough. However, in its latest quarterly earnings call, Apple reported a drop in revenues from the Chinese region by around 10 percent year-on-year.

And this has been for the fifth quarter running.

But one area that is seeing improvements are Apple services. And for services to thrive in the Chinese market, they have to get the approvals from the Chinese technology regulators.

iPhone’s share in China has fallen to nine percent in the January to June period as compared to a peak of 14 percent in 2015, says a Counterpoint research analyst. Homegrown brands such as Huawei, Oppo, Vivo and Xiaomi have pushed Apple iPhone to the fifth position in terms of sales.

The fate of Google

China has a thriving local software apps and services ecosystem. The Great Firewall of China prevents direct access to a lot of US-based technology companies including Google, a lot of whose clones are currently operational in China. A major reason for this is again, the regulation of apps and services. Google, which was functioning smoothly in China since 2006, met a roadblock in 2010.

Google decided to shut off its China operations after it discovered a cyberattack from China targeted at it and many other companies. Google also discovered that Gmail IDs of a lot of human rights activists had been compromised. It decided to shift its search operations to Hong Kong. While Google’s decision was applauded worldwide, soon enough all Google services were banned within China. And considering the immense market potential of China, Google is taking measures to make a comeback there, by hiring people and working towards an agreement to come up with an app store which would only have government-approved apps.

Apple would certainly not want to do something drastic and go against the local laws, lest its services are not allowed in China as well, a market the Cupertino giant just cannot ignore. The App Store is a huge revenue generator for Apple, and with the Play Store still not official in China, Apple would certainly not want to lose that edge.