Tag: Apple

Foxconn’s Savvy Investment: Hedging against an Emerging Trade War

“Designed by Apple in California; Assembled in China” are the words engraved on the back of Apple’s ubiquitous iPods, iPads, and iPhones.  Might that soon change? 

Foxconn, the Taiwan-headquartered company that does Apple’s assembling in China, announced last week that it will invest up to $10 billion in production facilities in Wisconsin. That sounds like something to cheer. After all, investment is essential to economic growth and foreign direct investment tends to nourish the domestic commercial eco-system by bringing in companies with new ideas and better ways of doing things.

But Foxconn is in the business of contract manufacturing—producing, but mostly assembling, electronics products branded and owned by other companies. It’s not a high value-added operation requiring high-skilled workers. It’s the kind of supply chain operation better suited to economies with an abundance of low-skilled workers willing to work for much lower wages than Wisconsin’s work force expects to earn. Then again, economic considerations aren’t the only determinants of investment decisions.

Back in 2011 at a dinner in Silicon Valley, President Barack Obama asked Apple’s founder and CEO Steve Jobs why all of the production and assembly of the company’s products couldn’t be done in the United States. Jobs was a bit dismissive, responding that those kinds of jobs weren’t coming back. 

But the message wasn’t lost on other business executives, including GE’s Jeff Immelt, who was quick to announce repatriation of some operations that had recently been outsourced to China. The president was in a political jam and his reelection efforts might benefit if he were to show that U.S. companies were reshoring and bringing those manufacturing jobs back stateside.

Apple, China, and the Wages Of Tyranny

This week, Apple announced it had pulled several apps from its iOS App Store that offer virtual private network (VPN) services in China. As quoted by tech blog TechCrunch, Apple stated:

Earlier this year China’s [Ministry of Industry and Information Technology] MIIT announced that all developers offering VPNs must obtain a license from the government.  We have been required to remove some VPN apps in China that do not meet the new regulations. These apps remain available in all other markets where they do business.

One published report claims that as many as 60 VPNs were pulled from the China version of the App Store. A Google search on the topic generally shows Apple taking a public beating for the action, which, in fact, was unavoidable if Apple was to comply with the new Chinese government law. 

As David Pierson of the LA Times noted, it’s hardly Apple’s first anti-free speech accomodation to the Communist Chinese government:

This is not the first time Apple has acquiesced to authorities in China, the company’s second-biggest market after the U.S. It has pulled apps from its China app store that mention the Dalai Lama and ethnic Uighur activist Rebiya Kadeer. Apple also removed the New York Times app this year and disabled its news app in China in 2015.

Apple will face exactly the same situation in November, when a new Russian law banning VPNs comes into effect. 

Veteran Apple watcher John Gruber made the following observation on Apple’s decision:

The thing I keep thinking about is that iMessage and FaceTime are among the few protocols available inside China with end-to-end encryption. The Chinese just started blocking WhatsApp a few weeks ago. I don’t know why they allow iMessage and FaceTime to continue working, but they do, and both of those protocols are designed from the ground up to only work using end-to-end encryption. There is no “off switch” for iMessage encryption that Apple can flip inside China. If you’re using iMessage, it’s encrypted. It would surprise no one if China started blocking iMessage and FaceTime, but for now, their availability is a real benefit to the people of China that seems to go largely unrecognized.

You can pretty much take it to the bank that blocking iMessage and FaceTime will be next up for Chinese (and probably) Russian censors, with further demands that other apps offering end-to-end encryption be excised from the iOS App Store.

And it will be those kinds of precedents that incoming FBI Director Christopher Wray and his colleagues in the American Intelligence Community use to force Apple and other manufacturers of privacy technology and software to give them “back doors” into said apps and services or to seek an outright ban on them on “national security” grounds. If that happens, American citizens should remind their federal legislators that if House and Senate members are allowed to use encrypted messaging apps and services, so should the citizens who elect them and pay their salaries.

What’s Missing from Apple’s Latest Lobbying Disclosure Form

MacRumors has a piece out today noting that Apple has raised its lobbying game in Washington over the last six months, spending $3.6 million on a team of lobbyists who’ve visited House and Senate offices on issues ranging from “general patent reform” to “green technology” to “issues related to implementation of Section 1502 of the Dodd-Frank Act.” What’s missing from the lobbying disclosure form is any mention of federal government surveillance practices, whether it be Section 702 of the FISA Amendments Act or that nasty encryption-related battle Apple had with the FBI in the wake of the San Bernardino shooting in 2015. 

As Reuters noted earlier this month, the tech industry generally has been rather quiet about FISA reform, though members of the Reform Government Surveillance consortium (of which Apple is a member) like to point to a letter they sent to key Congressional committees earlier this year as evidence of their committment to getting NSA and the FBI to clean up their acts on domestic surveillance. But as the old saying goes, talk is cheap.

Apple, as the richest and most successful tech company in human history, certainly has the resources to make it’s lobbying campaign–or even a surveillance reform-focused PAC–far more robust and politically threatening to pro-Surveillance State House and Senate members. That it has declined to do so to date is telling. Until Apple and the other members of the RSG make it clear to House and Senate members that there will be a steep political price to pay for failing to rein in NSA and the FBI, don’t expect significant domestic surveillance reforms to make it into law.

Obama Chastises Rogue Trade Agency for iPhone Ban

On Saturday, the president vetoed a decision of the U.S. International Trade Commission for the first time in over 25 years. As a result, the United States will not be imposing an import ban on older iPhones despite the ITC’s finding that Apple infringed certain patents owned by Samsung. This action by the Obama administration is undoubtedly a good development, not just because you will still be able to get a free iPhone 4 when signing a 2-year contract, but because the veto simultaneously disciplines and discredits the ITC’s disruptive role in the U.S. patent system.

The president’s intervention corrects a bad decision by the ITC. The patents that Samsung accused Apple of infringing in the ITC investigation are standard technology required to run phones on a 3G wireless network. Owners of standard-essential patents must agree to license the technology on fair, reasonable, and non-discriminatory (FRAND) terms to anyone who asks. Samsung claimed at the ITC that Apple refused to pay any royalties at all, and Apple claimed that Samsung demanded an unreasonable royalty. The ITC sided with Samsung.

The ITC’s ruling has been controversial not because Samsung won the case, but because the ITC’s remedy—total exclusion of the infringing products from the U.S. market—is excessive.

If Samsung had brought its case in federal district court instead of the ITC, the judge would most likely have ordered Apple to pay the royalties it owed Samsung. An injunction against future sales would not be granted, because Samsung never had the right to keep Apple from using the technology in the first place, only to collect royalties.

As I wrote last month in anticipation of a potential presidential veto, this action by the president has a number of policy implications that go beyond the Apple–Samsung patent dispute. The Obama administration, leaders in Congress, and much of the tech industry have been converging lately on the idea that remedies for patent infringement at the ITC are too strict. The ITC should not be able to ban future sales in a situation where a district court would refuse to do the same thing. As it stands now, the ITC’s excessive remedies allow patent holders to wield more power than they should and exacerbate the ongoing struggle against patent trolls.

Korean press coverage of the issue has implied that the administration’s veto of Samsung’s patent victory against Apple amounts to “flagrant protectionism.” In a separate case, the ITC is set to decide later this week whether Samsung infringed patents owned by Apple. If the administration allows an import ban on Samsung products despite intervening to help Apple, many in Korea will surely cry foul.

A trade conflict would be a fitting consequence of mixing patent litigation with trade policy. It doesn’t make sense for President Obama to have the power to intervene in a patent case simply because he doesn’t approve of the outcome. Section 337 of the Tariff Act of 1930, the law that enables the ITC to litigate patents, was designed as a protectionist trade remedy. The president’s veto power is meant to ensure that the ITC’s decisions don’t impede U.S. foreign or economic policy. If the ITC were a legitimate patent court, its decision would not be subject to executive override. The ITC is simply the wrong place to litigate patents, standard-essential or otherwise.

The Real Reason Politicians Want a Bigger Bite of Apple

Earlier this month, I explained four reasons why the Apple “tax avoidance” issue is empty political demagoguery.

And Rand Paul gave some great remarks at a Senate hearing, excoriating some of his colleagues for trying to pillage the company.

But this Robert Ariail cartoon may be the best summary of the issue.

Arial Apple Cartoon

What makes this cartoon so effective is that it properly and cleverly identifies what’s really driving the political class on this issue. They want more revenue to finance a bigger burden of government spending.

When I did my contest for best political cartoonist, I picked a cartoon about Greece and euro for Robert Ariail’s entry. While I still think that was a very good cartoon, this Apple cartoon would probably take its place if I did a new contest.

Senators Levin and McCain: Two Peas All Up in our iPods

Earlier this year, Senator Carl Levin (D-MI) announced that he will be retiring after many, many, many decades of lawmaking when his term expires in January 2015. But he doesn’t intend to make for the exits without sealing his legacy of disdain for America’s wealth creators. After holding hearings last September to shed light on the “loopholes and gimmicks” employed by U.S. multinational companies to avoid paying their “fair share” of taxes, Levin resumed his inquisition today by holding a hearing intended to publically shame one of America’s most successful and most bountiful companies:

Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.

Man, the spite in those words is palpable.

At the outset, it is important to note that no illegalities have been alleged, nor have any likely been committed. Like most other U.S.-based multinational corporations, who face tax rates of 35 percent on profits repatriated from abroad, Apple has tax avoidance specialists on its payroll to figure out the most effective ways to minimize their tax burden. They’d be sued for corporate malfeasance by their shareholders if they didn’t.

Unlike foreign-based multinationals whose governments don’t tax their profits earned abroad (or do so very lightly), U.S multinationals are subject to double taxation—first in the foreign countries where they operate at local tax rates and then by the IRS, at up to 35 percent, when profits are brought home. Well guess what? That system discourages profit repatriation, depriving the economy of working capital, and it encourages elaborate, legal tax avoidance schemes.

Oddly, Senator Levin’s problem is not with these perverse incentives, but with the act of following them. Thank you, sir, may I have another! But even worse, Senator John McCain (R-AZ) acknowledges the faults and disincentives of the system, but still casts the blame on those following Congress’s incentive structure:

I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.

A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration.

Apple’s byzantine tax structure?

Should Apple be blamed for optimizing according to the legal incentives created by the likes of Senators Levin and McCain? Rather, the public would be better served if Senators Levin and McCain were hauled before a public panel to explain why the tax system they helped create and have failed to reform penalizes U.S. companies, and discourages domestic reinvestment.

Apple Users Are Stupid

Wow! That is fun to say! After suffering years under the smug superiority of my Apple-using friends…

The evidence that they’re stupid is not evidence of stupidity at all. It’s evidence that they are willing to pay a premium for luxury/status goods like their Apples. The evidence was gathered by the Orbitz travel web site, which has experimented with pricing hotel rooms consistent with what Apple users are likely to pay: more.

Perhaps we’ll hear wails of outrage from self-styled consumer advocates, the drama heightened by the glow of the apple icons on their Macbooks. Perhaps Congress will look into “unfair” pricing schemes. I’m hard-pressed to see how offering a price based on an indicator of one’s willingness to pay is unfair.

What’s happening here is the articulation of pricing and marketing practices that have been at play probably since commerce began. (Perhaps you’ve heard of haggling.) I’m not saying commerce began around his time, but my dad used to tell me about when he sold suits. If a guy wearing a fancy blue suit came into the store, he would try to sell him a fancy blue suit. If a guy came in wearing something a little downscale, pops steered him over to the sale rack. Now that’s happening with digital data rather than analog data.

Perhaps public reaction will be strongly opposed. A rough sense of pricing “fairness” will threaten differential pricing’s practitioners with too much opprobrium to make it worth the risk. Or perhaps Apple users are relatively indifferent to price and they won’t be able to sustain their outrage. I’m in favor of whichever development the free interaction of sellers and buyers produces.

I hope you gather the negative inference in that last sentence: this is not an issue for politicians to meddle with. If they did, that would be truly stupid.

Update: Kashmir Hill, not befogged with glee at Apple users’ travails, writes with more care, noting, “Mac users can still choose to sort their hotel and flight options by price, and then see the cheap stuff. And PC users can still filter their results so they get four- and five-star hotel options instead of a three-night deal at the Super 8 Hotel.” So it’s not actually differential pricing, though I wish it were…