National Security Concerns Heat Up Smartphone Wars

Beijing, Taipei worry over smartphone security

A trio of headlines are shining a spotlight on a new twist in the brutally competitive smartphone market, where national security is suddenly becoming a major new headache for manufacturers. In one headline, Chinese smartphone sensation Xiaomi is being investigated in Taiwan for national security risks related to the storage of local user data on some offshore mainland Chinese-based computers. In a similar news bit, Beijing is reportedly considering forbidding government workers from using foreign-made smartphones.

And in yet another related story, global smartphone giant Apple (Nasdaq: AAPL) is reportedly finally on the cusp of winning approval to sell its new iPhone 6 in China, following an embarrassing delay that may be related to the cybersecurity issue.

At the heart of most of the concerns is a growing generation of new smartphone-based services that are provided directly by handset manufacturers rather than traditional telcos. Problems arise when the manufacturers host such services on computers in their home markets. That makes it legally difficult or impossible for countries like China to force companies like Apple to hand over records for China-based iPhone users when there are national security concerns, since such data is technically housed in off-shore locations outside Chinese jurisdiction.

Let’s begin our look at the rising national security issue with Xiaomi, which has become the subject of an ongoing investigation by the Taiwan government. (English article; Chinese article) Taiwan’s telecoms regulator, the National Communications Commission, recently opened its probe after learning that some Xiaomi phones may automatically send some user data back to computers based on the Chinese mainland. That would put such data outside the jurisdiction of Taiwanese legal officials. It said it expects to complete the investigation within 3 months.

Meantime in China, a number of media reports have indicated Beijing is also considering banning government officials from using foreign-made smartphones over national security concerns. In the latest report, media are saying that the national Ministry of Commerce has ordered government officials in the financial hub of Shanghai to use only domestic-brand smartphones. (English article)

The reports say the program will forbid Shanghai government workers from using phones made by Apple and Samsung (Seoul: 005930), 2 of the most popular and prestigious brands in the market. They add that the program, aimed at protecting national security, could later be expanded to the rest of the country.

Finally there’s Apple, which had been hoping to launch its new iPhone 6 models in China on September 26 as part of an Asia-wide launch event, following a global launch in the US a week earlier. China-based iPhone fans know the Chinese launch had to be scrapped at the last minute, after Apple failed to receive the necessary regulatory approvals in time for the phones to operate on China’s 3 major wireless networks.

Apple didn’t comment on the situation, but several tech executives speculated that the delays centered on a new iPhone feature that stores user data on servers based outside of China. Apple had previously said it planned to store some data for its China-based users inside the country, though analysts at the time said the move was aimed at improving the speed of services. Now China’s telecoms Minister Miao Wei has officially said the iPhone 6 is awaiting one final approval, and that he believes it will soon get the official green light to be sold in China. (Chinese article)

All of these developments highlight the growing concerns over national security creeping into the smartphone market, which could significantly affect its future development. At the end of the day, companies like Apple and Xiaomi will probably simply host data on computers physically located in the markets where their users are based, making such data legally accessible to the local government. But that transition could be a rocky one, giving a short-term advantage to makers of lower-end smartphones that don’t include any built-in services requiring off-site data storage.

Bottom line: National security concerns could cause short-term turbulence in China’s smartphone market, but are unlikely to have a long-term impact as manufactures work to address Beijing’s concerns.

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