Social Control Is Another Chinese Problem

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple's (NASDAQ: AAPL) chief executive Tim Cook recently made a highly publicized trip to China to try to drum up more business. Around the same time, Google's (NASDAQ: GOOG) Eric Schmidt made a humanitarian visit to North Korea, perhaps to push a little at the edges of China's strict system of controls. With a massive population, lots of companies are looking to China for growth. However, some might be better off staying away.

A big opportunity

China is a huge country, with only India approaching its scale in terms of population. The country's shift from a largely agrarian economy to an industrialized one has been a massive force for change. The most notable being that more and more people are entering the middle class, which is providing them with disposable income. Moreover, the government is pushing education in a big way, which means there will be lots of highly educated and increasingly wealthy people around to spend money.

This has enticed many companies to jump aboard the China bandwagon. These include such companies as Yum! Brands (NYSE: YUM), which has labeled China one of its top growth priorities, and McDonald's (MCD) to Apple and other device makers. The big draw is the massive population that is on a well-known trajectory to spending more money. After all, the West has already lived through this phase of economic growth, so what comes next is reasonably assured.

A system of controls

The problem with China, however, is that it has a strict government that tightly controls virtually every aspect of life. From the ill-fated one-child policy, which will be a massive hindrance to the country's continued growth in a few decades, to the “1984” style of web monitoring, China's citizens do not want to run afoul of the government. Particularly since people have a habit of just disappearing, more often than not to never be heard from again.

Dealing with this dictatorial control issue is what drove Google out of the country a few years ago. The government basically wanted Google to rat out residents that the Chinese government felt were dissidents. Knowing all too well what happens to Chinese agitators, Google tried to work with the government on a compromise only to realize that wasn't a real option. Sticking to its beliefs, management chose to forgo the potential offered by China. It probably chose the right path in more ways than one.

Not a big deal

For other companies, however, dealing with the government is less of an issue. For example, selling chicken, pizza, and hamburgers in China doesn't require effectively spying on anyone. So Yum! brands and McDonald's don't need to face too many ethical issues. That said, both companies have had to deal with unscrupulous vendors, most notably Yum! and its current chicken quality flap. That episode is likely to cost the company notably over the next few quarters as it tries to rebuild KFC's reputation in the country.

Or is it?

Apple, which desperately needs a massive new market to sell into if it wants to keep growing, is something of a middle ground situation. On the one hand, the company is, basically, a consumer device seller. So all it wants is more bodies to sell to and what happens after the device is sold isn't really its problem. However, it could be if Apple is asked to make changes to its phone to enable government tracking of any kind.

The big score for Apple would be a deal with China Mobil (NYSE: CHL), the country's largest cell phone provider. It was one of the companies that Cook met with on his trip. Gaining access to this one company's customer base could provide years worth of growth for Apple, since the smart phone transition isn't as far along at China Mobil. Unfortunately, part of the reason for the slow smart phone adoption is likely the involvement of the Chinese government, which many believe led the company to use a non-industry standard technology for its network.

With the government so involved and so interested in its citizens, it isn't a stretch to think that a request for subtle, but important changes could be made to the iPhone and iPad's Apple is hoping to sell. If that were to happen, Apple, which is seen as a corporate good guy by most people, would have to make a similar choice to the one made by Google: earnings or ethics? That can be a very difficult question for a publicly traded company to make, since investors want to see results above all else.

No easy answer

There's no easy answer in China. The government is a big question mark and likely to see an even more contentious relationship with its citizens as they become better educated and wealthier. For some companies this isn't and will likely never be a big deal, for others entering China could mean compromising their identities.

Yours,
Reuben Gregg Brewer 


Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and McDonald's. The Motley Fool owns shares of Apple, China Mobile, Google, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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