Apple Investment in China Raising Security Questions

Company spending $1 billion on ride-hailing app linked to government

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The U.S. technology company Apple, Inc. is spending $1 billion in China on a ride-hailing application, and the investment is raising concerns among security analysts who say the company will be cooperating with Chinese security and intelligence agencies after spurning the U.S. government in a recent terrorism case.

Apple announced May 12 it would put $1 billion into Didi Chuxing Technology Co., a company that is competing with Uber for China’s growing ride-sharing market. Uber began operating in China in 2014 and is reportedly losing $1 billion a year there.

The investment is considered unusual for the tech giant that boasts of its $233 billion cash holdings, most of which is held outside the United States.

Apple spokesmen did not return emails or phone calls seeking comment on the Didi deal.

Financial and security analysts say the investment appears to be part of Apple’s bid to gain greater access to Chinese markets and specifically to convince Didi to adopt Apple Pay as one of its online payment forms.

The deal also is part of Apple’s effort to curry favor with the Beijing government that in April blocked the company from online book and movie sales through iTunes as part of a government crackdown on unofficial media.

The investment in Didi Chuxing links Apple with two state-linked Chinese financial entities, China Investment Corp., the sovereign wealth fund, and Ping An Insurance. Two major Chinese tech companies, Tencent and Alibaba, also are investors in Didi.

Kevin Freeman, a financial analyst in Texas, said the investment announcement coincides with the Chinese government demand for a review of Apple’s encryption and security protocols, ostensibly to protect Chinese consumers.

"If we assume that the Chinese government has a national interest in hacking information, as has been repeatedly demonstrated, this effort is an ideal backdoor way to explore security flaws for their own use," Freeman said of the security reviews.

"It is the opposite approach of the FBI who demanded Apple provide them access to unlock iPhones and when refused, they hired a hacker," he added. "The Chinese get access to the security blueprints they could hand over to their own hackers and make the job even easier."

Apple refused to cooperate with the FBI in unlocking the government-owned cell phone of San Bernardino terrorist Syed Farook, citing privacy concerns. The refusal to cooperate came even though Farook had been killed in a shootout with police and his phone was property of the San Bernardino County Department of Public Health.

An FBI case against Apple seeking software support to access the iPhone was withdrawn after the Bureau was able to open the killer’s phone with the help of a private security company.

Chinese authorities recently conducted security reviews with executives from Apple, Cisco Systems, Microsoft, and other foreign companies, the New York Times reported this week. The security reviews by the Cyberspace Administration of China, Beijing’s Internet monitoring agency, raised concerns China would use them to gain access to corporate proprietary data.

China has passed a counterterrorism law that requires foreign companies to provide encryption keys to their corporate data, although Beijing has not enforced the measure, which would force many companies to stop doing business in China.

"If the People’s Armed Police went to Apple and said ‘We want access to an iPhone of a Uighur terrorist’, there is no doubt they would provide it," said an American business executive in Asia.

Former State Department official John Tkacik said Apple’s motivation with the investment may be linked to efforts to shield its overseas cash in Chinese ventures to avoid paying extra taxes by bringing it back to the United States.

Tkacik, a China specialist, said ride-sharing apps pose potential security vulnerabilities.

"When it comes to telecommunications privacy on smart phones, very few phone apps are as intrusive on smart phone databases as ride-hailing apps like Uber and Lyft," he said.

Users who employ ride-sharing apps must authorize broad access to identity data, contacts, cameras, GPS locations, cell phones, texts, calendars, music, and video. This access could be used by sophisticated hackers to gain access to email as well.

"In China, the security services have unfettered access to ride-hailing so it's always seemed ironic to me that Apple is comfortable turning a blind eye to Chinese government intrusion, not to mention commercial app providers' intrusion into smart phone privacy, but yet loudly protests when asked for even the most modest and legitimate cooperation with American agencies," Tkacik said.

Tkacik said he suspects Apple is providing research and development assistance to Chinese state-run laboratories that are under strict, clandestine obligations to cooperate with Chinese state security services. "I would not be surprised if Chinese cryptanalysis agencies already find it easier than American agencies to penetrate Apple device security," he said.

William C. Triplett II, former chief Republican counsel for the Senate Foreign Relations Committee, said the Apple investment raises security concerns.

"Apple’s investment in Didi represents a billion little hostages held by Beijing," Triplett said. "Anyone in the U.S. wanting to block Huawei Technology's next effort to gain access to U.S. secure communications or impose sanctions on Chinese companies for continuing military transfers to Iran, may run afoul of Apple's army of lawyers and lobbyists in Washington out to protect their client's interest."

Freeman, whose company is Freeman Global Investment Counsel, said Apple, Cisco, and Microsoft could be compelled by China to provide sensitive data in order to continue doing business there.

China has asked to review security and encryption for Google, Facebook, and Yahoo even though those companies do not really do business in China, he said.

"What is their interest there? It can’t be to protect Chinese consumers," Freeman said.

Apple’s iPhone sales in China have been larger than any other country and the decline in Apple’s stock price has been linked to recent Chinese economic weakness. Many analysts predict that access to the lucrative Chinese market could be curtailed, Freeman said.

"This move by Apple is designed to put overseas cash to work—of which they have plenty—and also to increase ties to China," he said. "The problem is that you can’t make a major investment in a Chinese company without official approval. Official approval requires compromise and security access is the key target. China is simply going about it with a carrot at this point."

The Apple investment highlights how "American companies can be compromised by their markets," Freeman said. "The promise of lucrative trade with China comes with strings that could potentially damage our national security."

Apple chief executive Tim Cook recently traveled to China to meet with Chinese officials.

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