Overflights and iPads - China is not as big as it thinks!

The trademark spat between Apple and Proview of China just got really interesting, and, ironically, reminded me of Air Canada.

For those not following, Apple claims it bought the worldwide rights to the trademarked term "iPad" several years ago, but Proview claims it did not, at least in China. On that basis, Chinese officials have been seizing iPads from retail outlets in China. Further, as the above article states, Proview is now trying to get Chinese officials to block all exports of iPads. Since iPads are all manufactured in China, and Apple keeps very small inventory, this could directly shut down all iPad deliveries and have a very negative impact on Apple.

It shouldn't surprise anyone that the Chinese government is acting in cahoots with its local companies. Many statist countries work this way - think France and airbus, Japan and the heavy industries, etc. What is surprising is the willingness to use the "nuclear option" so quickly. There is no question that this is out and out blackmail; a Chinese company is using the Chinese government to threaten the core business line of a major international technology company. Essentially, the Chinese are saying, "you need us, we own you. Without us, you are nothing, so pay the protection money, or we will strangle you." It reminds me of the scene in Tom Clancy's bestseller, "The Bear and the Dragon," wherein the Politburo ministers are convinced no clothing manufacturers will ever pull out of China, since, "they need us! No one would dare leave the Middle Kingdom!"

The incident reminds me of a story with Air Canada and Tel Aviv Ben Gurion Airport in Israel back in 2000. As the Internet was booming, and Israeli startups were multiplying, Air Canada did not have enough capacity with its once-daily Toronto-Tel Aviv flights, and so wanted to add a second flight. Needless to say, Israeli carrier El Al, in bed with the airport authorities, realized the need, and decided it wanted the extra landing and gate slots. So it used the airport authorities to deny Air Canada the extra slots due to "lack of space," to try and force customers onto El Al planes. After all, "you need us!"

Air Canada didn't miss a beat. It went to Transport Canada, who promptly informed El Al that they were terribly sorry, but they may not have enough airspace for the El Al overflights from Tel Aviv to Los Angeles and New York - El Al's number one market - and so they could no longer fly. Needless to say, El Al (and Israel Airport Authority) quickly relented.

The moral of the story: as they say in business, no one is irreplaceable.

Yes, in the short run, Apple absolutely needs China to get its production out to customers. It will pay up the "protection money," whether $1MM or $1BN. But they will take the lessons to heart, and never leave themselves captive to capricious, non-rule-of-law countries again. Expect Apple to invest seriously (and convince its Japanese and Taiwanese and American partners to do the same) in diversifying its manufacturing out of China. And where Apple moves, others will follow. China has no natural, built-in, cultural or other right to own manufacturing of anything, from clothing to iPads. People go there because it makes business sense. And when it doesn't, they will leave.