Amid growing speculations of iPad 3 releasing in March this year, Apple Inc. (AAPL) is reportedly entangled in a legal dispute in China pertaining to the “iPad” trademark. The legal dispute involves Shenzhen-based Proview Technology; a division of now-bankrupt Proview International Holdings.
In December last year, Proview received a favorable ruling in a Shenzhen court over the “iPad” trademark. Proview successfully argued that it holds the trademark in China and several other countries since 2000, when it intended to use it for a web-capable hand-held device. However, the project was eventually scrapped.
Apple said that it bought Proview's worldwide rights to the trademark in 10 different countries several years ago, including the rights to the iPad name from Proview International, a Taiwan-based subsidiary. However, Proview Technology in a countersuit claimed that the sale did not cover the trademark's use in China, where it owns the iPad name. Apple has currently appealed against the Shenzhen court’s ruling.
Meanwhile, Proview has asked authorities in more than 20 Chinese cities to investigate the matter and determine whether iPads were being sold following the ruling. Reportedly, Chinese authorities have already seized iPads from local retailers in a couple of cities (Xuzhou, Shijiazhuang), which does not bode well for Apple, in our view.
Hong Kong-based Proview has filed another lawsuit in Shanghai with the hearing scheduled for February 22. Proview Technolgy is also seeking a ban on the export of iPads from China and has also filed an application regarding this with the General Administration of Customs.
Although Proview recently admitted that it would be difficult to get such a ban, we believe that even a temporary ban would be destructive for Apple as the company remains dependent on the production facilities based in Chengdu and Shenzhen.
We note that China is one of the fastest growing markets for Apple and a lingering trade dispute, which may prevent it from selling its iconic tablet could hurt its competitive edge going forward. We also believe that if the court upholds the current ruling against Apple, the company may have to seek an out-of-the court settlement with Proview, which would involve a hefty payout for using the trademark in China. We believe that this could compel Apple to raise the prices of the tablet devices in China and other countries.
As China is relatively more price sensitive than Apple’s other territories (North America and Europe), we believe that the company may eventually find it difficult to gain significant market share in China against the stiff competition from low-priced alternatives from other established players, such as Amazon Inc. (AMZN) over the long term.
Conclusion
In recent times, Apple has been facing a number of headwinds in China. One of the most significant was its relationships with its Chinese suppliers that have been accused of ill-treating their workers and endangering the environment.
To clarify its own position with respect to these misdeeds, Apple published a list of suppliers that received the maximum amount of its spending in January this year. Apple also announced that it will give access to Fair Labor Association auditors to facilities in its supply chain and allow them to publish their findings.
However, we think that the recent trademark dispute will add to Apple’s woes. This is primarily due to the lack of clarity of Chinese intellectual property laws, which have for long been accused of bias in favor of domestic companies. If an export ban is finally imposed on Apple, we believe that the company may have to eventually look out for options to shift its manufacturing operations to some other countries such as Israel.
We note that Apple recently bought Israeli flash chip-maker Anobit Technologies Ltd., which not only provides the company a talented workforce but also lays the foundation for future research & development activities in this low-cost region.
We maintain our Neutral recommendation on Apple over the long term (6-12 months). Currently, Apple has a Zacks #1 Rank, which implies a Strong Buy rating in the near term.
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