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Once again, rumors that Apple (Nasdaq: AAPL) has cracked the China market for the iPhone have set the news media buzzing. However, the talk apparently did little for Apple's share prices Tuesday.
If true, though, those rumors mean Apple is set to grow like gangbusters.
Meanwhile, Cupertino has locked up chip supplies and is launching attacks on other fronts.
These will help offset some problems with iPhone security that surfaced recently, which could impact the handset's efforts to crack the enterprise market.
Can't We Have Dim Sum Now?
Conflicting reports about whether Apple has or has not signed a deal 
with China Unicom, the second largest wireless carrier in China, are rife this week.
Reuters filed a story noting that the Shanghai Securities News reported that a deal has been struck; that report included a few financial details. iPhonAsia, a Web site focusing on iPhone launches throughout Asia, cited Chinese Web site Tech.QQ, which quoted anonymous sources asserting similar stories.
However, iPhonAsia points out that the report does not mention when China's Ministry of Industry and Information Technology will grant Apple the required Network Acess License, and although its story is quite detailed, it suggests this news is just a rumor.
Teahouse of the August Smartphone
Here's why everyone's so excited: The market for iPhones in China is huge.
China's mobile phone market will grow to 239 million units this year, and that includes 33 million units in the gray market, according to Kevin Wang, market research firm iSuppli's director of China research.
China Unicom, which Apple is reportedly in talks with, is only a relatively weak No. 2 in that country's market, with 138 million subscribers compared to top dog China Mobile's 477 million. Verizon has 87.7 million and AT&T (NYSE: T) has 79.6 million.
Apple has been struggling since at least 2006 to crack the China market. Reportedly, its major obstacle is that Chinese mobile operators won't accept the business model Apple has been able to coax other carriers into. Verizon apparently didn't want to play by those rules either, which is why the iPhone is being carried exclusively in the U.S. by AT&T.
If Apple does manage to come to some sort of deal with China Unicom, the strong demand for the iPhone, as shown by vast gray market for the device there, is likely to boost its bottom line.
No Bad Deal Goes Unpunished
However, don't look for the Chinese operators to sign the same sort of deal AT&T agreed to.
The iPhone has boosted AT&T's customer ranks. The carrier racked up more than 2.4 million iPhone activations in the second quarter because of the iPhone 3GS launch, according to its Q2 earnings call earlier this month. However, the device is also bleeding AT&T dry.
"The iPhone is benefiting AT&T in terms of net adds, revenue, etc., but it's also hurting AT&T's margins," Julien Blin, principal analyst and CEO of JBB Research, told MacNewsWorld.
"It's like a medicine that has side effects -- you know it's good for you, but the side effects may hurt."
There have already been several reports noting that negotiations between Apple and China Unicom are being held up because of disagreements over terms and conditions. Unless Apple makes some concessions, it may have to go back to square one in its quest to nail this enormous market.
Planning for the Future
While it's battling to secure a carrier partner in China, Apple is also busy keeping its supply lines clear and controlling its costs.
It has pre-paid Toshiba $500 million to secure its future supplies of NAND flash, chief financial officer Peter Oppenheimer announced at the company's third-quarter earnings conference earlier this month.
Apple was the third largest purchaser of flash memory in 2008, consuming about 13 percent of total production.
Apple has consistently sought to hold down its costs by pre-purchasing components, and this is not the first time it has pre-paid for NAND flash. In November 2005, it announced it would pre-pay $1.25 billion to chip makers Toshiba, Intel (Nasdaq: INTC), Micron, Samsung and Hynix for flash memory components.
That cost control has paid off -- Oppenheimer attributed the company's total gross margin of 36.3 percent for Q3. 2009 to, among other things, spending less than expected in various areas.
Apple's cash, plus short- and long-term marketable securities, totaled $31.1 billion at the end of Q3, Oppenheimer said during the earnings call. "Our investment priority for the cash continues to be preservation of capital, which has served us well in the current economic environment," he noted.
Look for Apple to maintain a tight hand on the purse strings and retain a strong cash position.
Security May Dampen Enterprise Efforts
That growth may be slowed down due to what could be a major security flaw discovered in the iPhone 3GS recently by iPhone developer and hacker Jonathan Zdziarski.
Wired's Gadget Lab quoted Zdziarski as saying that the encryption feature on the 3GS is broken, and it's easy to access a user's private information from the device in minutes should it ever become lost or stolen.
The 3GS's ability to erase itself using the MobileMe service is not fool-proof, because criminals just have to remove its SIM card to prevent the remote-wipe command from being received.
Government agencies and Fortune 1,000 corporations could see this as a threat to their information security and assurance, Ozzie Diaz, CEO of wireless intrusion prevention vendor AirPatrol, told MacNewsWorld.
"With the rapid adoption and proliferation of devices like the iPhone within these mission-critical and regulatory compliance environments, each vulnerable device is like a new pinhole in information security," he said.
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