Choppy wa­ters

China’s po­ten­tial hi-tech threat to global peace keep­ers

The Daily Telegraph - Business - - Front Page - Ghost Fleet

In the ex­haus­tively re­searched pot­boiler novel – sub­ti­tled “a novel of the next world war” – China and Rus­sia launch a sur­prise at­tack on the US. They start by dis­abling its hi-tech fighter jets with se­cret mi­crochips in­serted into their sys­tems dur­ing man­u­fac­ture many months be­fore­hand. That was a fun con­cept in 2015, but now Amer­i­can ad­mi­rals and gen­er­als have to con­sider the pos­si­bil­ity that it was more than just fic­tion. China stands ac­cused of in­sert­ing se­cret “spy chips” into servers used in ev­ery­thing from CIA drone op­er­a­tions to Navy war­ships.

The al­le­ga­tions sent shock waves through the com­puter in­dus­try when they were re­ported by Bloomberg last week. For­eign pol­icy wonks have spec­u­lated for years about Chi­nese “sup­ply chain at­tacks”, in which com­puter net­works are com­pro­mised be­fore they have even been built. But if the Peo­ple’s Lib­er­a­tion Army (PLA) truly did sneak tiny mi­crochips ca­pa­ble of re­motely edit­ing code into US servers used by 30 com­pa­nies, it would be an in­cred­i­ble coup – one which would call into ques­tion the safety of ev­ery com­po­nent that ever passed through main­land China.

Ap­ple, Ama­zon and the server maker, Su­per­mi­cro, have is­sued strong and de­tailed de­nials. Ap­ple’s former head lawyer, Bruce Sewell, says the FBI told him there was noth­ing in it. The US Depart­ment of Home­land Se­cu­rity and Bri­tain’s GCHQ said they had no rea­son to doubt these de­nials, and a source said se­nior GCHQ staff were not aware of any in­ves­ti­ga­tion. Yet even if the story proves false, it is only the lat­est of its kind, and it won’t be the last.

In 2014, a US court in­dicted five PLA of­fi­cers for plant­ing mal­ware on US busi­ness com­put­ers. In 2016, re­searchers caught Chi­nese soft­ware in­stalled on 700 mil­lion An­droid phones send­ing users’ text mes­sages, call his­tory and ad­dress books back to servers lo­cated in China. In 2017, the In­dian govern­ment claimed China had sub­verted 42 smart­phone apps. In 2018, US phone net­works and high street shops cut ties with Huawei, a se­cre­tive tech­nol­ogy com­pany founded by a former PLA sol­dier which helps main­tain Bri­tain’s 4G net­work. Huawei’s prod­ucts are con­tin­u­ally checked for back­doors sys­tems in GCHQ’s Ban­bury lab­o­ra­tory (nick­named “the Cell”).

Len­ovo, the Chi­nese PC maker, has also been ac­cused of try­ing to cor­rupt the sup­ply chain of the Pen­tagon it­self. “The ma­jor­ity of net­work kit and fire­wall stuff is man­u­fac­tured in China,” said Jake Wil­liams, a US Army vet­eran turned cy­ber­se­cu­rity con­sul­tant. “Not find­ing ex­tra chips doesn’t mean they are not there.”

Such fears are po­tent fuel for a White House packed with long­stand­ing China hawks who be­lieve the US has shied from con­fronta­tion for too long. Don­ald Trump’s trade tar­iffs have tar­geted Chi­nese hard drives, op­ti­cal fi­bres, moth­er­boards and tools for mak­ing moth­er­boards.

He blocked the sale of Qual­comm, an Amer­i­can chip­maker, to Sin­ga­pore­based Broad­com, cit­ing “na­tional se­cu­rity con­cerns”. A re­port that he or­dered warned last week that “Tro­jan chips” could in­fil­trate US sys­tems; that night his vice pres­i­dent, Mike Pence, made a bel­liger­ent speech de­scribed by one ex­pert as launch­ing a “new cold war”.

“It’s very clear that the po­lit­i­cal at­ti­tudes, the reg­u­la­tory at­ti­tudes, to­wards ev­ery­thing that’s fi­nanced from China or con­nected to China have changed,” said Ray Bing­ham, a part­ner at Canyon Bridge Part­ners, a China-backed Sil­i­con Val­ley fund whose ac­qui­si­tion of a US-based chip firm was blocked by the Trump ad­min­is­tra­tion last year. “I don’t think the door is closed, but this pop­ulism wave, and cer­tainly the Bloomberg-like in­for­ma­tion, isn’t help­ful.”

Amer­i­can al­lies, he said, are of­ten en­thu­si­as­tic in pri­vate about more Chi­nese in­vest­ment, but pull back when leaned on by Wash­ing­ton.

What would hap­pen, then, if Amer­i­can com­pa­nies re­ally did start to pull out of China – to shift their sup­ply chains into other coun­tries, or even bring them back into the West (as Mr Trump has ad­vo­cated)? Would such a thing even be fea­si­ble?

China by some es­ti­mates makes 75 per cent of the world’s mo­bile phones and 90 per cent of its PCs. Its ex­port elec­tron­ics sec­tor em­ploys more than 80 mil­lion peo­ple, in sup­ply chains in­volv­ing per­haps hun­dreds of sep­a­rate com­pa­nies for a sin­gle prod­uct. China ac­tu­ally im­ports most of its mi­crochips – around 85pc – from hi-tech plants in coun­tries such as the USA and South Korea, which jeal­ously guard their meth­ods. But in as­sem­bling com­po­nents built else­where it is the undis­puted king.

Ban­ish any thoughts of cheap, un­skilled work­ers toil­ing in ratty fac­to­ries. As Ap­ple’s chief ex­ec­u­tive Tim Cook has pointed out, “China stopped be­ing the low-labour-cost coun­try many years ago”. To­day China’s ad­van­tage comes from a huge pool of skilled en­gi­neers, an ed­u­ca­tion sys­tem that ex­cels at vo­ca­tional train­ing and a mas­sive net­work of fac­to­ries, uni­ver­si­ties, trans­port sys­tems and con­tainer ports han­dling ev­ery stage of pro­duc­tion and ship­ping. To build that up else­where would take years, pos­si­bly decades.

“I think it’s re­ally too late,” said Mario Mo­rales, a semi­con­duc­tor in­dus­try an­a­lyst at IDC. “Com­pa­nies are now de­pen­dent on the sup­ply chain that China. Even if we were able to move all the as­sets we have in China back to the US, we don’t have the tal­ent any­more to ac­tu­ally use it.” Try­ing to build de­vices else­where, he added, could jack up con­sumer prices by 25 per cent, which con­sumers might not be able to bear (some re­ports have sug­gested a US-built iPhone would cost $2,000).

More­over, mod­ern China is it­self a huge con­sumer of elec­tronic de­vices, in­clud­ing iPhones. It con­sumers one third of the world’s semi­con­duc­tors, mostly for do­mes­tic users. “That’s why no US or Euro­pean com­pany is go­ing to get out of China,” Mr Mo­rales said. “They’re ben­e­fit­ing from its growth.” Be­sides, US pres­i­dents think four years ahead; com­pa­nies mak­ing cap­i­tal in­vest­ments think 10 or 15. In Mr Mo­rales’ view, few Western coun­tries will be brave or stupid enough to wean them­selves off Chi­nese elec­tron­ics.

Oth­ers are more up­beat. “Over my life­time it’s gone from made in Ja­pan to made in Tai­wan to made in Manila,” said Brian Matas, vice pres­i­dent at the semi­con­duc­tor mar­ket re­search firm IC in­sights. “There are other re­gions of the world that could take this on.” Coun­tries such as Malaysia and Viet­nam are al­ready plun­der­ing cheap man­u­fac­tur­ing jobs from China, and in time they could be­come assem­bly hubs too. The tran­si­tion would be ex­pen­sive and slow, but once es­tab­lished they could turn out prod­ucts just as cheaply as to­day. Western com­pa­nies could also choose to man­u­fac­ture par­tic­u­larly sen­si­tive prod­ucts, such as de­fence sys­tems, in their home coun­tries.

More likely than a to­tal re­treat from China, then, is a bi­fur­ca­tion.

In the face of Mr Trump’s trade war, even Chi­nese com­pa­nies are hedg­ing their bets. Mean­while the Chi­nese govern­ment is rac­ing to build its own semi­con­duc­tor in­dus­try, which is pre­dicted to sup­ply 40 per cent of its chips by 2027.

At the heart of this trade war, and of the Bloomberg story, is one ques­tion: do China and the US feel de­pen­dent enough on each other not to burn their bridges? “We as­sumed that po­lit­i­cal re­form would fol­low eco­nomic re­form, and that a kind of lib­er­al­i­sa­tion of the Chi­nese po­lit­i­cal model would come with the rise of a Chi­nese mid­dle classes,” said John Hem­mings, di­rec­tor at the Henry Jack­son So­ci­ety. “Un­for­tu­nately what we dis­cov­ered is that we’d de­vel­oped a peer com­peti­tor that has ad­vanced tech­nolo­gies and cap­i­tal that no Com­mu­nist has been able pre­vi­ously to get.”

If Western coun­tries and com­pa­nies truly want tech­no­log­i­cal in­de­pen­dence, they will soon find out the cost – and whether their con­sumers are will­ing to pay it.

China stands ac­cused of in­sert­ing spy chips into servers used in ev­ery­thing from US navy war­ships, to CIA drones, ac­cord­ing to al­le­ga­tions re­ported by Bloomberg. The re­port has been de­nied but US at­ti­tudes are hard­en­ing

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