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