Shop Lo­cal

▶ ▶ “China has the mus­cle to get what it wants” ▶ ▶ The govern­ment de­mands more data and boosts lo­cal com­pa­nies

Bloomberg Businessweek (North America) - - Technology - with Dina Bass �Bruce Ein­horn,

China hasn’t been a wel­com­ing place for many for­eign tech­nol­ogy com­pa­nies. Google, Face­book, and Twit­ter are blocked. Mi­crosoft is fac­ing an an­ti­monopoly in­ves­ti­ga­tion. Qual­comm, the lead­ing maker of mo­bile chips, paid the govern­ment $975 mil­lion to set­tle an an­titrust suit last year and con­tin­ues to have trou­ble col­lect­ing li­cens­ing fees from clients in the coun­try. And things are get­ting worse.

On Jan. 1 a law took ef­fect that re­quires telecom­mu­ni­ca­tions and In­ter­net com­pa­nies op­er­at­ing in China to pro­vide law en­force­ment with tech­ni­cal as­sis­tance, in­clud­ing de­cryp­tion of sen­si­tive user data, in any probe meant “to avert and in­ves­ti­gate ter­ror­ist ac­tiv­i­ties.” The ver­sion ap­proved by the leg­is­la­ture’s stand­ing com­mit­tee at the end of De­cem­ber dropped draft pro­vi­sions that had drawn ob­jec­tions from the White House. Com­pa­nies won’t have to keep lo­cal user data at fa­cil­i­ties in­side China, and they won’t need to give the Chi­nese govern­ment back doors into their sys­tems. But U.S. and Euro­pean trade groups still aren’t happy. The Euro­pean Union Cham­ber of Com­merce in China says the law’s vague word­ing on when and how to help law en­force­ment de­crypt data “leaves con­cern about how com­pa­nies will be ex­pected to carry this out.”

The law builds on other coun­tert­er­ror­ism, na­tional se­cu­rity, and bank­ing and in­sur­ance mea­sures en­acted last year that ei­ther ease reg­u­la­tion on or di­rectly sub­si­dize pur­chases of home­grown tech. China seeks to purge most out­side tech­nol­ogy from its banks, mil­i­tary, state-owned en­ter­prises, and key govern­ment agen­cies by 2020, Bloomberg News has re­ported. The lat­est rules “con­tinue the Chi­nese govern­ment’s on­go­ing ef­forts to re­strain or force out for­eign tech­nol­ogy com­pa­nies,” ac­cord­ing to a Jan. 11 re­port by the In­for­ma­tion Tech­nol­ogy & In­no­va­tion Foun­da­tion, a Wash­ing­ton think tank whose hon­orary co-chairs in­clude Repub­li­can Sen­a­tor Or­rin Hatch of Utah and Demo­cratic Sen­a­tor Chris Coons of Delaware.

The Chi­nese govern­ment has been good at pro­tect­ing some dig­i­tal turf at home— Baidu owes much of its suc­cess to Google’s ab­sence, for ex­am­ple—but it’s still had to work with a wide range of for­eign hard­ware and soft­ware be­cause other coun­tries set the stan­dards. China spent years dur­ing the mid-2000s pro­mot­ing a home­grown stan­dard for 3G wire­less com­mu­ni­ca­tion, which if adopted would have net­ted lo­cal com­pa­nies reg­u­lar roy­al­ties from adopters abroad. That ef­fort failed, as did sim­i­lar at­tempts to cre­ate made-in-china stan­dards for ra­dio-fre­quency-iden­ti­fi­ca­tion chips and stream­ing TV.

Now, though, com­pa­nies such as Huawei, ZTE, and Len­ovo are among the world’s top mak­ers of com­put­ing hard­ware and tele­com net­work­ing equip­ment. Pres­i­dent Xi Jin­ping’s govern­ment can af­ford to phase out its use of for­eign ri­vals and count on those who re­main in the short term to keep co­op­er­at­ing. Given the lim­ited eco­nomic growth in the U.S., Europe, and Ja­pan, even China’s slow­down and mar­ket tur­moil don’t sig­nif­i­cantly weaken Xi’s hand in deal­ing with for­eign tech com­pa­nies, says James

Mcgre­gor, Greater China chair­man of con­sult­ing firm APCO World­wide in Shang­hai. “China has the mus­cle to get what it wants,” he says. “Com­pa­nies in China are go­ing to have to more and more play by China’s rules.”

Sur­veil­lance prac­tices in the U.S., most no­tably those of the Na­tional Se­cu­rity Agency, have given China freer rein to tighten reg­u­la­tions un­der the aus­pices of na­tional se­cu­rity, says Mark Natkin, man­ag­ing di­rec­tor of Mar­bridge Con­sult­ing in Bei­jing. In a Dec. 16 speech at a tech con­fer­ence in the east­ern city of Wuzhen, Xi de­nounced what he called cy­ber­se­cu­rity “dou­ble stan­dards.” With­out men­tion­ing the U.S., he said, “We can­not just have the se­cu­rity of one or some coun­tries while leav­ing the rest in­se­cure.”

Shen Dingli, vice dean of the In­sti­tute of In­ter­na­tional Af­fairs at Fu­dan Univer­sity in Shang­hai, says the U.S. was the first to tar for­eign com­pa­nies in the name of na­tional se­cu­rity. Huawei and ZTE have had dif­fi­culty sell­ing to U.S. car­ri­ers since a 2012 con­gres­sional re­port named them as se­cu­rity risks.

There are lim­its to how far China can push for­eign com­pa­nies. Chi­nese con­sumers re­main hun­gry for iphones, for ex­am­ple. Per­haps more im­por­tant, the coun­try’s chipmakers aren’t ready to re­place In­tel mi­cro­pro­ces­sors with home­made alternativ­es, says Li Xi­gen, a pro­fes­sor at City Univer­sity of Hong Kong. When it comes to re­search into semi­con­duc­tors and other com­put­ing build­ing blocks, “there’s some kind of bot­tle­neck,” Li says. “The gap is big.”

For now, U.S. com­pa­nies in par­tic­u­lar are ramp­ing up their part­ner­ships with Chi­nese cousins to make sure there’s a lo­cal in­ter­est in keep­ing them there. On Jan. 17, Qual­comm an­nounced a joint ven­ture with south­ern China’s Guizhou province to make server chips. Dell is work­ing with Chi­nese com­pany King­soft to de­velop cloud servers and has formed an ar­ti­fi­cial-in­tel­li­gence lab with the Chi­nese Academy of Sci­ences. In re­cent months, HP, Cisco, and IBM have also an­nounced plans to work more closely with lo­cal part­ners. That all sug­gests Xi’s plan is work­ing, Natkin says: “China is mov­ing full steam ahead.”

Co­op­er­a­tion car­ries no guar­an­tees. In the year since Chi­nese au­thor­i­ties raided Mi­crosoft of­fices as part of an in­ves­ti­ga­tion into al­leged price fix­ing, Mi­crosoft has worked hard to keep the govern­ment happy. It’s teamed up with state-owned China Elec­tron­ics to cus­tom­ize Win­dows for Chi­nese users. It’s given up on push­ing its search en­gine, Bing, in China, in­stead mak­ing Bei­jing-based Baidu its Win­dows search de­fault in the coun­try. When Xi trav­eled to the U.S. in Septem­ber to meet with Pres­i­dent Obama, he first landed in Seat­tle to meet with Bill Gates and Chief Ex­ec­u­tive Of­fi­cer Satya Nadella at Mi­crosoft’s head­quar­ters.

None of that has re­solved the com­pany’s China trou­bles. On Jan. 5, China’s State Ad­min­is­tra­tion for In­dus­try and Com­merce an­nounced a fur­ther probe of al­leged Mi­crosoft vi­o­la­tions of an­ti­monopoly law. SAIC said the U.S. com­pany needs to “clar­ify ma­jor prob­lems” that turned up from the ear­lier in­ves­ti­ga­tion, ac­cord­ing to Xin­hua, the state news agency. “We’re se­ri­ous about com­ply­ing with China’s laws and com­mit­ted to ad­dress­ing SAIC’S ques­tions and con­cerns,” Mi­crosoft said in a state­ment. Nei­ther party de­tailed the con­cerns in ques­tion.

“We can­not just have the se­cu­rity of one or some coun­tries while leav­ing the rest in­se­cure.” �Pres­i­dent Xi Jin­ping The bot­tom line Xi’s lat­est na­tional se­cu­rity rules, plus fa­vor­able poli­cies for Chi­nese com­pa­nies, are ac­cel­er­at­ing his push to shop lo­cally by 2020. Pricey Poop

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