The US and China have rarely seen eye-to-eye. But with years of appeasement getting it nowhere fast, the US is now not only talking tough on trade with its biggest rival but also taking steps to harm the business interests of Chinese firms. Here’s my latest for IDG Connect:
This month a deal between Huawei and AT&T to sell its smartphones in the US collapsed after pressure from senators worried about unspecified security concerns. It was a major blow to the world’s third largest device maker and could result in tit-for-tat retaliation by Beijing. In China, Apple announced it would be handing over management of iCloud services to a local government-owned partner — in order to comply with Chinese laws created as a result of escalating tensions and protect its revenue stream in the Middle Kingdom.
These two tech giants are at the center of what could well become a major trade dispute between the world’s pre-eminent superpowers. If it continues to escalate, it could spell disastrous news, not just for IT buyers, but the global economy.
A long time coming
It’s a battle that’s been brewing for years. On the one side, US firms — and technology players in particular — are desperate to access China’s vast market of over one billion internet users. To do so, they’ve been prepared to put up with strict Chinese laws which demand partnering with domestic firms, and technology transfers which can expose IP to the local partner. Along with out-and-out IP theft in the form of cyber espionage — carried out with the blessing or perhaps even backing of the government — this has helped Chinese firms catch up fast in the technology stakes over the past few decades. Censorship of various US platforms — think Twitter, Facebook and Google — also helped to provide a useful vacuum for local players to thrive.
China’s new Cybersecurity Law (CSL) may overlap with GDPR, but could still deliver the opposite effect from the intended one. How will China’s GDPR-like Cybersecurity Law impact business?
Now the US is hitting back. The first big move came when lawmakers effectively banned Huawei and ZTE from touting for telecoms infrastructure contracts in the US, citing national security concerns. Then came the NSA leaks and revelations from the portable USB drives of Edward Snowden, describing how US intelligence had been spying on China for years by intercepting and bugging US-made Cisco routers. That was all Beijing needed to escalate its own policy of prioritising homegrown products and putting yet more roadblocks in the way of US firms.
Huawei rival Cisco was hardest hit, seeing its China market share reportedly plummet over 30%. But some reports suggest that the number of government-approved foreign tech firms in China fell by a third between 2012 and 2014, while those with security-related products fell by two-thirds.
Microsoft has also been singled out, with Windows 8 banned for government use, while Qualcomm was hit with an anti-trust fine of nearly $1bn. Then China introduced a rigorous new Cybersecurity Lawwhich — although seemingly designed to improve baseline security for local organizations — could also provide a legal basis for forcing US firms to hand over source code during national security ‘spot checks’.
This law is the reason Apple has been forced to transfer local iCloud operations to partner Guizhou on the Cloud Big Data (GCBD). It claims to have “strong data privacy and security protections in place” and says that “no backdoors will be created into any of our systems”. But experts are sceptical. Threat intelligence firm Recorded Future previously claimed that the law could give the government “access to vulnerabilities in foreign technologies that they could then exploit in their own intelligence operations.”
That’s not all. By handing over local control of iCloud accounts to a Chinese partner, Apple may be putting at risk the privacy and security of employees of US firms operating in China.
“This latest move by Apple to essentially cede control and operation of its cloud services in China to the Chinese government is part of a larger and disturbing trend by Western technology companies to limit user privacy in exchange for continued access to the Chinese market,” Recorded Future director of strategic threat development, Priscilla Moriuchi, told me.
Hackers could have a head start on researching exploits that US firms have not yet caught wind of. Why does China spot security vulnerabilities quicker than the US?
“Per Apple’s security procedures, GCBD would have access to metadata about Chinese users’ iCloud documents, as well as complete access to any unencrypted @icloud email activity.”
While it’s not clear if this is the case for foreign firms operating in China, the vagueness of the CSL certainly makes it possible.
The big freeze
Now the speculation is that President Trump could escalate what is already a de facto tech Cold War by imposing unilateral sanctions on China in retaliation for claimed IP theft and forced tech transfers. So is a full-blown trade war looming?
China-watcher Bill Bishop is pessimistic of future US-Sino relations. In his popular Sinocism newsletter he had the following:
“I think the forced termination of the Huawei-AT&T deal significantly raises the likelihood that a major US consumer electronics firm with meaningful operations in China will be smacked down at the first sign of a real US-China trade war.
“Beijing assumes the US government is so paranoid about Huawei because it uses US firms to do what it says Beijing does with Huawei, and the Snowden revelations confirmed many of those suspicions. If anything, Beijing has been remarkably tolerant of some US consumer electronics firms given the treatment of Huawei and what we learned from the documents Snowden stole.”
Given the large percentage of US tech firms with manufacturing facilities in China, a trade war would have a catastrophic impact on global supply chains, making parts and products more expensive, reducing choice for IT buyers in the West and devastating parts of the US economy. If the revenue made by large multi-nationals in China were to dry up, jobs would be lost — not only in those firms but all their partners, suppliers and local economies.
Canalys analyst, Jordan De Leon explained just how reliant on foreign suppliers both Chinese and US organisations are.
“In the US Lenovo is the fourth-largest PC vendor and has a massive installed base. It also has key clients in its datacentre business in the US. Similarly, in China, Dell is number two and HP is number four in PCs,” he told me by email.
“In the event of a trade war, though unlikely, these three brands will be impacted. The extreme scenario is if there is legislation that is made to totally ban US-products in China and vice versa, which means businesses in those markets have to comply. China is also an important market for Apple, not to mention the fact that China is a vital manufacturing base for Apple.”
However, Forrester principal analyst, Andrew Bartels, believes strong opposition from big business could be enough to prevent Trump from creating such a scenario.
“A US-China tech war is more likely than US-China trade war, despite Trump’s periodic Tweets, because there are strong institutional forces built around supply chains that would cause big businesses to resist through legal and political action any imposition of trade barriers,” he told me by email.
“The US-China tech war is kind of in an uneasy truce, with the US government tacitly accepting that the Chinese government is favouring its own technology developments and vendors in China, and the Chinese government tacitly accepting that the US is going to put up barriers periodically to Chinese firms buying US companies.”
Ultimately, this dynamic should be enough to temper the policies even of a dogmatic populist like Trump. This is a numbers game, and China has the numbers — both in the size of its domestic market, and the $340bn+ surplus it’s running with the US. Acting tough with Beijing can be a dangerous game to play, and the tech industry is first in the firing line.
News emerged a few days ago that Foxconn had effectively laid off 60,000 workers in China and replaced them with robots. “So what?” you might think. And to be honest, if it keeps the cost of our tech devices down, then good for Foxconn, right? Well, unfortunately it’s not that simple.
The changing dynamics of the Chinese labour market could have a profound effect on us here in the West, and even portend similar disruption to our own workforce in the not-too-distant future.
These stories have been doing the rounds for years because – well – contract manufacturers like Foxconn and others have been investing significant sums into robotics for years. Why? The answer’s pretty simple, according to IHS analyst, Alex West.
“Robots don’t need to stop working, but they don’t get drowsy, distracted or depressed either, so quality and consistency of manufacturing is enhanced. With the developments in AI and predictive analytics, robots are also far less likely to get ‘sick’, reducing downtime,” he told me.
To that I’d add that they don’t go on strike, commit suicide or complain to the papers about poor working conditions – all problems Foxconn for one has encountered. But robots can also add value in other ways, such as helping firms win business from their rivals, according to West.
“Robots are evolving, becoming more intelligent as AI solutions help them to ‘learn’ on the job, but also becoming far easier to program and integrate on production lines,” he continued. “Collaborative robots are also making robotic solutions safer and easier to install without the additional safety concerns and equipment.”
There’s clearly a drive for this in China, the tech manufacturing centre of the world. The Chinese government has made investment in robotics a priority in its 13th Five-Year Plan, with IHS forecasting a 30% CAGR. But this threatens to create social instability as human workers are shelved in favour of machines. Foxconn and others claim bots are only used for repetitive tasks that humans don’t want anyway. But there’s no guarantee that there are enough skilled roles to fill the gap.
“Dull, repetitive jobs on the plant floor will be replaced by a range of higher-skilled positions such as robot/systems integrators, programmers, and data scientists supporting enhanced AI,” argued West.
“However, there will be less of these more advanced roles, and some of the type that existing workers will not have the skillsets to be able to transition to.”
This might seem a long way from the UK. But our workforce is also facing a robot invasion – not from these industrial bots, but service robots like Softbanks’ Pizza Hut-serving Pepper. In fact, a Deloitte study has claimed that 35% of UK jobs have a high chance of being automated in the next decade or two.
Robots still only account for 0.3% of all machinery produced in China last year, according to West, so there’s still a long way to go. But it’s probably time to start getting nervous in the UK.
What is Microsoft’s future in the mobile space? It’s a question that’s generated more than a few column inches over recent years. Now with Redmond agreeing to sell the feature phone division to Foxconn and licence the Nokia name, things have perhaps started to get a little clearer.
First, the bad news. IDC is predicting Windows Phone’s market share for 2016 will stand at just 1.2% this year – that’s down from 2% last year, 2.7% the previous year, and 3.3% in 2013. The firm is clearly not getting any OEMs on board for future devices anytime soon, and there was no mention of new Lumias in the Foxconn announcement – just that it would support current devices. From this – and speaking to a few experts for an upcoming feature – I think the smart money’s on a Surface handset.
Surface has done pretty well in the tablet/laptop space – albeit after a few iterations. And a high-end Surface handset would show off the best features of Windows 10 Mobile, as Microsoft finally harmonises its OS across all platforms. It could have crack at competing with the Samsung Galaxy range and potentially the iPhone. Whether this is enough to prop up Microsoft’s mobile hardware business is unsure, however, and more job cuts could be on the way.
A Surface smartphone could appeal in particular to business executives and the like, according to IDC analyst Susana Santos. “It’s a strategy that makes sense, but it takes time. It’s too early to say if it’ll work or not. It certainly won’t help with its volumes. These devices are more expensive and not as easy to sell,” she told me.
With the business market set to rise only to 20% of the global smartphone market, according to IDC, this is also a concern if Microsoft can’t persuade those BYOD consumer/employees to migrate away from their iOS or Android handsets. It’s been said many times before, but Microsoft is in many ways still a victim of its lack of vision a decade ago, which let Apple and Google steal the hearts, minds and wallets of consumers.
And what of its chances of getting those sought-after OEMs on board?
“Of all companies, Microsoft knows the value of a developer and application ecosystems, but has been poor to drive this agenda in the mobile realm. I’d expect it to continue with Windows phone, but play mostly in the higher-end,” Quocirca’s Rob Bamforth told me by email. “The words it has used seem to indicate an interest in mobile computing devices, with telephony capabilities, rather than emphasis on ‘handsets’, so I think that means higher-end pricing and positioning – and perhaps a closer connection to Lync/Skype for Business and Skype Meeting. Perhaps we might be looking for a Skype Surface.”
The question is whether Redmond can maximise its IP and engineering talent in this space, “gluing the bits together in a way that Apple seems to mange elsewhere”, according to Bamforth. If it can, it’ll be the greatest comeback in the history of computing.
What will the smart home of the future look like? Despite drawing the crowds at CES this year, it’s clear that the industry is still in its very early stages. Yes, the big boys are all involved – Amazon, Apple, Google et al. – but at the moment it’s a messy hotchpotch of competing standards, point products and exaggerated claims.
I may be biased of course, as my house is about as dumb as you can get – save for a couple of Sonos speakers dotted around the place.
But where I see things really coming together over the next few years is when we start to get more industry alliances, partnerships and/or M&A to consolidate competing platforms. At CES more than 10 smart home vendors announced integration with Amazon’s Echo/Alexa, for example, which begins to tie together a bunch of disparate tools for the smart home. Apple’s HomeKit, Google’s Nest ecosystem and Samsung SmartThings all have similar potential.
Strategy Analytics’ senior analyst, Joe Branca, claimed the biggest challenge facing the industry as a whole is finding a business model that works for vendors and their customers.
“The price point for solutions offered by traditional security companies helps to prevent a lot of consumers from buying into the smart home concept,” he told me when I interviewed him for a recent feature article.
“Our data shows, however, that there’s a strong interest in the benefits offered by security and smart home solutions – not to mention digital health and elderly care solutions – but at a lower price point than what’s available in the market at present.”
However, there may be other ways to subsidise the cost for consumers – for example, by getting insurance companies and marketers on board. The latter would be prepared to access user-generated data while the former benefit from more safe and secure houses, he claimed.
“Other big challenges have to do with customer service and installation,” Branca added.
“With multiple product and service offerings part of a single smart home ecosystem, consumers want to know who they will speak to when they need assistance. With regard to installation, DIY products have gotten a lot of praise, but we believe that to succeed with a mass market offering, installation by trained professionals is key.”
That’s a problem the Silicon Valley giants may need to partner up on to solve.
So what of the future?
Branca reckons more personalised, seamless, user-friendly experiences. I’d agree, but I think the usability and interoperability problems will still mean homes full of point products rather than smart ecosystems. As for the vendors, he argued that firms will end up transitioning to service-based business models.
“The real opportunity for smart home is in services that generate recurring revenue, and not simply the sale of hardware,” he concluded. “In the US, the security model is well-established. However, there is both an opportunity for security services that don’t fit the traditional mould – i.e., services that are lower cost and/or are a better match for renters or apartment owners – and services outside of security, including home maintenance and repair, for example.”
Long story short: I can’t wait for the smart home of the future, but I think I’ll be forced to for several years yet.
Apple had a rip-roaring second quarter, as I’ve just reported here for IDG Connect. But the financials were about more than putting yet more dollars in the bank. In years to come, the quarter may well be seen as a tipping point – the point when the Cupertino giant came to rely way too much on China.
Although sales in China have yet to surpass the Americas, that point is not too far away. But the quarter did see iPhone sales from the Middle Kingdom overtake the US, and it also witnessed total revenue from China leapfrog that of Europe – two pretty significant milestones.
Apple is in a position that its American rivals and counterparts – Google, Microsoft, Amazon, Facebook etc – would dearly love. They’ve all been either banned or investigated for anti-trust dealings – in other words harangued by the authorities. These firms face an uncertain future in the world’s soon-to-be largest technology market. But while Apple is largely loved by consumers still in style-obsessed China, its days too could be numbered.
Certainly the government has been making life difficult for US tech firms over the past year or two. The revelations from NSA whistleblower Edward Snowden has given it the perfect excuse to request stringent security checks on products destined for the public sector market. It’s a de facto ban for many providers. Beijing is trying to do the same with the banking industry. And it will get its way, eventually.
What does it mean for Apple? Yes the firm is a large investor in the country. But that won’t count for much if or when Beijing wants to apply some pressure. Apple has already been forced to comply with its unpalatable censorship demands, withdrawing apps from its store. It was notably silent when the authorities launched a Man in the Middle attack on iCloud last year. And CEO Tim Cook was forced to make a grovelling apology when a state TV-led witch hunt found issues with its customer service in the country. Cook has reportedly also agreed to give the government access to its source code in a bid to pacify regulators and ensure its devices are approved. This in itself could backfire if Beijing uses that intelligence to create backdoors to spy on Apple users outside the country.
Then there’s the issue of growth. China is not necessarily the license to print money many think it is for Apple.
IDC analyst Xiaohan Tay told me smartphone growth will begin to slow in the country over the coming years.
“Most of the growth in the smartphone market will come from the lower end segment of the market. As Apple is a high-end product in the China market, most of its growth will come from replacement users which are the Apple fans, as well as those who may be using the higher end Android phones at the moment,” she added.
“The new iPhones were a hit in the Chinese market as consumers were awaiting the release of the larger screen sized phones from Apple for the longest time, and this helped to drive growth in the past two quarters since the new iPhones were launched in China.”
Growth will continue, but at a slower rate, although the Apple Watch represents a great opportunity to arrest that slide, she added.
“The die-hard Apple fans as well as the middle and upper-middle class consumers in the cities will help to sustain the growth,” said Tay. “I believe that Apple’s high prices actually makes its phones more desirable for the consumers. Owning an iPhone represents a status symbol that the average consumer wants to work towards.”
Plenty of positives for the future for Apple in China, then. But what the Middle Kingdom giveth it can also taketh away. In my opinion, Cupertino had better disperse its eggs into other BRIC baskets if it wants to avoid a nasty surprise down the road.
This week news emerged that the Indonesian government is planning to levy a 20 per cent luxury goods sales tax on all smartphones made outside the country. It’s an old fashioned piece of protectionism which could hit mobile phone makers in the region pretty hard and is unlikely to have the desired outcome.
As I mentioned in my story for The Register, Indonesia is a growing smartphone market with massive potential – as the world’s fourth most populous nation.
Firms that might be particularly dismayed by the tax include BlackBerry, which counts Indonesia as one of its few remaining strongholds, and Apple, which only recently restarted iPhone 4 production to target budget conscious locals.
If the rumours are true it can be seen less as an attempt to spur local handset makers, of which there are few, and more as a means to persuade more global manufacturers to locate facilities in the country.
Foxconn has already stolen a march on its rivals here by announcing a $1bn investment in facilities there.
Canalys analyst Jessica Kwee told me that, seeing as most domestic smartphone makers are focused on cheap, low-end handsets it’s unlikely that high-end users will be persuaded by the tax to buy local.
“What I think is more likely to happen is that the extremely wealthy would continue to buy their premium phones as is,” she said.
“Then other users will resort to the grey market to source their high-end phones – either via grey importers, by buying when they travel to nearby countries like Singapore or Malaysia, or by requesting from their friends etc. The latter would certainly not benefit the government.”
It’ll be interesting to see whether the government follows through with its plans. After all, at one stage it was mooting the tax only on handsets over Rp 5 million (£260), which I still reckon is the most likely outcome.
It’s based on a Trend Micro report – The Mobile Cybercriminal Underground Market in China – published this week by its Forward Looking Threat Research Team, which reveals once again the sophistication and commercialisation of the underground networks via which cyber criminals trade goods and service.
Although the report itself doesn’t throw up a huge amount of new data it’s interesting to see evidence that such networks exist in China, selling common attack kits like premium service abusers, SMS Forwarder Trojans and spam.
Typically, being broadcast journalism we were kept strictly to 5 minutes of short, sharp soundbursts by the BBC which allowed for little meaningful discussion of the topic besides “what’s the Dark Web”? “How do I get on it?” and Who’s behind these attacks?”. I had a better chat with the researcher the night before.
That said, it’s an important topic to air publically.
Although we didn’t cover this in as much detail as I’d have liked, the real message to listeners of the program – which apparently has among the highest audience numbers on the planet – is to be more vigilant when downloading apps online and make sure they install basic AV on smartphones.
In China, where unregulated third party Android stores are the norm and mobile AV is rare, the cyber criminals have it made.
The only light I can see on the horizon in this part of the world is for the government to follow through with its planned regulation of the mobile app space. This would force industry to self-regulate and clamp down on malicious apps either pre-loaded onto phones or uploaded to web stores.
The only problem is that any new regulations are also likely to restrict content deemed “offensive” to Beijing – in other words censorship by the back door.