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.
Huawei has leaped over local rival Xiaomi to take number one spot in China’s much prized smartphone market, according to Canalys. I covered the news for IDG Connect and asked Canalys VP analysis, Rachel Lashford, whether she thought the Middle Kingdom now belonged to domestic players.
She argued that the market has actually decelerated slightly of late (1% from 1H14 to 1H15) which has increased the pressure on all vendors – but Apple and Samsung are still flying the flag for the Rest of the World.
“Apple still has a very powerful brand in China and we expect to see the latest product launches to continue its popularity,” Lashford told me.
Samsung, meanwhile, has dropped from the top spot of a 15% share in 1H14 to fourth place (9%) a year later.
“But it is recovering in the high end and has really focused on investing in localised marketing messages,” Lashford added, by email. “Combined with recent restructuring of its channels, focusing on large retail and operators, it should be well equipped to keep the pressure up on its local competition.”
So what of Huawei and Xiaomi? The former’s rise has come on the back off a steady building out of online channels over the past two years and a focus on its offline channel presence. Aiming squarely at the mid-range ($200-500), it has increased investment in the brand to good effect, concentrated on quality and kept momentum with regular product updates.
Xiaomi, on the other hand, may have taken its eye off the ball by concentrating on wearables, TVs and other smart home kit. It will need a “refreshed flagship” in time for Chinese New Year to wrest back momentum, she claimed.
And what of the two vendors’ plans for international expansion? Well, half of Huawei’s sales already come from outside the massive China market. But Xiaomi will need more help to get it competing beyond the Great Firewall.
“Many vendors are hindered by the lack of patents and having the difficulties and expense of licensing those in order to enter markets like the US and Western Europe where these are adhered to, so this needs to be overcome,” claimed Lashford.
“As does the adoption of a successful channel strategy. Xioami’s focus has been directly online, but it will still likely need the expertise of distributors mobility businesses – like Tech Data and Ingram Micro – in order to navigate the complexities of bringing those products to market.”
It’s shaping up to be an exciting 2015 for those in the space as these platform players look to differentiate in an increasingly crowded market, while the telecoms operators struggle to recoup the cash they’re losing from decreased SMS and voice call revenue.
Canalys analyst Jessica Kwee was quick to point out the pressure these traditional telecoms players are under.
“SMS/texting in the traditional sense has been impacted greatly, especially as people see more value in messaging apps – as in many cases they are considered ‘free’ as they are part of the data plans,” she told me via email.
“Plus, messaging apps are also more flexible and can handle more than traditional texting – no character limits, and on opposite spectrum, you don’t feel obliged to try to use up the character limit either, so it’s easier to text something very short and quick. Also, there’s the ability to communicate in groups, send pictures, videos, voice notes, emoticons, etc.”
However, there are some opportunities for operators.
“People will increasingly rely on an always-on connection and not be able to just rely on wi-fi at home or at work, as they will want to be connected all the time,” Kwee explained. “So even though it is much more difficult to get people to spend a lot of money on expensive data plans, especially in price-conscious markets, it could be a compelling alternative where telecoms provide cheaper data plans to exclusively use such apps.”
Frost&Sullivan principal analyst, Naveen Mishra, added that adoption of mobile messaging apps has soared over the past 12-18 months thanks to their added functionality and free price tag.
“Increasing smartphone penetration and growing internet adoption is driving this usage. Emerging markets like India, are growing extremely fast, both in terms of adoption and usage,” he told me.
“Between May 2014 and Oct 2014, WhatsApp’s monthly active users grew from 50 million to 70 million, which is 10% of the total user base. The next 3-5 years are also looking very promising, as key emerging markets have large opportunities of growth. In India alone, there are over 930 million mobile subscriptions out of which only 70 million are current WhatsApp users.”
As for the various market players, success will come down largely to innovating with new features.
“All the OTT application companies are constantly trying to innovate, however the success of the application largely depends on the value a new feature brings in,” he said.
“Line has tied up with LG Electronics, where through its chat session, LG appliances can be activated and controlled. On the other hand, WhatsApp is working on a voice calling service, which is expected to be launched in early 2015.”
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.
Lenovo is the number one PC maker in the world and rapidly gaining popularity in the smartphone space, where it’s second in China, yet it’s been forced to delay its planned entry into the US mobile space by up to 3 years.
Reports from CES last week had Lenovo execs lowering expectations in front of the media rather than the usual ambitious predictions and bravado that characterise the world’s biggest consumer electronics show.
However, at CES Lenovo’s Americas president Gerry Smith told journalists it could be another 2-3 years, and that the firm was waiting for the “right time”, the “right product” and looking to boost marketing/branding spend first.
It’s certainly a given the firm will eventually take on Apple in its own back yard, but with PC sales tanking globally, why such a long lead time?
I spoke to some local analysts to find out.
IDC’s Melissa Chau argued that it comes down to brand recognition and industry partnerships.
“The biggest challenge any smartphone player has in breaking into the US has to do with partnerships. Even Nokia found it a problem building the right relationships with carriers and I wouldn’t be surprised if Lenovo is finding the same,” she told me.
Lenovo needs also to find a unique selling point – something to differentiate it from the likes of Huawei, ZTE and others which have already shown they can produce decent handsets for US punters at low cost.
Canalys analyst Jessica Kwee was more optimistic, arguing that Lenovo already has good brand recognition thanks to its Thinkpad laptop line.
“Lenovo is one of the most well-known Chinese brand with a good brand image even in the US, which may help it do better than some of its Chinese peers when it does launch its smartphones there, although there are plenty of other reasons that will help determine its success, such as the products, channels, marketing and timing,” she told me.
In the end there’s nothing wrong with a company like Lenovo taking its time before launching into an important market.
But I have a feeling that it will make a move sooner rather than later. Giving your rivals – especially Chinese ones like Huawei – a 2-3 year head start is never wise, let alone in a fast-moving and highly competitive space like the US smartphone market.
Lenovo has been talking up its move into the US smartphone market this week, as global PC sales continue to stagnate, but the analysts I spoke to are far from convinced that the Chinese hardware giant can repeat its success in the traditional computing space.
CEO Yang Yuanqing told the WSJ that the firm would be taking aim at the US mobile space within a year. You can’t argue that it doesn’t represent a “new opportunity” for growth, given that PC shipments are still falling in most markets around the world.
In Western Europe they declined by the biggest ever amount in the last quarter – down 20 per cent year-on-year – and even in the still healthy Chinese market they are only forecast to grow by 3-4 per cent this year.
So can the hardware behemoth, which recently became the world’s number one PC vendor, tap a user trend which is seeing more and more gravitate towards mobile devices instead of traditional notebooks and desktops?
Well, Gartner has forecast it will take the lead in its domestic market – the world’s biggest for smartphones – as early as this year, but the US would seem harder to crack.
“The only way Lenovo would have a way to even have a chance would be to have a key carrier support it by lining up one or more of their products in the portfolio. Even this way, I believe consumers will not necessarily see the brand as sexy,” Gartner research VP Carolina Milanesi told me.
“Lenovo’s position in the corporate PC market might give them an opportunity in the prosumer segment especially if they brought to market an Android based device with an enterprise class security and manageability feature set. Bottom line: it’s a tough job and Lenovo would be better off capturing more of the tablet market first so that they could get one step closer to consumers.”
Canalys research director Nicole Peng was not much more optimistic of its chances in the near term, telling me China sales would continue to make up the majority of its global volume.
“The competition landscape in the US smart phone market is far more challenging for new comers, with Apple and Samsung dominating over 70 per cent share,” she added. “However to start selling smart phone in the US, more importantly to gain carrier support is strategically important for Lenovo’s overall PC+ strategy globally.”
All reasonable comments and I think they’ll be true in the short term, but I wouldn’t be surprised to see Lenovo up there in the top three or five US smartphone vendors in a couple of years’ time. ZTE, with all of its problems and negative publicity in the US, has already nabbed third place, according to new stats from ITG Market Research.
With a hefty R&D team and vaulting ambition, Lenovo will be hard to ignore, even if its brand image is not exactly an enticing one for smartphone users Stateside at the moment.
Just finished an interesting piece on what to expect from Chinese tech firms in 2013 so thought I’d précis the key points below.
To be honest as with any year end predictions to an extent there’s always more-of-the-same than anything else, and to that point there’ll be greater international expansion on the mobile handset front by ZTE, Huawei, Lenovo, and potentially TCL-Alcatel.
Aside from the big names, Canalys analyst Nicole Peng told me there could also be attempts by feature phone vendors like Gionee and K-Touch to make it overseas, claiming that the technical and business support offered by chipset companies like Qualcomm and MediaTek is making it easier than ever to break into new smartphone markets.
But away from hardware, what about China’s growing raft of web companies?
It would be easy to write a story saying “the Chinese are coming, look out Facebook, Twitter et al!”, but the honest truth is that the likes of Tencent, Sina, Alibaba and others have become successful in China in part by copying their US rivals and in part thanks to local restrictions banning their rivals.
Where they have done well is in localising their platforms for the domestic user – something Alibaba and Baidu are doing now even for their mobile OS platforms – and innovating on top of what has gone before.
Aside from the odd service like Tencent’s WeChat which has managed to cross the Great Firewall to acceptance elsewhere, I’m sceptical that these firms will expand successfully in 2013, and to an extent, with less than half of the vast Chinese population online, there’s probably enough untapped growth left domestically to keep them busy for now.
Peng is slightly more optimistic, however.
“Many of the local mobile services/applications we have seen in China, such as Tencent Weixin, Sina Weibo provide great user experience and innovative features that we could not find from the international big name,” she told me.
“As long as they continue to innovate and own their IPs, I do not see Chinese internet companies having any major disadvantages in competing, as mobile services become device/OS agnostic in the future.”
Perhaps. But with local incumbents like Twitter, Facebook, Google et al, mature Western markets will certainly be too tough a nut to crack.
On top of this, Chinese tech firms will have to put up with increasingly hostile attitudes from various national governments.
National security concerns will continue to dog Huawei and ZTE on the telecoms infrastructure front, and there are signs that US regulators may soon begin the process of de-registering Chinese firms from US stock markets for failing to comply with domestic securities laws.
Oh, and there’s the small matter of a potential conflict over that bunch of barren rocks known as Diaoyu/Senkaku.
Plenty to look forward to, then, in 2013!