China 2014: The Empire Strikes Back

chinese flagIt’s the most wonderful time of the year. At least, if you’re an IT commentator or a vendor with “end of year round-up/next year predictions” stories to sell in to the media.

As a hack whose inbox has been deluged with this kind of dross for weeks now, I’m going to look ahead to 2014 with a more focused question, namely: “how will Western companies fare in China next year, and vice versa?”

Well, first up the signs aren’t looking good for US tech firms. Washington has turned up the anti-China rhetoric fiercely in 2013 and with high profile reports like Mandiant’s finally tying Beijing to cyber espionage, things were already looking tricky for US firms in China.

Then Edward Snowden happened – a gift from heaven for the Chinese government which can now portray itself as victim of spying, not a perp, with an even straighter face.

Expect the backlash to come from Beijing, partly because of this, but also because China has some world class companies of its own now, especially when it comes to networking equipment (Huawei and ZTE), PCs (Lenovo) and mobile devices (all of the above plus Xiaomi, Oppo, Meizu, Coolpad, etc etc), so it can afford to be more self-reliant.

IBM and HP have both announced they’re shedding jobs in the PRC, despite the strategic importance of the market.

IBM just announced a new cloud partnership which will see it team up with Azure partner 21 Vianet to provide managed private cloud capabilities to business customers there, however it admitted in October a 22 per cent sales slump in China. Ouch.

Cisco has seen a recent 6 per cent sales slump in China with John Chambers admitting on a November earnings call: “China continued to decline as we and our peers worked through the challenging political dynamic in that country.”

Then there’s Qualcomm, which counts China as a $1bn market, has worked with countless local OEMs to support their products and yet now finds itself at the centre of an anti-monopoly investigation which could see it fined in excess of $1bn.

The rule in Beijing seems to be; if you can’t beat ‘em (and China still has some way to go before its chip makers are world class), fine ‘em.

Expect more of the same next year.

So what of the great Chinese invasion? I spoke recently to Deloitte TMT partner William Chou about this.

In the hardware space historically only the likes of ZTE, Lenovo and Huawei had a chance to grow their offerings abroad, but with VC firms now splashing the cash, more innovative local firms will be able to invest in R&D and expand their footprint internationally, he argued.

Coolpad, Meizu and Xiaomi, to name but three, could be names to watch for 2014.

“There are a lot of these smartphone manufacturers but the ones which will be winners are  not really the handset manufacturers but the ones which can combine hardware, software and internet services, like Xiaomi,” Chou told me.

Others he mentioned included a Shenzhen-based handset firm looking at JVs in France and South Africa and an unnamed private company “aggressively” looking to expand in the European market.

On the internet side there are fewer potential breakaway global brands which could make a real impact in 2014.

Tencent’s WeChat is definitely one of them, although Chou argued that Google-beater Baidu will struggle as it seeks to “re-engineer its business model from search to mobile internet”.

There are also a host of little-known software and online firms under-the-radar ready to pounce, including one of the China’s online travel giants which is looking to acquire in Germany, Chou revealed.

In fact, the recently announced Deloitte Fast 500 list of fastest growing APAC start-ups had more companies from the Middle Kingdom than any other represented, although none made the top ten.

Going into 2014 entrepreneurs who are able to “apply technology to other industries” will stand the best chance of success, Chou said.

“China has an ageing population and a one-child policy so healthcare is a serious problem, so how you apply e-health will be a trend,” he explained. “Another major challenge is pollution, so clean tech will be a major area for entrepreneurs to consider as well.”

Whatever happens, things are never quiet in this part of the world. Let’s see what you’ve got 2014.

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The Communist Party’s everywhere in China, even in foreign multinationals

chinese flagToday an interesting tale of ideology, back door deal making and hypocrisy as the worlds of government and hi-technology collide.

You’ve presumably all been made aware by now of the US lawmakers’ report into Huawei and ZTE which basically warns off all American firms and government bodies from purchasing their telecoms kit because of the national security risk they pose.

The key point is that the Chinese tech giants were unable to allay investigators’ concerns about the role of Communist Party committees within their firms.

The report has the following:

In essence, these Committees provide a shadow source of power and influence directing, even in subtle ways, the direction and movement of economic resources in China.

It is therefore suspicious that Huawei refuses to discuss or describe that Party Committee’s membership. Huawei similarly refuses to explain what decisions of the company are reviewed by the Party Committee, and how individuals are chosen to serve on the Party Committee.

All of which is fair enough, although virtually all Chinese companies are required to have a Communist Party committee on board, as Huawei argued to the lawmakers.

However, it has been mentioned since then that may foreign companies, including US ones, with outposts in China also have these committees. If true, it would seem to add weight to Huawei’s argument that the report reached a “pre-determined outcome”, and that its authors were unfairly harsh on the Chinese duo, even hypocritical given Party involvement in US firms in China.

Tea Leaf Nation, for example, pointed to articles claiming IBM, Nokia Siemens Networks, Standard Chartered and others all had communist bodies within them.

Now, I’ve heard back from NSN and IBM who both claimed their Chinese businesses don’t have Communist Party committees but that individual members of staff are free to join the Party if they wish.

However, I’ve yet to hear back from IBM on what  this picture and article refers to, as it seems to indicate a party branch of IBM China members.

Most likely at play here is semantics. These firms are denying having an organised party committee within their organisation, but it seems (at least in IBM’s case) they do have self-organised groups of Party members therein.

Whether this amounts to the same thing is difficult to tell, because if it’s one thing the Party is pretty good at it’s secrecy.

It has become adept over the past several decades at hiding the orchestrating role it plays at all levels of Chinese society – a role so key that it is pretty obvious if a large MNC wants doors to open for it then it needs to acknowledge and engage with the Party.