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.
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.
Last week Asian chip giant MediaTek launched its latest System on a Chip design, the 28nm quad core MT6589. Before you click on to something more interesting, here’s why it should make anyone with a mobile phone sit up and take notice.
First, MediaTek. It’s probably the most ubiquitous chip company you’ve never heard of. Asia’s biggest and the fourth largest fabless chip company by revenue globally, it lists LG, Huawei, Sony and others among its clients. Until now the firm has largely been focused on the 2G feature phone market, especially in China where demand was huge until recently, but this announcement sees it really break out into the high end smartphone space.
The analysts I spoke to pretty unanimously agreed that MediaTek and arch rival Qualcomm between them are making a seriously disruptive play in the mobile space. Put simply, MediaTek is making quad core affordable by sticking CPU, GPU and wireless modem on the same SoC, which means the MT6589 will end up in plenty of cheap smartphones as well as some higher end ones.
The result? The big brands are going to have to differentiate on something other than quad core. In effect, as IDC analyst Teck-Zhung Wong told me, it’s going to kick off a whole new round of price competition, which is great for users and will spur the industry forward to keep on innovating, which is good for all stakeholders.
In the background there’s also the tussle between Qualcomm and MediaTek.
Qualcomm is doing amazing things this year and now sits third by revenue in IHS iSuppli’s new ranking of global chip companies. It has already produced a quad core aimed at the same market and has an advantage in its modem capabilities, which even MediaTek admitted to me. So it’s Taiwan versus the US in the battle of the budget quad cores. MediaTek historically has that huge customer base in China to tap and is likely to be faster to market but Qualcomm is catching up and apeing many of MediaTek’s technical advantages and customer relations strategies.
The jury’s out but it will be an interesting 12 months to see who the smartphone winners and losers will be.