Donald Trump made some questionable remarks this week that have rightly caused an almighty backlash. But one thing he did that may have more support, is sign an executive memorandum which will most likely lead to a lengthy investigation into alleged widespread Chinese theft of US IP. This is a big deal in Silicon Valley and something that has irked US business in general for years.
The question is, will this latest strategy actually result in any concrete changes on the Chinese side? As you can see from this new IDG Connect piece, I’m not convinced.
Years of theft
There are few things Democrats and Republicans agree on, but one is that China has had things far too long its own way when it comes to trade. The US trade deficit between the countries grew to $310 billion last year, helped by the growing dominance of Chinese businesses. Many of these have been able to accelerate their growth and maturation thanks to IP either stolen by hackers from US counterparts or take via forced joint ventures and tech transfers. Many of them are selling back into the US or their huge domestic market, undercutting American rivals.
Chinese firms don’t have the same restrictions around forced JVs and tech transfers to enter the US market. In fact, the likes of Baidu even have Silicon Valley R&D centres where they’re able to recruit some of the brightest locals, while government-backed VC firms have been funding start-ups to continue the seemingly relentless one-way IP transfer.
There are, of course, more nuances to the dynamic, but you get the point.
So, will this investigation get us anywhere? After all, it will empower the President to take unilateral action including sanctions and trade embargoes. Well, on the one hand, little gain can be made from stopping Chinese IP hackers, as they have stopped outright theft ever since a landmark Obama-Xi deal in 2015, according to FireEye Chief Intelligence Strategist, Christopher Porter.
“If anything, discontinuing straightforward theft of intellectual property for strictly commercial purposes has freed up Chinese actors to focus more on these other targets than ever before, so the risk to companies before and after the Xi Agreement depends heavily on what industry that company is in and what sort of customer data they collect,” he told me via email.
That’s not to say the Chinese aren’t still active in cyberspace, but it’s less around IP theft, which is the focus of this investigation, Porter added.
“We have seen an increase in cyber threat activity that could be Chinese groups collecting competitive business intelligence on US firms selling their products and services globally—several companies that were targets of proposed M&A activity from would-be Chinese parent companies were also victims of Chinese cyber threat activity within the previous year, suggesting that they may have been targeted as part of the M&A process to give the Chinese company a leg-up in negotiations,” he explained.
Which leaves us with JVs and tech transfers, which have provided Chinese companies with vital “know-how” and “know-why” over the years. To my mind, if there’s any area where the US can and should focus its diplomatic and negotiating efforts, it’s here. However, as reports in the past have highlighted, it took China years to construct a gargantuan, highly sophisticated tech transfer apparatus, and it won’t be looking to bin that anytime soon, especially with the Party’s ambitious Made in China 2025 strategy now in full swing.
Neither side will want to become embroiled in a trade war. The US has too many companies which count China as a major market – it’s Apple’s largest outside the US, for example – and Chinese firms are doing very well selling into the US, as that huge trade deficit highlights.
In the end, my suspicion is that this is just another bit of Trump tough talk which will actually produce very little.
“This long-awaited intervention should also probably be viewed in the larger picture of the way the Trump administration operates: in terms of ‘carrot and stick diplomacy’,” Trend Micro European Cyber Security Strategist, Simon Edwards, told me.
“It is also well documented that the US administration is trying to use trade deals to get action on the situation in North Korea; and perhaps this is more of a stick to be used with the accompanying ‘carrot’ of a greater trade deals?”
Time will tell, but it’s unlikely that US tech companies operating in China, and their global customers, will be any better off after this latest test.
China’s head honcho when it comes to censorship recently stepped down. This being China, no-one seems to know whether he was effectively sacked, or asked to move to a new bigger and better role. But what we do know is that things aren’t going to get any better for those inside the Great Firewall.
Over the past three years, Lu Wei has been a constant thorn in the side of rights groups, diplomats and Silicon Valley bosses. His aggressive defence of China’s sovereign right to do with its internet what it sees fit – most notably at the laughably titled World Internet Conference in Wuzhen – has been jarring at times. The Cyberspace Administration of China (CAC) he headed up also runs root CA and .cn operator the Chinese Internet Network Information Center (CNNIC). As such, it was blamed by Google last year for issuing unauthorized TLS certificates for several of its domains, which were subsequently used in man-in-the-middle (MITM) attacks.
Even more damning, the CAC was accused of launching Man in the Middle attacks on Outlook users last year in response to its migration to HTTPS, which the authorities can’t monitor. And then it was pegged for a DDoS attack on anti-censorship organisation Greatfire.org – a constant thorn in the side of the authorities in Beijing.
I spoke to Greatfire.org co-founder Charlie Smith about the reasons for and implications of Lu’s departure.
“If it ain’t broke, don’t fix it, right? We probably just had the quietest anniversary of Tiananmen [Square massacre] yet, in terms of online dissent and discussion. There is more censorship in general. Less circumvention because of a crackdown on VPNs. And fewer foreign companies are trying to challenge the status quo,” he told me via email.
“We know controlling the medium is pretty near the top of [president] Xi Jinping’s agenda. So why make a change now? The timing likely indicates that this was a planned and not a rash decision. There was no need to unsettle things before the 4 June anniversary and the change happens well before the next ‘World’ Internet Conference in Wuzhen.”
Smith went on to argue that, even though Lu presided over an unprecedented crack down on internet freedom – primarily through a new regulation banning the spread of “rumours” online – he didn’t go far enough.
“Lu was not perfect. As we have shown, it is impossible to completely block all information for those inside China,” Smith continued. “Maybe in this regard, Lu was being blamed and Xi decided he wanted somebody who can get the job done. Maybe Xi was upset about being ‘vilified as a murder suspect’ and could not comprehend why Lu Wei was unable to scrub information from the Chinese internet.”
Lu’s removal, if that is what it was, may also have been an attempt by Xi at curbing his growing influence – after all, propaganda is at the heart of the Party’s power and everyone inside knows it. His replacement, Xu Lin, is a Xi Jinping acolyte and one time deputy secretary of Tibet’s Shigatse Prefecture who will certainly toe the presidential line.
As Smith put it, “if Xu Lin fails to quell ‘rumours and slander’ Xi does not have to second-guess whether or not Xu is doing everything within his power to stop these attacks.”
So what prospects for the future? Pretty grim if you’re inside China and are a fan of human rights and internet freedom.
Beijing was one of a few countries – Russia, India, Indonesia included – that voted against a non-binding resolution at the UN this week stating all individuals must be afforded the same rights online as offline and that the universal right to freedom of expression should be upheld online.
As Smith said, if Xu Lin “handles information control on the Chinese internet the same way the authorities handle information control in Tibet then the situation could even get worse.”
There is some hope for businesses and individuals which need to leap the Great Firewall.
The hope is that it will encourage greater use of VPNs and help developers improve their circumvention products, as well as provide a much needed additional source of revenue for Greatfire.
The concern is that if it gets popular enough, Beijing will do all it can to put it out of action.
As explained in my latest for IDG Connect here, Beijing has, via tightening regulations, antitrust investigations and even more restrictive censorship rules, been making the Middle Kingdom an increasingly hostile place for foreign – especially US – tech companies. It was never easy – foreign firms have always had to team up with a local partner to have a crack at the huge domestic market, with all the risks that entails. But now it’s even more difficult.
So enter India – a nation of over one billion and with the world’s fastest-growing economy. US firms have had a much better time there historically. Foreign direct investment is very much OK, and even in those few industries which are less welcoming – retail, media, telecoms and banking, for example – successful partnerships with local players are possible.
The start-up cash pouring in from Silicon Valley and elsewhere is staggering – dwarfing that in China already, according to Forrester research director, Ashutosh Sharma. In the last quarter this reached $6bn from private equity alone, he told me. What’s more India can boast:
- A suspicion of China matched only by the US
- A nominally democratic political system based on rule of law, making its regulatory environment more predictable, if still overly bureaucratic
- A young, tech savvy, increasingly well educated, and affluent population
On the minus side, however, it has dreadful mobile connectivity and poor broadband penetration.
“The size of the country in terms of populations makes it difficult for any government to strike a right balance between pursuing growth through investments versus leaning towards more socialistic policies,” Sharma told me.
“This dithering on policy initiatives since India liberalised its markets in early ’90s have cost them time which has manifested in poor physical and virtual infrastructures.”
A large, “digitally dark” population which doesn’t speak English makes it hard to justify investments in digital media, he said.
“However all indications are that this is temporary because at the pace innovation is happening both in terms of affordability of mobile devices, data connection, and local language solutions it won’t be long before a major part of India is digital,” Sharma added.
As mentioned, the regulatory framework is still over complex and bureaucratic, although this too is apparently changing.
“The pace of simplification and speed of execution has improved since the new government has come in place,” he said.
It will take years before India even comes close to the $600bn in bilateral trade the US and China enjoy. But that trade is massively unbalanced, comprising mainly of Chinese imports to the US. This is not the case with US-India relations.
The winds of change are blowing, and they’re blowing to the sub-continent.