TECHNOLOGY INDUSTRIES IN CHINA
Seagate Wuxi Factory As of the late 2000s, high tech companies accounted for less than two percent of the Chinese economy, but their stake has gotten much bigger since then. At that time Chinese technology firms aimed to make the leap from users and copiers of advanced technology to being creators and designers. By 2010 the Chinese government wanted to have 10 technology companies with exports of more than $5 billion and offered generous tax breaks and other incentives to attract investment.
China has showed it has the ability to quickly mobilize resources to fund rapid economic growth. Initially it was stronger in hardware development than software innovation and is generally better in quantity development than quality. But in recent years Chinese companies have shown they can be very innovative, particularly in the Internet and mobile phone sectors.
Manufacturing sophistication is rising all the time. China advanced beyond just being a producer of toys, textiles and shoes in the 2000s. It made the leap into high-end manufacturing in the late 2000s and early 2010s. Telecommunications companies at that time began making sophisticated electronic switches that route phones calls and Internet traffic through telecommunications networks. There were also factories that mass produced made car engines, lithium batteries, food pressing machinery and air conditioners. Liu Chuanzhi, the head and founder of Lenovo, told the Financial Times in the early 2010s he expected China to eventually replace the U.S. as a global trend-setter in technology as the take-off in Chinese domestic consumption would force global tech companies to set their development roadmaps to follow Chinese consumer tastes.
Among the Chinese companies with world-beating technology are Huawei Technologies, ByteDance, the operator of short video app TikTok, drone-maker DJI, artificial intelligence firms Megvii, SenseTime and iFlytek , surveillance camera vendor Hikvision and e-commerce conglomerate Alibaba Group. [Source: Reuters, July 27, 2020]
China kind of skipped over the computer revolution — even the mass retailing revolution — and went straight to the mobile phone revolution. Jiayang Fan wrote in The New Yorker: “In China, what is sometimes called “the shift to mobile” never happened — hasn’t needed to happen — because the country’s wealth is too recent for people to have been swept up in the PC revolution, the way Americans were. Instead, they went straight to phones, an example of a phenomenon known as leapfrogging, in which non-participation in an older technology spurs early adoption of whatever innovation comes next. Jack Ma, of Alibaba, has argued that the entire e-commerce sector in China exemplifies this pattern: people happily shop online because there haven’t been Walmarts everywhere. In the U.S., “e-commerce is a dessert, ” he said. “In China, it’s become the main course.” [Source: Jiayang Fan, The New Yorker, July 23, 2018]
See Separate Articles CELL PHONES, SMART PHONES AND APPS IN CHINA factsanddetails.com ; COMPUTERS AND COMPUTER COMPANIES IN CHINA factsanddetails.com ; INTERNET BUSINESS AND TECH GIANTS IN CHINA factsanddetails.com ; LENOVO factsanddetails.com; INDUSTRIES IN CHINA factsanddetails.com
China’s Lack of Brand Power
John Pomfret wrote in the Washington Post: “Quick: Think of a Chinese brand name. Japan has Sony. Mexico has Corona. Germany has BMW. South Korea — Samsung. And China has...? If you're stumped, you're not alone. And for China, that is an enormous problem. No big marquee brands means China is stuck doing the global grunt work in factory cities while designers and engineers overseas reap the profits. Much of Apple's iPhone, for example, is made in China. But if a high-end version costs $750, China is lucky to hold on to $25. For a pair of Nikes, it's four pennies on the dollar. "We've lost a bucketload of money to foreigners because they have brands and we don't," Fan Chunyong, the secretary general of the China Industrial Overseas Development and Planning Association, told the Washington Post. "Our clothes are Italian, French, German, so the profits are all leaving China. . . . We need to create brands, and fast." [Source: John Pomfret, Washington Post, May 25, 2010]
Microsope factory in China “China also faces enormous challenges to creating globalized firms,” Pomfret wrote. “Studies of Chinese executives show that they spend far more time with government officials — who in China are the key to their profits — than with customers, who are the key to international success. "Chinese executives like me need to spend a generation outside China to learn how business is done around the world," said Hua Dongyi, who chairs a massive Chinese mining company in Australia but has also built roads in Algeria and infrastructure in Sudan. That's definitely true for Hua. In April, he was forced to apologize to his Australian workers after he told Chinese media that the workers were money-grubbing and lacked the "loyalty and sense of responsibility existing in many Chinese enterprises."
“China's government has responded in typically lavish fashion, launching a multibillion-dollar effort to create brands, encourage innovation and protect its market from foreign domination. Through tax breaks and subsidies, China has embraced what it calls "a going-out strategy," backing firms seeking to buy foreign businesses, snap up natural resources or expand their footprint overseas. Domestically, it has launched the "indigenous innovation" program to encourage its companies to manufacture high-tech goods by forcing foreign firms to hand over their trade secrets and patents if they want to sell their products there. Since 2007, thousands of Chinese businessmen have attended government-sponsored seminars on "going out," learning everything from how to do battle with domineering Americans and Britons during conference calls to why a Chinese boss should think twice about publicly humiliating his wayward foreign workers — as he'd do to his staff at home.
Beijing Earmarks $1.5 Trillion for High-Tech Industries
China has made it official policy to become a "world power" in science and technology by the middle of this century. However, it has a long way to go from its current situation where about half its technological know-how is imported. This was according to China's State Council, the nation's Cabinet, which derived the measure by taking technological know-how as a percentage of the sum of technology imports and domestic spending on research and development.
In February 2011 Reuters reported that “China is considering investments of up to $1.5 trillion over five years in seven strategic industries, sources said, a plan aimed at accelerating the country's transition from the world's supplier of cheap goods to a leading purveyor of high-value technologies. Analysts expressed skepticism at the sheer amount of money — it equates to about 5 percent of China's gross domestic product on an annual basis — but said that the eye-popping headline figure was an indication of the government's determination to catalyze a structural shift in the economy.”[Source: Reuters, December 3, 2010]
The targeted sectors include 1) alternative energy, 2) biotechnology, 3) new-generation information technology, 4) high-end equipment manufacturing, 5) advanced materials, 6) alternative-fuel cars and 7) energy-saving and environmentally friendly technologies. The central government itself would most likely not deliver the bulk of the money, but would seek to spur spending by corporations, investment by local governments and lending by banks. The State Council is considering a plan to invest up to $300 billion each year in the seven new strategic industries over the next five years," a source with ties to the leadership and direct knowledge of the proposal told Reuters. Beijing has said before that it wants to promote the sectors, a policy that it hopes will make the country less dependent on low-end, dirty manufacturing. The value-added output of the seven strategic industries together account for about 2 percent of GDP now. The government has said it wants them to generate 8 percent of GDP in 2015 and 15 percent by 2020.
Chinese officials sometimes declare vast investment ambitions as a way of rallying support for spending initiatives, even if the numbers ultimately fail to live up to their original billing. "Focusing on the seven new strategic industries will increase China's competitiveness and push the economy further up the value chain," Zhao Changhui, chief economist of the Export-Import Bank of China, told Reuters. "It will provide direction for transforming China's economy. It's the next stage of globalization."
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Advances and Innovation by Chinese Tech Companies
In the 2000s, China struggled in attempts to generate high-tech breakthroughs. An effort to produce a home-grown microprocessor took years to replicate features of those from Intel Corp. and Advanced Micro Devices Inc., whose products had continued to evolve. A Chinese-developed mobile phone technology was unsuccessful has yet to gather significant momentum abroad, despite the government forcing China's largest phone company to adopt it.
But its not like that anymore. Eric Schmidt, who was the CEO at Google for 15 years and now heads a Pentagon think tank, told the BBC that during his long career in Silicon Valley, he had underestimated China's ability to innovate. "I have carried the prejudices about China in my years working with them," he said. "That they're very good at copying things, that they're very good at organising things, that they throw large numbers of people at it. But they're not going to do anything new. They're very, very good at stealing, if you will, our stuff. Those prejudices need to be thrown out.” [Source: Gordon Corera, BBC, June 19, 2020]
Now "The Chinese are just as good, and maybe better, in key areas of research and innovation as the West. They're putting more money into it. They are putting it in a different way, it is state-directed in a way that is different from the West. We need to get our act together to compete." According to te BBC: He denies the Chinese model of state-directed investment in technology is intrinsically more successful than a free-market model. However, he believes the West needs to make the most of its strengths by: 1) investing more in research funding; 2) ensuring greater collaboration between private sector, the state and academia; and 3) remaining open to the best talent from around the world "Most people would prefer to live and work in the West than work in China," he says.
One of the problems in the US and particularly in Silicon Valley, Mr Schmidt believes, is a historical blindness to the role of the government in supporting research. "Everything you see in Silicon Valley to the first order came from initial federal science grants of one kind or another."
In 2019, Schmidt chaired a US National Security Commission looking at artificial intelligence. "I would say they are a few years behind," he says. "Not five years, and not 10 years. And there's evidence of China closing the gap in the next few years. So the question is: what happens then? Well obviously, artificial intelligence has military and national security applications." China's work on quantum computing, he adds, is on a par with that of the West, and could even be ahead.
Mr Schmidt views the decoupling of the technology sectors in China and the US as "undesirable", believing it will lead to two distinct systems. "Once you diverge these global platforms, you don't get them back," he says. "We benefit from having a common platform of interchange... and I worry that by building these platforms separate, the countries will understand each other less. China's going to dominate whether we couple or decouple. They have the resources, they have the money, they have the technology. The question is do they operate on global platforms or do they operate on their own platforms? The more segregated the platforms are, the more dangerous it is. It is in the West's interest that every technology platform has Western values in them.
Still there are issues that China has to iron out. There are a number of challenges that threaten growth. They include a population that is aging quickly because the one-child policy has limited births in recent decades, and environmental damage resulting from the country's breakneck pace of industrialization. But nontheless the West has to be on guard. Charlene Barshefsky, the former U.S. trade representative said: "Our competition has gotten tougher during a period for the U.S. of profound economic weakness that magnifies any perceived threat." There is a "significant and profound — almost theological — question about the rules as they exist."
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Patents and Technology in China
International patent filings in 2010: 1) United States (44,855 patents, down 1.7 percent from the previous year); 2) Japan (32,156 patents, ); 3) China (12,337 patents, up 56 percent percent from the previous year); 4) South Korea (9,686 patents, up 20.5 percent from the previous year). In 2010, ZTE Corp, China’s second biggest maker of phone network equipment was No.2. l in international patent filings behind Panasonic with 1,863. Huawei, a Chinese telecom giant, applied for more international patents than any other firm in 2008. [Source: World Intellectual property Organization]
Yale’s Stephen Roach wrote in the Christian Science Monitor, “China is rising in terms of international patent applications. At the same time, China is targeting a research-and-development share of GDP of 2.2 percent by 2015 — double the ratio in 2002. This fits with the 12th Five-Year Plan’s new focus on innovation-based “strategic emerging industries” — energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels. Currently, these seven industries account for 3 percent of Chinese GDP; the government is targeting a 15 percent share by 2020, a significant move up the value chain.”
John Pomfret wrote in the Washington Post, “China's attempts to fight what it sees as the stranglehold of foreign patents and intellectual property rights have also had hiccups. China is estimated to have paid foreign firms more than $100 billion in royalties to use mobile telephone technology developed in the West, according to executives of Western communications companies. So in the late 1990s, it decided to develop its own. But after more than $30 billion in development costs, its unique technology still has fewer than 20 million users in a market of more than 500 million. Handset makers have told China's government that they won't produce phones equipped with the new technology unless they are given subsidies. And China has resorted to giving away the technology to Romania and South Korea to encourage broader use. [Source: John Pomfret, Washington Post, Tuesday, May 25, 2010]
Chinese Tech Companies Hurt by Bad China-West Relations
In 2020, Reuters reported: “Huawei and ByteDance, the operator of short video app TikTok, are the two companies which best exemplify China's ambitions to challenge U.S. tech dominance” but they “are now stymied by strains in relations between China and countries including the United States, India, Australia and Britain. Chinese companies with world-beating technology — including drone-maker DJI, artificial intelligence firms Megvii, SenseTime and iFlytek , surveillance camera vendor Hikvision and e-commerce conglomerate Alibaba Group — are also among those losing access to markets. Smaller companies are being forced to re-think too. “What we are experiencing now is unprecedented," said a Chinese startup founder who has operations in the United States and India but asked not to be identified as he is now considering walking away. "My entrepreneurial spirit has been dampened due to all this, let alone global ambitions." [Source: Reuters, July 27, 2020]
“It's a big shift from even a year before, when the U.S.-led trade war with China and security concerns about Huawei were having little impact on most Chinese tech champions. SenseTime and Megvii, backed by U.S. investors, were eyeing big IPOs. ByteDance's TikTok unit was enjoying unfettered global growth. Alibaba was touting the global prospects for its cloud business, and DJI was consolidating domination of the drone business.
“U.S. President Donald Trump ratcheted up anti-China rhetoric as he sought re-election and Chinese President Xi Jinping has taken a tough line. Tensions have also risen between Beijing and other countries over repression of the Muslim Uighur population in the Western province of Xinjiang and new security laws passed for Hong Kong, and a border skirmish with Indian troops led to an India government ban on 59 Chinese apps.
“The U.S. Interior Department has grounded the privately held DJI's fleet and halted additional purchases because of data security risks, and more restrictions could be in the offing. Alibaba Group is cutting staff at its UC Web subsidiary in India after its popular mobile Web browser was banned by the government. DJI has put IPO plans on ice. The companies are watching geopolitical developments "with white knuckles," said Daniel Ives, managing director of equity research at Wedbush Securities.
“Investors said some less sensitive sectors such as gaming are still open to Chinese players. Tencent Holdings has had some of its apps in India banned, but not popular games such as PlayerUnknown's Battlegrounds. The company recently launched a new California-based gaming studio and plans more such operations. A huge domestic market is by far the biggest profit centre for China's tech firms, and some countries remain keen to accept Chinese investment. “Global markets are big and Southeast Asia and Europe should still be open to Chinese companies," said one Beijing-based, internet-focussed hedge fund investor.
“But some startups in Southeast Asia that were previously open to taking Chinese money are becoming more reluctant, said David Chang, managing director of Hong Kong-based MindWorks Capital. “For example, if I take ByteDance on my (equity) capitalization table and then ByteDance gets blocked and blacklisted in the U.S., my dream of listing on the Nasdaq is limited," he said, referring to the U.S. stock exchange popular with tech firms.
“Efforts by Chinese companies to change the minds of the foreign regulators have had little effect in the absence of policy changes by Beijing. ByteDance says it has ring-fenced TikTok from its China operations and poached a Disney executive to head the unit. That has failed to assuage Washington. “That's about all you can do," said Mark Natkin, managing director at Beijing-based Marbridge Consulting. "Push the public relations as hard as you can, hire managers that give you more of a foreign feel, and keep your fingers crossed that there isn’t another geopolitical flashpoint."
Greater Bay Area and Xi Jinping’s Tech Ambitions
The Greater Bay Area (GBA, Guangdong-Hong Kong-Macao Greater Bay Area) comprises the two Special Administrative Regions of Hong Kong and Macao, and the nine municipalities of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province. The area is around 56 000 square kilometers, has a population of over 86 million people and a GDP of US$1.7 trillion in 2020. [Source: Constitutional and Mainland Affairs Bureau, 2018]
In July 2017, Chinese President Xi Jinping and the governments of Guangdong, Hong Kong and Macao signed the Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Greater Bay Area in Hong Kong. According to the Chinese government: The Framework Agreement sets out the goals and principles of cooperation and establishes the key cooperation areas in the development of the Greater Bay Area. The development of the Greater Bay Area is accorded the status of key strategic planning in the country's development blueprint, having great significance in the country's implementation of innovation-driven development and commitment to reform and opening-up. The objectives are to further deepen cooperation amongst Guangdong, Hong Kong and Macao, fully leverage the composite advantages of the three places, facilitate in-depth integration within the region, and promote coordinated regional economic development, with a view to developing an international first-class bay area ideal for living, working and travelling.
According to Bloomberg: The Greater Bay Area has been “tasked by President Xi Jinping with pushing the nation toward global technology leadership. “The Pearl River Delta — long one of China’s richest and most economically dynamic regions and rebranded by Xi as the Greater Bay Area — stretches from the forested hills around Zhaoqing in the northwest to the concrete towers of Hong Kong Island in the southeast. It’s the epicenter of Xi’s strategy to attain high-income status, bind the former colonial centers of Hong Kong and Macao into the motherland, and complete what he calls the “rejuvenation” of the Chinese nation. He wants this region of about 70 million people to rival the clusters of Tokyo Bay or San Francisco-Silicon Valley and the role they play in driving innovation, entrepreneurship, and growth. [Source: Jeff Black and Allen Wan, with Zhu Lin, Bloomberg, September 30, 2020]
“The Greater Bay Area strategy is rooted in an earlier time in Xi’s chairmanship that was all about China going out into the world through investment, acquisitions, and geopolitical partnership-building through initiatives such as the “Belt and Road” enterprise. First mooted by Shenzhen local authorities in 2014, and then elevated into a central government policy blueprint unveiled last year, the plan outlines the ambition to build a tech hub to “target the most advanced technologies and industries in the world.”
“Far from Beijing and close to the open sea, the Pearl River Delta has long been China’s most mercantile and innovative place. The crowded islands that form Hong Kong and Macao remain separate jurisdictions even today, with their own laws, currencies, and political traditions shaped by the legacy of British and Portuguese colonialism. In Hong Kong, the differences between local society and the political culture across the border are a major source of friction, with hundreds of thousands of people in Hong Kong taking to the streets in often violent protests last year to push back against increased control by the Communist Party.
“Standing among the futuristic towers of Shenzhen, just across the marshy borderland from Hong Kong, it’s easy to imagine the goal of technological leadership being within reach. In this city, mythologized as rising from a mere fishing village to a global metropolis within four decades, companies with a genuine claim to world leadership have their home. More than a dozen Fortune Global 500 companies in the Guangzhou-Hong Kong-Shenzhen conurbation help drive a trillion-dollar economy that exports more than Japan does. The region spends double the national average on R&D, and Shenzhen alone accounts for more than a fifth of China’s high-end exports.
Troubles for the Greater Bay Area Tech Center
The fortunes of some of China’s largest technology companies are entwined with the Greater Bay Area (GBA) and tech battle between the U.S. and China that were ramped up when Donald Trump was U.S. president from 2017 to 2021. According to Bloomberg: “The GBA’s ability to innovate and integrate enough to succeed in that task is facing its stiffest challenge yet from a U.S.-led global backlash against Chinese tech and Beijing’s political crackdown in Hong Kong. If the GBA’s companies can surmount the obstacles being placed in their path, they could well determine how advanced and prosperous China can become under Xi.[Source: Jeff Black and Allen Wan, with Zhu Lin, Bloomberg, September 30, 2020]
Huawei, which had a record $122 billion in sales in 2019, reflects the dilemma the companies are in. “Guo Fulin, a two-decade veteran of the company who ran parts of its business in Europe and is now its president of international media affairs, deploys gnomic understatement to describe Huawei’s predicament. “The star in the sky will shine either to the west or to the east,” he says, meaning there will be opportunities for Huawei whether the U.S. slams the door shut or not. “We are not targeting every customer in the world. Customers who choose Huawei will eventually live better.”
“With his actions — restricting sales of high-end semiconductors to Huawei, banning Americans from doing business with Tencent Holdings Ltd.’s WeChat app — Trump threatened revenue and product development at China’s most innovative companies. The importance of that is magnified by the timing of his actions, which come as China is upgrading its industries, with many sectors still in need of expertise from abroad to complete the development Xi expects.
“China’s leaders maintain their public commitment to the open, globalized world economy that’s benefited the nation so handsomely over the past two decades. But Xi is also adopting inward-looking ideas of self-sufficiency in a shift back to an industrial model less integrated into global supply chains. That’s not necessarily in China’s interest, says David Dollar, a former U.S. Treasury emissary to the country who’s now a senior fellow at the Brookings Institution in Washington. “The danger is if you feel you have to respond to the U.S. protectionism with Chinese protectionism,” he says. “If you go down that road, then all this aspiration to become a more innovative economy is pretty hopeless.” This kind of tech decoupling could cost the world economy some $3.5 trillion in wasted output over the next five years, according to a report in July by Deutsche Bank AG. The costs arise from extra R&D, demand disruption, and supply chain rerouting that would become necessary if the current flow of know-how and parts — much of which already passes through China — shifts permanently.
China’s Days as World’s Factory Finished?
Young Liu, the chairman of Hon Hai Precision Industry Co. (Foxconn), the main supplier for Apple and many other foreign tech companies, said it’s gradually adding more capacity outside of China, the main base of production for iPhones, Dell computers and Nintendo Switches. The proportion outside the country in August 2020 was 30 percent, up from 25 percent in June, 2019. One reason for this is the shift of manufacturing to Southeast Asia and other regions to avoid escalating tariffs on Chinese-made goods headed to U.S. markets, Liu said: “No matter if it’s India, Southeast Asia or the Americas, there will be a manufacturing ecosystem in each,” Liu said, adding that while China will still play a key role in Foxconn’s manufacturing empire, the country’s “days as the world’s factory are done.” [Source: Bloomberg, August 12, 2020]
Bloomberg reported: “Intensifying trade tensions between Washington and Beijing have pushed device manufacturers to diversify their production bases away from China, and Liu last year said that Apple’s most prized product, the iPhone, can be made outside China if needed.
“Foxconn has been shaking up its traditionally China-focused operations. Hon Hai is among Apple assembly partners that plan to expand operations in India, potentially helping the iPhone maker grow its presence in the country of 1.3 billion and shift some of the U.S. company’s supply chain outside of China as ties between Washington and Beijing fray.
Foreign Tech Companies in China
According to the New York Times: “Since China began opening its economy to the outside world in the 1980s, the government’s policies have encouraged manufacturing and exports with the creation of special economic zones. But those same policies have discouraged domestic consumption of overseas brands. Most products made in China by big multinationals had to be physically shipped out of the country and then brought back so that they could be taxed as imports — hence, the U-turn employed by many companies. [Source: David Barboza, New York Times, December 29, 2016]
“When Apple first moved into China, the country was largely a low-cost production site. It quickly evolved into one of the world’s biggest consumer markets, with more than a billion potential customers. But Apple initially had to take the “Hong Kong U-turn” to get its products into the hands of Chinese consumers. In 2005, Apple’s best-selling portable music device, the iPod, was manufactured in southern China. To comply with the country’s stringent rules, iPods were loaded onto a cargo ship and sent to Hong Kong. Often, when the ship arrived, it was simply turned around and sent back to China. “This was really a legacy of China’s old export-oriented economy,” said Edwin Keh, the former head of global procurement at Walmart, who worked for the retailer and other multinationals in China for 20 years. “Back then, we built supply chains good at making things in the East and selling them in the West.”
“Apple and other multinationals wanted a better system. By the time Apple released the iPhone in 2007, China faced growing pressure to loosen its restrictions and give global companies easier access to its market. Apple and other companies believed that shipping goods to Hong Kong was a waste of time and energy. They wanted to send goods from the factory gate in China directly to their stores and distribution centers inside the country.
Chinese Government and Foreign Tech Companies
David Barboza wrote in the New York Times: “As the economy slows, Beijing has started to shift its development path away from manufacturing and exports and toward innovation and consumption. It wants to empower Chinese brands and foster homegrown technology. To advance its cause, Beijing has started to rethink the investment policies that support overseas companies. In November 2014, China’s State Council, the country’s cabinet, directed local governments to evaluate and eliminate any preferential treatment, including subsidies and tax breaks that benefited multinational exporters. The threat prompted a pushback, mostly notably by Foxconn which, along with other international businesses, fought to keep existing incentives. Since then, Beijing has backed off the issue. [Source: David Barboza, New York Times, December 29, 2016]
“But the broad trend lines are clear: Overseas companies will no longer get the welcome they once received. The Chinese government is tightening access to its huge market and pressuring Western technology companies to advance domestic goals — in a coordinated action that one congressional study in the United States called a new form of “techno-nationalism.” “The government wants to know what you can give to China,” said James McGregor, who lives in Shanghai and has for decades advised American companies operating in China. “And they have the market and the muscle. They’re not playing around anymore.”
“Chinese regulators have been penalizing overseas companies, like the American mobile chip giant Qualcomm, which was forced to reduce prices for companies that sell smartphones within the country. It is a market increasingly dominated by Chinese brands like Huawei and Xiaomi that undercut Apple and Samsung on price. China is also scrutinizing Western technology companies over national security issues. Beijing has increased oversight of the internet with new cybersecurity rules and forced state companies to reduce spending on overseas technology.It pressed Apple to hand over its source code. Apple said it refused.Apple has agreed to the government’s request to store more of its local data on Chinese servers. It must also undergo “security audits” on new models of the iPhone before gaining approval to sell the product.
“Beijing also expects American companies to help develop China’s own capabilities. Apple is teaming up with UnionPay, a state-backed financial services company. It has invested $1 billion in the Chinese ride-hailing service Didi Chuxing, which has significant backing from state companies. Tim Cook, Apple’s chief executive, has also carefully cultivated Apple’s image as a big employer, a good corporate citizen and a major economic contributor. He comes to China regularly. He has donned factory uniforms and walked the assembly line in Zhengzhou. He has courted regulators, the heads of state telecom giants and the country’s top leaders, including Mr. Xi.
Pressure by the Chinese Government on U.S. Tech Firms
In 2015, San-Diego-based, Qualcomm agreed to pay $975 million, the largest in the country's corporate history, to resolve an antitrust dispute in China. Reuters reported: “The deal also requires Qualcomm to lower its royalty rates on patents used in China, likely helping Chinese smartphone makers like Xiaomi and Huawei [Source: Noel Randewich and Matthew Miller, Reuters, February 9, 2015]
In 2014, the Los Angeles Times reported: Anti-monopoly investigators have raided Microsoft's China offices, and the government has banned Windows 8 from state computers. Qualcomm was accused of overcharging customers for smartphone patent licenses. And the government is encouraging Chinese businesses to abandon IBM systems in favor of local products. [Source: Julie Makinen and Andrea Chang, Los Angeles Times, August 19, 2014]
It seems that no large tech company is escaping government scrutiny. Google services such as Gmail and Maps have been increasingly stifled this year by China's "Great Firewall" — the country's censorship and surveillance program — while Facebook and Twitter remain blocked on the mainland. Last month state-run TV aired a report on the iPhone's tracking feature that suggested the devices could be used to expose state secrets.
China says it's simply enforcing antitrust rules and looking out for national security. But the regulatory moves — coupled with increasingly heated rhetoric against Silicon Valley giants and strong calls by Chinese leaders for homegrown tech innovation — are raising fears of a tougher business climate and a new burst of protectionism. It's not just U.S. tech firms like Microsoft and Qualcomm feeling the pressure in China. These days, foreign companies of all kinds — including Japanese and German carmakers and European drug manufacturers — are being ensnared in anti-monopoly investigations. South Korea's KakaoTalk messaging service and a similar product from Japan called Line were blocked in China.
A number of experts say that's the natural result of China ramping up enforcement of its anti-monopoly law, which is just 6 years old. But the Chinese government is casting high-tech companies as a particular threat as the two countries trade cyberspying and hacking allegations. China's suspicions about American companies were heightened in the wake of the Edward Snowden revelations, Clark noted, and Beijing is furious about Washington's allegations that China's military is stealing secrets from U.S. firms.
Meanwhile, the state-run media have been bashing Silicon Valley stars for months. "American companies including Apple, Microsoft, Google, Facebook, etc. are all coordinating with the Prism program to monitor China," the Communist Party mouthpiece, People's Daily, said about the National Security Agency's electronic surveillance data-mining program in June. "To resist the naked Internet hegemony, we will draft international regulations and strengthen technology safeguards, but we will also severely punish pawns of the villain." in professor 2014, state-run TV aired a report on Apple iPhones' "Frequent Locations" feature (which enables Apple to track a handset's position) and cited a researcher saying the devices posed a serious risk. Anyone with access to the data could gain knowledge of "state secrets," the expert said — a charge that Apple denies.
Chinese Technology Theft: U.S.’s Biggest Law Enforcement Threat, F.B.I. Says
In February 2020, FBI director Christopher Wray said China was the biggest law enforcement threat to the United States, with the of Chinese theft of U.S. trade secrets costing ‘$300 billion to $600 billion a year. Wray said Beijing was seeking to steal American technology by “any means necessary” and the bureau currently had about 1,000 investigations open into Chinese technology theft across its 56 regional offices. “The agency’s counterintelligence chief, John Brown, said the bureau arrested 24 people in 2019 in China-related cases and had already arrested 19 people in after one month in 2020. He told the conference at Washington’s Center for Strategic and International Studies (CSIS) that the FBI believed “no country poses a greater threat than Communist China.” [Source: Reuters, The Guardian, February 6, 2020]
Reuters “Wray said China was aggressively exploiting US academic openness to steal technology, using “campus proxies” and establishing “institutes on our campuses”. William Evanina, director of the National Counterintelligence and Security Center, told the conference China was placing particular priority on stealing US aircraft and electric vehicle technology. In advance of the event, Evanina estimated the theft of American trade secrets by China costs the United States “anywhere from $300 billion to $600 billion” a year.
“The FBI data shows an aggressively stepped-up campaign by US authorities to root out Chinese espionage operations pursuing American secrets. This has snared a growing group of Chinese government officials, business people and academics. In 2019 alone, public records show US authorities arrested and expelled two Chinese diplomats who allegedly drove on to a military base in Virginia. They also caught and jailed former CIA and Defense Intelligence Agency officials on espionage charges linked to China.
“China’s efforts to steal unclassified American technology, ranging from military secrets to medical research, have long been thought to be extensive and aggressive, but US officials only launched a broad effort to stop alleged Chinese espionage in the United States in 2018. The Chinese embassy in Washington rejected the US allegations as “entirely baseless”. “The people-to-people exchange between China and the US is conducive to stronger understanding between the two peoples and serves the fundamental interests of our two countries,” it said in an emailed statement.
“According to CSIS, of 137 publicly reported instances of Chinese-linked espionage against the United States since 2000, 73 percent took place in the last decade. The CSIS data, which excludes cases of intellectual property litigation and attempts to smuggle munitions or controlled technologies, shows that military and commercial technologies are the most common targets for theft. In the area of medical research, of 180 investigations into misuse of National Institutes of Health funds, diversion of research intellectual property and inappropriate sharing of confidential information, more than 90 percent of the cases have links to China, according to an NIH spokeswoman.
“One main reason Chinese espionage, including extensive hacking in cyberspace, has expanded is that “China depends on western technology and as licit avenues are closed, they turn to espionage to get access,” said a CSIS expert, James Lewis. In late January 2020, federal prosecutors in Boston announced three new criminal cases involving industrial spying or stealing, including charges against a Harvard department chair.
Image Sources: 1, 2) Cgstock http://www.cgstock.com/china ; 3, 4) Nolls China website http://www.paulnoll.com/China/index.html; Wiki Commons; Wiki Commons
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.