Global Tech Titans Are Walking A Tightrope in China

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Global technology executives are walking a tightrope in China as they balance increasingly aggressive government demands for Chinese partnerships and technology transfers against protecting their own business interests and US security concerns.

China has long sought technology and knowhow in return for market access. But multinationals have been necessarily wary due to rampant IPR theft. As the recent gathering of Chinese and American technology CEOs in Seattle organized by China for President Xi Jinping’s US visit demonstrated, China now believes it has the market size and the muscle to tell foreign tech MNCs to collaborate and cooperate with Chinese companies if they want a future in China.

In such sectors as telecom equipment, high speed rail, and nuclear and wind power, we are already seeing signs of state-sponsored competitors combining economies of scale, tweaked technology and an array of government subsidies and support to undercut MNCs outside of China.

This is forcing CEOs of tech MNCs to inventory their product portfolios to figure out what can be shared or sold to China without sabotaging their company’s future global success. Those on the high-wire today are the producers of backbone equipment and components: semiconductors, servers, routers, switches and the software that ties it all together. (Next on the agenda of Chinese state planners are medical devices and high end industrials such as factory robotics and 3D printing.)

In a January essay in China Brief, Clark Edward Barrett said that Edward Snowden’s cyber hacking revelations had emboldened China to be more forceful with foreign companies.

“China was quick to capitalize on U.S. discomfort from Snowden’s revelations. On June 25, 2013, People’s Daily claimed that the NSA had, ‘for the last 15 years conducted organized attacks, invasions, robbery and supervisory activities against Chinese and Hong Kong Internet and communications systems…and yet has repeatedly denounced China internationally for hacking without evidence, slandering the Chinese government and military in order to tarnish China’s international image’…. A key element of China’s interpretation of the Snowden affair is the claim that the NSA’s activities were aided by the massive technological superiority of the United States in IT hardware, computer operating systems, key intellectual property and the support of U.S. Industry.”

The tradeoffs underway by MNCs are shaped by their position in the China market and the barriers and benefits that China now presents.

  • Cisco’s formidable China market share has been shrinking fast as the government pushes “secure and controllable” local products. This helped fuel plans for Cisco investing $10 billion in Chinese tech and signing an MOU with the National Development and Reform Commission to enhance Chinese innovation, R&D, tech investments and job creation. This followed a $100 million JV with leading competitor, the Inspur Group, which includes hardware and software development and Inspur reselling Cisco’s router and switching products. In July, Inspur announced it would invest RMB 10 billion to build seven core cloud computing centers and 50 regional cloud centers in China.
  • In May last year, Inspur announced an “I2I Plan,” aimed at replacing IBMwith Inspur in smaller server systems. This came as the government began examining whether reliance on IBM servers in the banking system constituted a security threat. In August, IBM formed a partnership with Inspur in which the company’s WebSphere software and Power8 chips would be deployed in Inspur’s systems.
  • Facing a government ban on Windows 8 and increasingly popular and successful local ripoffs of Windows XP, Microsoft has expanded beyond its anti-piracy focus to partnerships and product deals. These include: customized cloud computing for SOE clients with Tsinghua Unigroup(which in July bid $23 billion for memory chip maker Micron Technology Inc.), and selling a localized version of Windows 10 in partnership with China Electronic Technology that replaces Bing search with Baidu.
  • As HP was sorting out splitting itself into two separate companies, and figuring out how to survive in China today, the company in May this year sold a 51% stake in its Chinese server and storage businesses for $2.3 billion toTsinghua Unisplendor (a subsidiary of the Tsinghua Holdings).

The tightrope could get more treacherous for American MNCs as journalists and politicians begin to examine what these partnerships and tech transfers could mean for US national security. The New York Times on October 30th publishedU.S. Tech Giants May Blur National Security Boundaries in China Deals, which looks at a number of companies and deals but focuses on IBM and various Chinese tech companies that have military ties.

Authors PAUL MOZUR and JANE PERLEZ wrote: “While the cross-border partnerships, under which American tech companies share, license or jointly develop advanced technologies with Chinese counterparts, are a growth area for business, security experts are increasingly questioning whether the deals harm United States national security. While the capabilities shared in the partnerships are commercial in nature, such technologies have also become more critical to defense. That is spurring concerns that widespread cooperation with Chinese companies could quickly increase China’s fundamental technological capabilities in a way that could easily help military research and operations.”

IBM responded with this rebuttal: “This misleading study wholly mischaracterizes IBM’s initiatives in China. The OpenPOWER initiative is global and not unique to any one country. All technology provided through the OpenPOWER Foundation is commercially available, general purpose, and does not require a U.S. export license. In addition, all IBM sales and technology licensing agreements comply with U.S. export regulations, and require that partners in any country do so as well.”

No matter how this current conversation sorts out, American tech MNCs should prepare themselves for increased US government scrutiny as they face intensified Chinese government pressure. Those on the China tech tightrope have a vested interest in not letting this turn into a political circus. The US government also has the responsibility to provide air cover for American companies that have no choice but to pursue success in China, as not doing so could threaten their competitive standing worldwide.

This post originally appeared on LinkedIn.

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About James McGregor
James McGregor is an American author, journalist and businessman who has lived in China for more than 25 years. Currently, he is chairman of APCO Worldwide, Greater China. A professional speaker and commentator who specializes in China’s business, politics and society, he regularly appears in the media to discuss China-related topics. McGregor is the author of the books "No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism" (2012) and "One Billion Customers: Lessons from the Front Lines of Doing Business in China" (2005). He also wrote the 2010 report "China’s Drive for ‘Indigenous Innovation’ – A Web of Industrial Policies." From 1987 to 1990 McGregor served as The Wall Street Journal’s bureau chief in Taiwan, and from 1990 to 1994 as the paper’s bureau chief in Mainland China. From 1994 to 2000, he was chief executive of Dow Jones & Company in China. After leaving Dow Jones, he was China managing partner for GIV Venture Partners, a $140 million venture capital fund specializing in the Chinese Internet and technology outsourcing. In 1996, McGregor was elected as chairman of the American Chamber of Commerce in China. He also served for a decade as a governor of that organization. He is a member of the Atlantic Council, Council on Foreign Relations, National Committee on US-China Relations and International Council of the Asia Society. He serves on a variety of China-related advisory boards.

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