This post was inspired by a recent BBC Radio Four programme entitled ‘The New Tech Cold War’; the post looks at the rise in private technological development in China, and the resulting competition with the West.
Headlines are emerging on the strain of Western and Chinese relations. Discourse has been a long time coming. The issue is whether the West will accommodate China’s advancements, or try to limit Western reliance on Chinese tech.
In May, the U.S. blocked Chinese phone company Huawei from access to its U.S. supply-chain manufactured and designed custom chips. These chips power Huawei's flagship devices. Tensions are exacerbated by coronavirus because it is a reminder of how heavily the West relies on Chinese infrastructure. Tensions are more complex, though, than Western dependence on Chinese technology – in fact, the issue is one of espionage and mistrust of Chinese or Chinese-backed businesses. Here, Radio Four cites M.P. Tom Tugendhat: “we have got to recognise that many companies attempt industrial espionage; the difference with China is that the state does it for you”.
But how could Huawei commence a New Tech Cold War?
As a brief introduction here, I had intended to outline Huawei Technology’s ownership; as Raymond Zhong writes for the NY Times, “for one of the world’s largest technology companies, it should be a simple question”. It is not. Zhong reports that Huawei is “owned by a labour union (the Union of Huawei Investment & Holding) that solicits donations from employees” and that “the firm says it is entirely owned by its employees, and that no outside organizations, including any affiliated with the Chinese government, own shares”. Whether this union is a genuine ownership scheme or a mere profit-sharing scheme is not clear. In any case, there remain American “suspicions that Beijing and the Communist Party are somehow pulling the strings” and alarm at the “new Chinese laws that require companies to assist in national intelligence work.” This is where the issues in Huawei-operated 5G wireless networks arise: ‘oceans’ of sensitive data could be “exposed to Chinese intelligence-gathering”. How does this impact the markets? National security pressure on the West to decouple public and private institutions from Chinese-operated or owned technology, networks and infrastructure.
How did we get so entangled? When and how did the West fall behind China?
In the UK, there is a historic tradition of open markets and global trading, argues Elisabeth Braw of the think-tank ‘Royal United Services Institute’. Braw says the UK generally resists scrutinizing opportunity for foreign investment. She says that the world has changed, though, and that the UK must catch on to China “exploiting globalization for its own gains”. Suspicions have resulted in claims of Chinese ‘underhand tactics’ like corporate espionage. These are rejected by Victor Gao – famous for his time as a translator for Deng Xiaoping – who says that “prosperity has come for China from greater infrastructure and connectivity” and that Huawei is merely a ‘lightning rod’ in a long history of Chinese technological development and advancements. He argues American accusations of ‘theft’ require either “producing a solid case, or an admission that the competitor has a better technology”.
It is precisely the Western prejudices about China’s governmental control that contributed to falling behind, reflects Google’s Eric Schmidt: “as an American, I have carried prejudices about China that they are good at copying things… but they are not going to do anything new. Those prejudices need to be thrown out. [The Chinese] are putting more money [into key areas of research] in a different way [to the U.S].” Schmidt highlights a historical blindness in the U.S. as to the “initial federal science grants” where its own technological development came from, and that its history of reliance on governmental investment is often forgotten in Silicone Valley. Sultan Meghji, founder of the fintech firm Neocova, highlights that the PRC (People’s Republic of China) has aligned the state, private sector and academia and invested “something like $50 bn”. On the “Western democracy side… we are scraping single digit billions”. Meghji adds that the “West is quite far behind”. For the capital markets, this raises the possibility of vehicles that incorporate government funding and ownership. The issue here may be the choice between entanglement of private companies and government oversight versus integration of Chinese technology or sale of Western technology to Chinese-owned business when it might be unclear how that personal data is managed on the Chinese side.
New perspectives on technology will shape domestic investment.
Elisabeth Braw argues on Radio Four that “we need to change our understanding of which companies are vital to international security”. Braw provides the example of gay dating app Grindr – who were acquired by Chinese company Beijing Kunlun in 2016 for $93 million – where almost four years of Chinese ownership went under the radar of the U.S. Regulator. In 2019, the Committee on Foreign Investment in the United States (CFIUS) determined that having the app owned by a Chinese company poses a national security risk, and essentially forced a reversal of that acquisition. In 2020 Kunlun sold its 98% stake to U.S. company San Vicente Acquisition Partners for $608m. There is clear U.S. concern over personal information where the data is ultimately Chinese-owned. Whether or not this is justified, or relies solely on fear and suspicion does not change the real-world and market implications of a forced sale by the U.S. regulatory body. The issue arises as to how Western companies who own personal data can effectively operate on a global scale in an environment of complete mistrust among governments.
Intensifying confrontation will lead to uncertainty in the markets.
“Xenophobia and hysteria are not healthy”, argues Victor Gao, particularly in the context of the coronavirus global health crisis. Gao asks Western powers to “focus on... commonalities between China and the U.S., rather than being driven to… hysteria by what China is developing in… a more economically efficient way”. Tom Tugenhadt argues that the risk is the West is “allowing itself to become too dependent on China” and points to the political unrest in Hong Kong as an example of China’s becoming more authoritarian and that it “does not share our values”. “The West has woken up to the way Beijing has been playing globalisation to its advantage”, says Elisabeth Braw, but the “problem is when one country exploits this global playing field and does not play by the rules”. These opinions suggest that any Chinese acquisitions of Western technology, or Western technology companies that hope to use cheaper Chinese technology, may see uncertainty in obtaining approval from domestic regulators. The ultimate financial burden of a more expensive supply chain or a less favourable merger, of course, falling either on the stakeholder or the consumer.
A ‘battle of Huawei’ and a ‘great coming apart’?
The world is no longer two separate economic systems, like the ‘face-off’ in the Cold War, agues Nigel Inkster, who says “globalization has engendered such high levels of entanglement between countries that it would be… literally impossible fully to disentangle”. “We are going to have to find our way to a new model where we accept entanglement and work out how to develop new strategies to manage the very real risks”, Inkster concludes. Eric Schmidt adds that the sanctions risk spurring China to develop its own technology even faster: “once you diverge these global platforms, you do not get them back… by building these platforms separately, the counties will understand each other less”. Schmidt posits that “China is going to dominate, whether we couple or decouple. They have the resources, the money and the technology… the question is [whether] they operate on global platforms or on their own platforms… the more segregated these platforms are, the more dangerous it is… the west benefits from having Western values in those platforms”. The “answer to Huawei” Schmit argues “is to compete by having a product and product line that is as good” and that the west requires “more research funding, more immigration of key people, collaborations, universities and the incredible tools that got [the West] to be so strong”.
Indeed, Alexander Gabuev wrote only yesterday (21/06/20) for the Financial Times that “the British government’s decision to launch a review of Huawei’s activity in the UK is an indication that the US campaign to pressure its allies to shun China’s biggest telecoms company is bearing fruit”. The U.K. government, he writes, is looking into forming an ‘alliance of democracies’ to provide developing countries with alternatives to Huawei’s 5G “market-leading” technology. Truly, it appears that the Chinese-driven globalisation of Chinese-owned technology is being met not just with resistance but active prevention by the West. Gabuev’s article then delves into the development of Chinese-operated 5G in Russia, a country overlooked by this ‘alliance of democracies'. The rest of this article, while it will not be included in this already very long post, is highly recommended reading from me: Alexander Gabuev for FT Opinion ‘Huawei’s courtship of Moscow leaves west in the cold’.
Conclusions on China: an economic giant pushes a new world order?
Back to Radio Four. “No one can indulge in any fantasy that China will no longer be a major contributor to world economic development”, argues Gao. Schmidt adds the Western perspective that “the best strategy is… brutal competition that is largely unregulated where [the West] seeks to win”. From the post above we can see that the predominant issue is heavy mistrust of China from the West, with pressure from the U.S. preventing Chinese access to U.K. markets, too. Gabuev suggests in his article that general hostility from the West has only facilitated China in forming an ally in Russia. A harmonious accommodation of China’s rise seems unlikely, suggests this Radio Four programme. It is now a question of whether there will be “brutal competition between two connected systems” or if we will we see a “great pulling apart” in a new “tech cold war”. In a world of ‘lesser evils’, the former would be far less expensive for a coronavirus-rattled economy. In any case, we may see a rise in conclusions like Gabuev's for the FT: “failure to act will help Beijing embed Russia in a China-centred technological order, a digital Pax Sinica with worrying, global ramifications”.
Comments