Michael Sainsbury
September 29, 2015

President Xi’s seduction in Seattle

President Xi’s seduction in Seattle

Powerful Friends: How do all these CEO's fit in a single photo frame?

There is intensifying competition between the world’s two largest economies in the technology sector. Part of this competition is overt – with Chinese tech and internet companies now of global scale – and part of it is covert, in the cyber intelligence/warfare sphere.

So it is no surprise that technology issues were front and centre of Chinese supreme leader Xi Jinping’s first official visit to the United States starting last week.

In the weeks leading up to his visit, the US government began publicly discussing possible sanctions against Chinese companies caught hacking into US commercial and government networks. The ‘will they or won’t they’ question was bandied around the media, but diplomacy prevailed.

So it was all the more galling for the US Government that China fast-tracked a technology conference in Seattle as President Xi’s first port of call.

The business delegation travelling with Xi was tech-heavy and included Alibaba founder Jack Ma, one of China’s richest men. Along with its original B2B sourcing platform – widely used in most western countries including Australia  – Alibaba also owns Taobao, China’s biggest consumer e-commerce company (a Chinese Amazon-equivalent).

Then there was Robin Li, whose Baidu has Google-like market share in the Chinese internet search sector, and is branching out into myriad e-commerce projects. Close on their heels was the fabulously named “Pony” Huateng Ma, who runs Tencent, China’s largest and most used internet portal.

And that was just the tip of the iceberg, with chief executives or CEOs from Lenovo, Sina, JD.com, and Qihoo 360 also attending. And that’s just the Chinese side. Powerful US CEOs from IBM, Microsoft, Apple, Cisco and Qualcomm, among others.

Also present was Lu Wei, China’s most senior executive official in charge of cybersecurity and internet policy. He is the man who runs what is effectively the world's largest intranet, the part of the internet where Chinese censors allow its citizens access.

Most of Xi’s trip to Seattle was hosted by Microsoft, a company which has negotiated the treacherous shoals of the Chinese tech world better than most. Although Chinese government firms are not permitted to purchase Windows 10, it will be interesting to see if that changes following the trip.

China is determined to drag its way up the manufacturing value chain, and successive governments have poured money into information technology parks. There is at least one in every Tier One and Tier Two city across the country, and scores more dotted around in smaller towns (the ones with, say, four or five million people, for instance).

But so far, most of its internet companies have succeeded, at least initially, by having rivals such as Facebook and Twitter blocked by the Great Firewall.

Google left in disgust over censorship, although its Android platform remains at the forefront of China’s fast rising mobile phone companies – spearheaded by a new generation of branded manufacturers like Xiaomi and Oppo.

Still, a notable absentee from Xi’s Seattle seduction was a senior executive (at least absent from official photos) of China’s biggest home-grown technology success story Huawei Technologies.

Huawei’s story is very instructive and has been perhaps a red flag (pardon the pun) to other Chinese groups trying to succeed offshore.

Early on in its rise, Huawei was sprung stealing source code from Cisco, and a deal was struck enabling Cisco to stay in the Chinese market. But it has slowly but surely been squeezed out as Huawei has grown to be the world’s second largest telecoms and internet equipment maker after Ericsson.

China and its companies are now far more subtle about the way they secure the intellectual property of others. No one wants to be subject to the blanket ban that Huawei suffers in the US (and indeed as a participant in the Australian government’s NBN project as well).

But just as the US and Australia can keep companies out, using national security and other provisions to provide a fig leaf to protectionism, China has also used various methods of protectionism to keep the US tech giants at bay. Mainly this has been the Great Firewall, and through government purchasing policies (very powerful in a corporate state model) in its markets.

The meeting in Seattle shows there still remains plenty of mutual self-interest. China is a massive market and is also emerging as technology hub that – like Japan before it – will have vast influence across Asia.

The trick for other companies that want to play the China game is to find non-threatening slots and sign-up to the rules of the game.

Those rules are getting tougher, with China looking at all sorts of ways to continue extracting IP from foreign companies.

Electronic financial platforms are one of the government’s latest concerns, and there is a stuttering push to get FinTech companies to hand over source code on national security grounds.

One of its latest rules is a new wide-reaching national security law passed in July, which states that all information systems must be “secure and controllable.”

The Wall Street Journal reported in August that foreign companies were asked last month to sign a pledge using the same language, so that is one of the new costs of doing business.

And indeed it was security of system, or cybercrime was the most significant outcome of summit that one wag described as otherwise being the hamburger with nothing.

China and the US have agreed to set up a twice yearly meeting to patrol commercial cyber theft. The elephant in the room, however, is that cyber theft by security organisations was left right out of the discussion. And in China, the People’s Liberation Army reports not to the Chinese government, but to the ruling Communist Party. It’s a very important distinction because the US agreement was with the government; it was not a Party deal.

As InnovationAus.com reported recently, Australia both in government and business is dragging the chain in its awakening to the real and present dangers of cyber theft and warfare.

This will no doubt change under the Turnbull Government, and most likely with the release of the Defence White Paper.

And for Australian technology companies, with cards played right, there are opportunities to be enjoyed.

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