While China still needs Western technology in the hardware sector, it can dictate the terms for Western software companies that want to enter the Chinese market.
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China’s march towards cyber hegemony

Despite much effort, China still has many problems achieving its goal of cyber sovereignty. But on the way towards independence, the country might achieve something else: cyber hegemony.

For years, the Chinese government has propagated a strategy to boost "cyber sovereignty," i.e. to achieve independence from Western IT-products, standards and technologies. But even though the government invests a lot of money, brainpower and political leadership, the strategy still faces many obstacles and is not producing the intended results. However, because of its massive market and its ability to gather data on a billion of users, China may achieve something else in the process – which I will call cyber hegemony in this article.

The IT landscape can broadly be divided into hardware and software. China needs help in some parts of the hardware sector – and wants Western technology even at a high cost. On the other hand, China has developed a closed system of software and services independent of Google, Facebook and Amazon, which dominate the markets in almost all other countries. This split has consequences for China's future IT policy, but also for business strategies of global IT companies.

Hardware: So much public money, so few working processors

The lack of homegrown Chinese technology became apparent this year, when Chinese mobile phone and technology company ZTE almost collapsed after being hit by US sanctions. Because it could no longer be in business with US firms around the world, the company lost many customers and critical parts of its supply chain. With the embargo kicking in, ZTE was no longer able to make smartphones, because it lacked tiny processors – so-called systems on a chip (SOC) - made predominantly by the US company Qualcomm. 

CPUs and SOCs have been a critical part of China's high tech-strategy for years. But apart from prestigious supercomputers, Chinese chips lack the capacity and calculating power of those of international competitors. Most laptops and desktop computers sold around the world use chips either made by Intel or AMD or are based on designs licensed from ARM. This is also true for China. Chinese manufacturers only achieve meaningful market penetration in chips for routers, home electronic devices or so-called Internet of Things appliances. 

To catch up with western chipmakers, a state-owned enterprise from China tried to take over US chipmaker Micron in 2015, offering 23 billion USD. The offer was rejected. Later, Micron reported a massive case of industrial espionage and accused newly founded Fujian Jinhua Integrated Circuits of attempts to copy its products. Fujian Jinhua asked Taiwanese chipmaker UMC for help – and Micron now accuses both of them of using material copied by former Micron employees, who now work for UMC, to circumvent the long and arduous process of designing chips. 

Software: China gives the could shoulder to western companies

Hardware is only part of the digital revolution – services and platforms are another. In China, this market is largely divided between Chinese players like Baidu, Tencent and Alibaba. Western IT giants such as Google and Facebook would also like to expand to China. The problem is that unlike the production of processors, their line of business is highly political in nature. A CPU will not ask about human rights, a user on an uncensored version of Facebook might.

In 2010, international human rights activists praised Google for leaving the Chinese market instead of complying with the censorship regime. But now, it seems, Google wants to find a way back in. The Intercept reported about a supposedly secret plan within the organization to offer a Google platform with censorship built in across all its services  in China – from search to news, from pictures to maps. Google reportedly even made a prototype app for phones that would link (censored) search requests to individual phone numbers or SIM cards. The so-called "Dragonfly" project has vocal advocates. Google CEO Sundar Pichai is said to have met "high-ranking" Chinese officials, although no decision has been publicly announced. The problem for Google is that making Google’s services available is not a big priority for the Chinese government. So Google returns to China, it will be completely on Beijing’s terms.

The same is true for Facebook. The social network that aims to connect the world would love to do the same in China. But there is no imminent market need and no business case for China or the Communist Party. In July, Facebook was awarded a Chinese subsidiary in Zhejiang, only to have it removed about a day later. The company had been set up to act as a startup-accelerator investing in Chinese companies.

Even Microsoft changed its business policy for China in a dramatic and yet unseen way. While the company rejects to grant Western governments special conditions to make changes to its operating system, the same is not true for China. Windows 10 sends some telemetry data back to Microsoft – mostly diagnostic information used to further develop the software. Western users – private, business and government – can only limit the extent of those data transfers. Even though Microsoft was widely criticized for this behavior by many data privacy activists, it said that it did not plan to make any changes to the policy.

Except, of course, for the Chinese government. After the government announced to ban some organizations from using Microsoft products, the company offered some substantial changes. Chinese government customers are now able to completely turn off the transmission of telemetry data. The government also mandated Microsoft to enable the use of homegrown Chinese encryption standards instead of the pre-installed ones. Microsoft announced the new partnership in a blogpost that sounded nothing like the statements usually distributed in other countries.

The examples show that China is one of the most attractive target markets for many IT companies. For some it is the chance to gather more data and learn about the consumer habits of a whole new group of customers, which is quickly catching up to Europe and the United States in terms of purchasing power. For others, it is the possibility to sell to a vast market of government authorities and regulators.

All IT business with China can be political

The pull of the Chinese market presents a dilemma for western IT companies doing business in China – even in seemingly innocuous and unpolitical areas like business software. SAP and Salesforce might be asked, for example, to allow a connection between their software to manage employees and the different mechanisms that form China’s Social Credit System for rating citizen’s economic and social behavior. Companies that sell tools based on machine learning technology, voice sampling or facial recognition face other ethical questions: In China’s emerging system of digital autocracy these technologies might enable broad surveillance or repression of citizens. 

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