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China Uses Restrictions Banned By The World Trade Organization to Restrict Competitive Tech Company Access To The China Market

ArmchairTechInvestor, March 21, 2018, by Brad Peery

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China Uses Restrictions Banned By The World Trade Organization to Restrict Competitive Tech Company Access To The China Market

Chinese tech companies are heavily favored in accessing the China market. The restrictions vary by sector, but the most onerous restrictions applied to foreign competitors are on providing Internet access to their databases or Internet search services. Only three Chinese companies, Alibaba Group Holding, Baidu and Tencent Holdings, are allowed to directly access the Internet.

Alibaba
*Alibaba Group Holding is one of three companies, including Tencent Holdings, and Baidu that dominate e-commerce, social media, mobile payments. With China moving toward what could be mostly an all-electric automobile market by 2030, providing a variety of subscription services to vehicles is viewed as an extremely large market opportunity in China, but also perhaps elsewhere. For example, Renault is forecasting that it could achieve a fivefold increase in revenues by 2023 as a result of its ability to sell automobiles in Alibaba’s platform.
*China’s Tech Giants Take to the Road, Wall Street Journal, by Trefor Moss and Liza Lin, March 19, 2018

**China is encouraging Chinese companies to list their stocks in China. However, there are Chinese stock market listing requirements that make this difficult for companies that are listed on the New York Stock Exchange, or other foreign exchanges. If they are listed elsewhere, they are not eligible for listing in China. Chinese regulators are looking at using American Depository Receipts (ADRs) as a way of getting around this dilemma. Alibaba uses these ADRs for its U.S. listing. Alibaba may be able to raise capital in China less expensively, but stock listed in China will not be convertible into its U.S. ADRs. That probably makes it inevitable that over time there will be two listing prices for Alibaba’s stock.
**Alibaba Looks to go Home, Wall Street Journal, by Julie Steinberg and Liza Lin, March 17, 2018

Anbang
Anbang is essentially a bankrupt very large insurance company that tried to act like a money manager in the guise of being an insurance company. Its distress is comparable to the failure of AIG in the U.S. The interesting aspect of Anbang is that the Chinese financial regulator is running the company and looking to use successful companies, such as Alibaba and TenCent Holdings, to bail out Anbang in return for being allowed to provide additional financial services beyond mobile services, which together they dominate. This is a risk that existing shareholders of Alibaba and Tencent Holdings may be required to take in return for China’s tight control being loosened on financial services sectors that are not openly competitive.
*Beijing Could Recruit Help to Clean Up Anbag’s Mess, Wall Street Journal, by Jacky Wong, February 21, 2018

Baidu
Baidu is one of three companies, including Tencent Holdings, and Alibaba Group Holding, that dominate e-commerce, social media, mobile payments. In particular it provides search and mapping services. With China moving toward what could be mostly an all-electric automobile market by 2030, providing a variety of subscription services to vehicles is viewed as an extremely large market opportunity in China, but also perhaps elsewhere.
*China’s Tech Giants Take to the Road, Wall Street Journal, by Trefor Moss and Liza Lin, March 19, 2018

Broadcom
Broadcom is a very large semiconductor company based in Shanghai. It attempted a hostile takeover of Qualcomm, which has an impressive portfolio of intellectual property patents. The attempted acquisition was rejected by the U.S. on the grounds that such an acquisition could jeopardize national security and the development of 5G Internet technology in the U.S. 5G will become crucial for developing advanced services such as artificial intelligence and advanced defense capabilities.

Huawei
*Huawei is a Chinese telecommunications equipment manufacturer. It is the largest wireless equipment manufacturer and the third largest smartphone maker. The company is making an investment in the United Kingdom. The UK has set up a facility, run by Huawei to examine the intricacies of their own equipment. U.S. politicians have expressed concern that the company’s equipment can be used to gather intelligence for China or even disable U.S. equipment. Even equipment in other countries might also be used for spying on the U.S. or network control purposes. The U.S. is a member of the “Five Eyes” intelligence-sharing partnership that also includes Brittain, Canada, Australia and New Zealand. These countries could be vulnerable to Huawei equipment security risks.

The House and Senate have each introduced bills to address the Huawei risk. Huawei counters that it is an employee-owned company and is respected in 170 countries around the world.

Canada’s Parliament is debating cybersecurity risks. South Korea’s largest carrier’s CEO called Huawei a “concern”. Australia ruled out Huawei for its Solomon Island undersea cable deployment despite the fact that Huawei is an advisor to it on its development of a 5G wireless network.
*Huawei’s Breadth Raises Concern, Wall Street Journal, by David George-Cosh, February 24, 2018.
**Caution Over Huawei Grows, Wall Street Journal, By Dan Strumph and Paul Vieira, March 21, 2018

Tencent Holdings
*Tencent Holdings is a Chinese Internet company. Because the Chinese Internet is very tightly controlled by the Chinese government, Tencent Holdings is in a very enviable position. One important capability is their ability to provide GPS mapping services. Driverless vehicles could be an extremely important application. Vehicle manufactures will need to use an Internet company to provide driverless vehicle services. Its Hong Kong-listed stock has doubled in 2017.

Tencent Holdings has made a number of attractive investments. One example is an investment in Tongcheng-Elong Holdings. The company is considering an IPO that could give it a valuation of several billion dollars. It runs Internet portals that provide online China and international travel services.
*Tencent-Backed Travel Company Is Cruising Toward IPO, Wall Street Journal, By Julie Steinberg and Liza Lin, March 10, 2018

Xaoimi
*Xaoimi, is one of the largest cellphone makers in the China, and has a $46 billion market capitalization. It has high quality smartphones that rival Apple in looks, but are inexpensive. It is planning an IPO that could have a valuation of $100 billion or more. Xaomi is essentially an Internet equipment company. Its China market share was 12% in 2017 and its shipments grew 50% to 96 million units. However, the company is risky and subject to the vagaries of hardware development companies with low margins. On revenues of $15.2 billion, it had profits of about $1 billion. By contrast Apple had a market capitalization of about $900 billion in early 2018. In China, non-Internet companies are generally banned from using GPS for self-driving vehicles and existing manufacturers, such as Xaomi, are very much in demand to provide future equipment for self-driving electric vehicles.
*Hot Xiaomi Carries Big Risks, Wall Street Journal, by Li Yuan, March 17, 2018.
**Beijing Dials Up Pressure on Xiaomi, Wall Street Journal, Stella Yifan Xie, March 2, 2018

Zejiang Geely-Daimler-Volvo
Geery has become the premier Chinese vehicle manufacturer by connecting with Western automaker technology. The journey began with Geely introducing a Chinese manufactured automobile at a Detroit auto show in 2006. The automobile was roundly criticized, particularly for its poor quality. Geely went to Ford to buy Volvo, and with Volvo doing poorly in 2010, it was bought from Ford for $1.8 billion, a fraction of what Ford had paid for it. The road forward for Geely was a risky one, but relying on the manufacturing expertise of Volvo in Sweden, and the design vision of a seasoned Western car designer, it has had increasing success both worldwide and in China. China is going toward all-electric vehicles, and Volvo plans to have 90% of its vehicles electric or hybrid by 2020. It has manufacturing plants in China and Europe and has a U.S. plant that will open in the U.S. in 2018.

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