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China’s Restrictions Substantially Disadvantage Competitive U.S. Tech Company Access To The China Market

ArmchairTechInvestor, March 22, 2018, by Brad Peery

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U.S. tech companies are severely restricted in accessing the China market. The restrictions vary by sector, but the most onerous restrictions are on providing Internet access to their databases and search services to their customers.

Alphabet (Google)
Google is blocked in China, and unlike Apple, it has not been able to limit the download of apps sufficiently to be able to enter the Chinese Internet search market.
*Why Google Quit China—and Why It’s Heading Back, The Atlantic, by Kavin Waddell, January 19, 2016

Amazon
*Online Internet retailers in China are not allowed to sell directly to their customers. This requires Amazon to go through a complicated process that severely limits its capabilities in China, compared with the big three allowed Chinese company Internet providers.

Amazon has warned, “Our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding, or if China enforces contractual relationships with respect to the management and control of such businesses.” The company added that if its international activities were found to be in violation of any existing or future laws in China or India. Or, if interpretations of those laws and regulations were to change, it would lead to fines, license revocation and or a complete shutdown of operations.

In China, the Amazon website is operated by local companies owned by Chinese nationals in order to meet ownership and licensing requirements.
*Amazon Warns of Ending India and China Operations Due to Complicated Laws, International Business Times. By Jerin Mathew, November 3, 2014

Apple
*Apple did well in the December quarter of 2017, increasing revenues by 11% in the Asia-Pacific region, but is losing market share in the huge smartphone markets in China, India and other Asian countries. Taking significant market share is Xiaomi, which has inexpensive and feature rich smartphones that compete with Apple’s top of the line X. The X sells for about $1,000.

Xiaomi, often called the Apple of Asia, has a smartphone, the Redmi Note 4. In China, that sells for about $200 and competes with the Apple X. Xiaomi’s cellphone market share was 19% in 2017, compared to 3% in 2015. Apple’s market share in China was about 8% in 2017, down from 13% in 2015.

The typical smartphone in India, for example, sells for about $200, and is not subsidized by the wireless carrier, as in the U.S. These smartphones may have batteries that are sensitive to power fluctuations, and often have features, such as cameras, that are unique to the Indian market.
**Asian Rivals Put Apple Under Pressure, Wall Street Journal, by Newley Purnell, March 2, 2018

China is issuing demanding cybersecurity requirements. It is requiring that all cloud data be located on servers in China, including encryption keys. Apple has said that the keys will be stored in a secure location, they will retain control of them, and havn’t put in any backdoors. However, Chinese seizure is always a possibility, or China could require that Apple give them specific keys. The U.S. Congress is very concerned about these keys being stored in China

The Apple data is vulnerable to Chinese surveillance. Apple also removed 700 apps that allow users to bypass Internet restrictions. Other restrictions include censoring content, and having to set up joint ventures with Chinese companies. Most smartphones are assembled by Chinese companies.
**Apple’s Cook Plays Along With China, Wall Street Journal, by Yoko Kubota, February 27, 2018
***Apple Puts iCloud Keys in China, Wall Street Journal, by Robert McMillan and Tripp Mickle, February 26, 2018

Boeing
*Boeing is an extremely large commercial plane producer. It is also an import resource to NASA in pursuing a commercially competitive space vehicle program, including using very powerful space launch systems. Those vehicles can compete with Space-X, which is looking to launch a system that might reach Mars in 2024.

*China and Russia are modernizing their nuclear forces, and there is growing risk from North Korea. The first phase of a U.S. land-based missile program replacement for the Minuteman 3, deployed in silos in the Great Plains, is underway. The first phase is a $700 million design phase, and Boeing and Northrop have been selected to compete for this business. It will include 600 land-based missiles, of which 400 will be deployed, and 200 will be used for testing.
*Nuclear Missile Overhaul Falls to Small Pool of Contractors
Wall Street Journal, By Doug Cameron, August 27, 2017

Daimler
*In 2010, Geely purchased Volvo from Ford for $1.8 billion, a fraction of the $6.4 billion that Ford had paid for Volvo in 1999.

In February, 2018, Li Shufu, the chairman of Chinese automaker Geely, bought Daimler stock, worth $9 billion. The stake will not be owned by Geely. It will be held by an investment vehicle known as Tenaclou3 Prospect Investment Ltd., according a regulatory filing.

Daimler has said it plans to begin assembling Mercedes-Benz vehicles in 2018 from a $1 billion facility shared with Renault-Nissan, in Aguascalientes, Mexico.The purpose of the Geely investment in Daimler is not clear, but because Geely is working to improve the quality of its vehicles, particularly in the luxury vehicle area, that is very likely a reason.
*China Humiliates Another Western Company, Wall Street Journal, by Michael Auslin, February 21, 2018

Facebook
*In December, 2017, Facebook had 2.13 billion active users, a 15% year-to-year increase. It had revenues of $40.7 billion in 2017. It is extremely profitable, with pre-tax margins of about 50%.

Facebook is facing significant scrutiny because of the hacking that apparently allowed 50 million of their customer’s data to be used for political purposes without their knowledge. It also faces inssues in Asia that included it being banned in the Chinese market.

*Russian interference in the 2016 presidential election is also an Issue for Facebook. Russians bought ads that were targeted at creating social divisions in the U.S. Facebook generates about $40 billion of annual revenues from ads that are narrowly targeted at specific audiences.
*Tone-Deaf: Facebook’s Russia Bungle, Wall Street Journal, By Deepa Seethharaman, Robert McMillian and Georgia Wells, April 3, 2018
**Facebook and the Tools of Uprising, Wall Street Journal, by Christopher Mims, February 20, 2018

IBM
*U.S. companies such as Tesla, Apple and IBM will, through their foreign subsidiaries in China, meaningfully assist China in their global trade ambitions. It is a brilliant scheme to use unfair trade practices to promote Chinese trade, economic, and political influence in the region from Europe to Asia and Africa, and use U.S. companies such as Tesla and IBM to do it.

* Staying up with China in quantum computing, and trying to get to a 100-qubit quantum computer, will likely be the next military frontier for the U.S. Countries such as China, Russia, the U.K., the European Union, and Australia are in a race to develop quantum computers, as are companies such as Intel, IBM, Microsoft and Alphabet (Google). The winners of the race will be able to obsolete existing cybersecurity technologies and systems.

China is apparently the leader in quantum computer research. In mid-2017, it launched the first satellite capable of transmitting quantum data. It is building the world’s largest quantum computing facility. Its focus is on code-breaking, and supporting its military with quantum navigation systems for stealth submarines. It appears to be getting close to getting a 40-qubit quantum computer prototype.
*The Computer That Could Rule the World, Wall Street Journal, by Arthur Herman, October 27, 2017

Lockheed Martin
*The first phase of a U.S. land-based missile program replacement for the Minuteman 3, deployed in silos in the Great Plains, is underway. The first phase is a $700 million design phase, and Boeing and Northrop have been selected to compete for this business. It will include 600 land-based missiles, of which 400 will be deployed, and 200 will be used for testing. Aerojet Rocketdyne Inc. has announced it is building the rocket motors for Northrop.

Some have estimated that the total cost of this program could be as high as $500 billion over the next 20 years, which is about 5% of the Defense Department budget.

A decision is expected in 2020 to determine the general contractor for the Ground-Based Strategic Development (GBSD) program, including the ICBMs, new communications systems, and a refurbishment of the launch silos.
*Lockheed Pursues Longer Jet Pack, Wall Street Journal, March 10, 2018, by Doug Cameron, March 10, 2018

Microsoft
*Microsoft is at the center of an email data storage lawsuit, on which an appeals court has ruled. Warrants cannot be enforced to gain access to data that is stored exclusively on foreign servers. The case, as of early 2018, is at the Supreme Court. The companies want to protect user data, and in some cases, public authorities are seeking access to that data. In the case of data in China, the authorities often have full unrestricted access to that data.

Companies such as Microsoft and Alphabet (Google) claim that if their customer data is not protected, they would be in the middle between U.S. law and the foreign country data privacy requirements. U.S. dominance of the $250 billion cloud computing industry is claimed to be at stake.

In the case in question, the data is stored on a database in Ireland, to which Microsoft has full access in the U.S. The case revolves around an antiquated 1986 U.S. law, the Stored Communications Act. The law is not a fit for today’s large scale cross-border data storage environment. The current law needs to be interpreted until the Congress can revise it.

Google and other tech companies are supporting Microsoft.
*Justices to Hear Microsoft Case on Email Storage, Wall Street Journal, By Brent Kendall and Nicole Hong, February 27, 2018
**Justices Grapple With Microsoft Case, Wall Street Journal, by Brent Kendall and Nicole Hong, February 26, 2018

Companies have a choice of where they store their data. If U.S. law does not apply to data stored outside the U.S., then the tech companies can find a place to store U.S. data that would be immune to access by U.S. authorities.
***Microsoft’s Legal Cloud Cover, Wall Street Journal. Editorial, February 27, 2018

Qualcomm
*Qualcomm is a worldwide leader in semiconductors used in cellphones and wireless communications networks. Qualcomm has developed 5G wireless networks that are used throughout the world. It was in a hostile takeover situation that could have resulted in a Singapore company, Broadcom, taking over the 5G networks being developed in the U.S. These networks will significantly improve the performance of artificial intelligence networks. The two main risks are that:
• China might have gained control of the networks that are used to deliver artificial intelligence in the U.S., and are very important to military systems; and,
• China might have used Chinese companies, including Huawei, the second largest supplier of 5G networks worldwide, to infiltrate the U.S. broadband communications networks;
o Chinese companies have sworn allegiances to China, or they wouldn’t be allowed to operate in China. This presumably applies to Broadcom.
The Broadcom acquistion of Qualcomm was blocked by the Treasury department.

In November, 2017 a new bill was introduced in the U.S. Congress entitled the Foreign Investment Review Modernization Act. The Committee on Foreign Investment In the United States (CFIUS) has the responsibility to review foreign investment in the U.S. There are continued attempts by China to invest in U.S. technology. The most recent controversy surrounds Broadcom’s hostile bid to take over Qualcomm.

The new bill comes amid increasing scrutiny of defense threats under the Trump administration, as the U.S. government has blocked several investments from China, including the high-profile proposed acquisition of Lattice Semiconductor Corp by Chinese state-backed Canyon Bridge Capital Partners.
*For Qualcomm, Yet More Fights Are on the Card. Wall Steet Journal, by Ted Greenwald, March 20, 2018
**Treasury’s Qualcomm Reversal, Wall Street Journal, Editorial, March 6, 2018
***The Qualcomm Question, Wall Street Journal, Editorial, March 5, 2018

Tesla
*Tesla has substantial electric vehicle intellectual property, including wireless car batteries, that it will protect by building an electric car manufacturing plant in Shanghai. This will likely avoid Chinese companies stealing their technology.

China does not allow foreign companies in China to set up manufacturing plants anywhere except in “free trade zones”. One of those free trade zones is Shanghai, where Tesla will locate its plant. There are also ten more such free trade zones throughout China.

China uses unfair trade practices, such as requiring foreign manufacturers to have a Chinese partner, or pay a 25% import duty, if the car is manufactured outside of China. Tesla seems to be unwilling to give away its technology to a Chinese company partner, and perhaps give away 50% of the local Chinese market to them.

Batteries, which are a significant portion of the cost of an electric car, will undoubtedly be able to be imported to the Shanghai plant. This will protect Tesla’s electric car battery technology. Tesla will also be able to benefit from the low cost of Chinese manufacturing, by being in Shanghai. This plant will be able to ship to Asian and European markets from this plant, and enjoy the low cost of Chinese manufacturing plants. It will also benefit from the low cost of automobile parts manufactured in China for its export markets outside of China.

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