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Chinese And U.S. Companies: Examples Of The Different Treatment They Receive In The Mainland China Market

ArmchairTechInvestor, July 17, 2018, by Brad Peery

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The technological war with China has begun. It remains to be seen whether U.S. companies can do business in China without giving away their technology. The U.S. is pushing back on the Chinese theft of the intellectual property of U.S. companies.

Companies such as ZTE and Huawei are finally being restricted because of the business they do in the U.S. that could provide a threat to U.S. security.

U.S. and other foreign 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.

*Alibaba Group Holding is one of three companies, including Tencent Holdings, and Baidu that dominate e-commerce, social media, and 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 on Alibaba’s platform.

***Baidu is one of the three companies that dominate e-commerce, social media, and mobile payments in Chins. 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.

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 U.S. rejected the attempted acquisition 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.

Following its failure to acquire Qualcomm, Broadcom is attempting to acquire U.S. software company, CA. The U.S. may also block this acquisition on the basis that Broadcom is furthering China’s goal of being a leader in semiconductors and software

Huawei is a Chinese telecommunications equipment manufacturer. It is the world’s 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 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.

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.

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. China could eliminate the sale of internal combustion engine cars in China beginning in about 2030.

Xiaomi, is one of the largest cellphone makers in the China, and has a $46 billion market capitalization. It has high quality cellphones that rival Apple in looks, but are inexpensive. It has completed an Initial Public Offering (IPO that could have a valuation of $100 billion or more. Xiaomi is essentially an Internet 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 providers such as Xiaomi are very much in demand to provide future services for self-driving electric vehicles.

Zejiang Geely-Daimler-Volvo
Geely has become the premier Chinese vehicle manufacturer by connecting with Western automaker technology. Geely went to Ford to buy Volvo for $1.8 billion. Relying on the manufacturing expertise of Volvo in Sweden, 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.

Daimler has said it plans to begin assembling Mercedes-Benz vehicles in 2018 from a $1 billion facility shared with Renault-Nissan in Aguascalientes in Mexico. In February 2018, Li Shufu, the chairman of Chinese automaker Geely, bought Daimler stock, worth $9 billion. Geely will not own the stake. It will be held by an investment vehicle known as Tenaclou3 Prospect Investment Ltd., according to a filing. 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.

ZTE and Huawei are two Chinese companies that could pose a threat to the U.S. broadband communications networks. ZTE has become the fourth largest cellphone supplier in the U.S. The UK banned the use of ZTE equipment because of concerns that China could force the company to infiltrate the UK’s broadband communications infrastructure. China essentially requires Chinese companies that wish to do business in China to pledge allegiance to China. This can result in those companies being used to spy on countries where they do business. This is the equivalent of the U.S. requiring Apple to spy on behalf of the U.S. government, which they would not do. The reverse is true in that Apple would be required to support Chinese government objectives, if it were to do business in China.

China-World Trade Organization
China has used the national security threat issue as a way to protect Chinese companies. China is still considered to be an emerging country under the World Trade Organization rules, showing how antiquated is the WTO.

China announced plans to significantly improve the competitiveness of its state and Chinese semiconductor companies when it launched a $21.8 billion semiconductor development fund in 2014. A U.S. Trade Representative’s report on March 22, 2018 declared the 2014 fund as an effort by government agencies and state-owned companies to meet Chinese national strategic objectives.

China has also announced a new fund that could total about $47.4 billion. Important semiconductor industry sectors it will support are likely to include microprocessors and graphic processors. The objective is to reduce China’s dependence on foreign semiconductor products from companies such as Qualcomm, IBM and Nvidia.

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.

Online Internet retailers in China are not allowed to sell directly. 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. In China, the Amazon website is operated by local companies owned by Chinese nationals in order to meet ownership and licensing requirements.

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 smartphones, and feature rich smartphones that compete with Apple’s X. The X sells for about $1,000.

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, will retain control of them, and hasn’t put in any backdoors. However, Chinese seizure is always a possibility, or it could require that Apple give them specific keys. The U.S. Congress is very concerned about these keys being stored in China

This could make the data 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. Chinese companies assemble most smartphones.

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-Quantum Computers
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 U.S. Congress has held hearings to understand quantum computing. China has pledged $10 billion to become the worldwide leader developing this worldwide weapon that could make all current cybersecurity efforts obsolete.

In 2013, Chinese government officials invaded the Beijing and Shanghai offices of Qualcomm. After a 15-month investigation, regulators saddled the company with a $975 million fine. In addition to the fine, Qualcomm:
• Was branded a monopoly;
• Was forced to reduce prices;
• Had to move more of its technical manufacturing to China;
• And, help boost the technological abilities of Chinese companies.
By 2018, a growing number of American companies “have complained that China has pressured them into sharing their technology in similar ways”.

Qualcomm, which is a worldwide leader in semiconductors used in cellphones, wireless communications networks and semiconductor technology, was threatened by an unfriendly takeover by Broadcom, a Singapore-based company. The U.S. blocked the acquisition on national security grounds. There were several concerns. The acquisition of Qualcomm could have reduced U.S. superiority in semiconductors. It could also have reduced the U.S. lead in next generation 5G broadband networks. Qualcomm has a large business in China, and China has threatened to block Qualcomm has made an offer to acquire NXP Semiconductors, an important part of its growth strategy. The acquisition has been stalled by an antitrust review. In early May, 2018, “Chinese officials said that Qualcomm will have to make more concessions to compensate for the market power it would enjoy after completing the deal, without providing details.”

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 risks were that:
• China could have been in 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 presumable applies to Broadcom.
The Treasury department blocked the Broadcom acquisition of Qualcomm.

Tesla has substantial electric car intellectual property, including wireless car batteries, which it will protect by building an electric car manufacturing plant in Shanghai, thereby avoiding 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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