Chinese Paranoia

Command and control: China’s Communist Party extends reach into foreign companies
By Simon Denyer

Chinese dictator attends the 19th National Congress of the Communist Party of China at the Great Hall of the People in Beijing in October. Xi’s vision of complete control over Chinese life is intruding into the boardrooms of foreign companies.

BEIJING  — American and European companies involved in joint ventures with state-owned Chinese firms have been asked in recent months to give internal Communist Party cells an explicit role in decision-making, executives and business groups say.
It is, they say, a worrying demand that threatens to put politics before profits, and the interests of the party above all other considerations. 

It suggests that foreign companies are no longer exempt from Xi Jinping’s overarching vision of complete control.
“The creeping intrusion by the party apparatus into the boardrooms of foreign-invested enterprises has not yet manifested itself on a large scale, but things are certainly going down that path,” said James Zimmerman, a managing partner of the law firm Sheppard, Mullin, Richter and Hampton and former chairman of the American Chamber of Commerce in China, who is instructing clients to “push back.”
The party’s demand would give its cells a formal role in approving management decisions, such as investment plans or personnel changes. 

And that is ringing alarm bells.
At the same time, a campaign to reinforce China’s draconian censorship of the Internet is beginning to affect foreign companies.
The twin efforts to keep tabs on foreign companies are an expression of the Communist Party’s constant paranoia about internal stability. 

But they also represent a shift in the balance of power here, as China feels itself to be stronger economically and Western businesses more dispensable.
Not every company is affected by the changes. 

Larger enterprises have dedicated lines and special technology ensuring unfettered Internet access. But the smaller ones do not have that latitude.
By the same token, wholly owned foreign ventures have not faced the same pressure from internal party cells, while even companies involved in joint ventures are pushing back against the new demands.
But everyone is aware which way the wind is blowing.
For decades, China was something of an El Dorado for foreign companies, its low wages luring manufacturers and its vast consumer market and rapidly expanding middle class presenting an unrivaled opportunity for growth — even if it was always a challenging place to operate. 

These days, the mood has perceptibly changed: China is no longer so keen to put out the welcome mat, and foreign companies are increasingly prone to complain of unfair treatment.
Even after the wholesale transformation of the Chinese economy, the Communist Party has remained ever present in business. 

Executives of state-owned firms are party members, while under Chinese law, any organization that has three or more party members has to provide the “necessary conditions” for cadres to establish a party cell.
In practice, that rule has not, up to now, been intrusive.
Party members might use company premises to meet, but they would tend to do so after office hours and might help organize social events for employees. 

Executives described relations as friendly and cooperative, with the cells acting at times as if they were adjuncts to existing human resources departments.
In the past year, that has begun to change. 

Party members are expected to spend more time studying Xi Jinping Thought, the president’s political theory, in office hours or in time-consuming off-site retreats. 

Although a formal role for party cells in management decisions is not required under Chinese law, business executives are worried about a trend toward growing party interference.
“The long-term negative cost, in my view, is the inefficiencies and wastefulness that are likely to result from political influence that has no other purpose than to drive the political machine,” Zimmerman said.
The European Chamber of Commerce in China said in a statement that introducing an “additional layer of governance” would have serious consequences for the independent decision-making ability of joint-venture companies and deter investment from the continent.
China’s investment law stipulates that foreign companies must enter into joint ventures in many sectors of the economy. 

Already, many companies are being used simply to mine their intellectual property, before they are one day pushed aside by their erstwhile partners.
For now, minority joint ventures are feeling the most heat from party cells, but even 50-50 joint ventures have reported a growing assertiveness, executives and business groups say.
“That’s the danger European investors see, a kind of salami-slicing tactics, that starts with the minority joint ventures, then heads for the 50-50 joint ventures, and eventually heading for the 100 percent foreign-owned companies,” said Joerg Wuttke, former president of the European Chamber of Commerce.
“We really want people here to understand: We don’t object to party activities or people, but we do want them to stay away from operational questions,” Wuttke said.
The controls on the Internet could follow a similar salami-slicing tactic, whereby controls are extended across smaller companies first.
China has embarked on a major crackdown on VPNs, or virtual private networks, technology that is widely used to jump over the country’s Great Firewall to gain access to banned websites such as Google, Facebook, Twitter and many foreign news sites.
Although large companies use dedicated lines and technology known as MultiProtocol Label Switching, which allows them to bypass the firewall and encrypt messages, that’s often too expensive for small and medium-size enterprises that rely on commercial VPN and encryption software.
Some companies have had ports closed down until they register with local telecommunications operators and report who is accessing the Internet and why.
To regain full access to the Internet, one American company was asked to sign a “solemn commitment” — that it would obey the Chinese Communist Party’s “seven bottom lines,” do nothing to undermine the socialist system, public order or social morality, and wouldn’t use the Internet to violate the interests of the state.

Chinese dictator shown on a screen in front of logos of China’s leading Internet companies, Tencent, Baidu and Alibaba Group, during the fourth World Internet Conference in Wuzhen, China, in December. 
The agreement, made in Shanghai last November, is typical of the hoops some foreign companies are having to jump through to maintain access to the Web, and to continue doing business in a country where politics is back on top of the agenda.
That has led many American companies to take a “much more cautious approach” to regulating who within their organization uses VPN software, said Jake Parker, vice president of China operations at the U.S.-China Business Council in Beijing.
A mergers and acquisitions team might, for example, be cleared to access websites such as Reuters and the Financial Times to make better business decisions, but other staffers would be more restricted, Parker said.
“That’s because there is an emerging consensus among our legal counsels that using VPNs for noncommercial functions could be construed as potentially violating China’s rules and regulations,” he said. 

“There is a ‘more safe than sorry’ approach.”
Parker said not everyone was taking this approach, but there has been a shift in that direction, with “10, 15 or 20” companies saying they had adopted similar procedures.
An ongoing clampdown on VPN use by private individuals could also have a negative effect on recruitment, executives say: Parents will be reluctant to relocate to China if their children can’t access their preferred social media sites, many of which are banned here.
A more fundamental anxiety is that the Communist Party will ultimately demand to see everything that flows in and out of the country over the Internet, under China’s new Cybersecurity Law, which went into effect in June.
“How safe will intellectual property and trade secrets be? Will servers have to be stored here? Will companies have to hand over encryption codes to Chinese authorities?” asked a ­Beijing-based diplomat, who spoke on the condition of anonymity to discuss sensitive matters.
“Could perhaps entire industry sectors become off limits for foreigners for security reasons? It’s not clear whether Chinese authorities are aware of possible collateral damage to businesses.”
To an extent, Beijing does not care as much about foreign firms as it used to, with a definite hubris setting in after the Western financial crisis, experts say.
“Foreign companies used to be seen as special here, as friends of China,” said James McGregor, a China-based author and businessman. 

“But that kind of flipped during the Western financial crisis.”
Attitudes changed, he said. 

China began to believe its system of state-directed capitalism was superior to the West’s, and that foreign companies are simply “here to serve us.”
One consequence: As President Trump starts to take retaliatory action against China over its trade and business practices, Beijing is putting off some of its most valuable lobbying partners.
“In the past, foreign business has been an important ally for China, but the country now appears to be alienating it at a time when it most needs friends abroad,” said Wuttke, the former president of the European Chamber of Commerce.

U.S. Tech Quislings

How Qualcomm Is Backing China’s Tech Ambitions
By DAVID BARBOZA

As the Chinese government develops drones, the American technology giant Qualcomm is helping. The same goes for artificial intelligence, mobile technology and supercomputers. 

Qualcomm is also working to help Chinese companies like Huawei break into overseas markets in support of China’s “go global” campaign to develop big multinational brands.
Qualcomm is providing money, expertise and engineering for Beijing’s master plan to create its own technology superpowers.
Big American companies fiercely protect their intellectual property and trade secrets, fearful of giving an edge to rivals. 

But they have little choice in China — and Washington is looking on with alarm.
To gain access to the Chinese market, American companies are being forced to transfer technology, create joint ventures, lower prices and aid homegrown players. 

Those efforts form the backbone of Xi Jinping’s ambitious plan to ensure that China’s companies, military and government dominate core areas of technology like artificial intelligence and semiconductors.
As concerns mount about Beijing’s industrial policy, the Trump administration is preparing a broad investigation into potential violations of American intellectual property, according to people with knowledge of the matter. 

Congress is also considering ways to restrict China’s ability to acquire advanced technology by toughening rules to prevent the purchase of American assets and limit technology transfers.

In this arena, America’s economic interests are aligned with its national security needs. 

The worry is that by teaming up with China, American companies could be sowing the seeds of their own destruction, as well as handing over critical technology that the United States relies on for its military, space and defense programs.
Advanced Micro Devices and Hewlett Packard Enterprise are working with Chinese companies to develop server chips, creating rivals to their own product. 

Intel is working with the Chinese to build high-end mobile chips, in competition with Qualcomm. IBM has agreed to transfer valuable technology that could enable China to break into the lucrative mainframe banking business.
“There’s a great deal of unease in Washington,” said James Lewis, an analyst at the Center for Strategic and International Studies, a Washington-based think tank. 

“The defense, intelligence agencies and others are concerned that advanced chip-making capabilities are going to China.”
Qualcomm declined to comment, as did Intel.
Qualcomm is caught in the middle.
The world’s dominant mobile phone chip maker, Qualcomm ran afoul of the Chinese government, getting hit in 2015 with a record $975 million fine for anticompetitive behavior. 

To get back in Beijing’s good graces, the company agreed to lower its prices in China, promised to shift more of its high-end manufacturing to partners in China, and pledged to upgrade the country’s technology capabilities.
The extent of Qualcomm’s involvement with the Chinese government — and the complications for American tech giants — is seen in a low-slung office building in the southwest part of the country. There, a team of engineers is developing leading-edge microchips to compete with the finest made by Intel. 

The chips will help power a huge data and cloud center with the potential to strengthen the country’s computing capabilities. 

No longer content to rely on buying the chips that go into cellphones, computers and cars, China now wants to design and build the brains that drive much of the digital world.
The government is providing land and financing to the start-up formed with Qualcomm, called Huaxintong Semiconductor. 

Qualcomm has provided the technology and about $140 million in initial funding.
“Qualcomm has a balancing act,” said Willy Shih, who teaches at Harvard Business School. 

“Most of the world’s PCs are made in China, and most of the world’s smartphones too, so they have to play along. It’s a fact of life.”
Qualcomm was early to break into China.
In the mid-1990s, as China’s economy began to boom, Bill Clinton pressed the country’s leaders to open to American technology companies.
Members of the Clinton administration, including Charlene Barshefsky, the United States trade representative, and William M. Daley, the secretary of commerce, were dispatched to Beijing to hammer out the details. 

They pushed for one company by name: Qualcomm.
“At the time, they were the only U.S. show in town,” Ms. Barshefsky said.
“Bill Daley and I pushed the Chinese hard on accepting the U.S. standard for wireless technology,” she added, “and that was Qualcomm.”
Mobile phone adoption was taking off globally, largely backed by a European wireless standard called G.S.M., or global system for mobile communications. 

Qualcomm had a competing American standard called C.D.M.A., or Code Division Multiple Access.
Irwin M. Jacobs, a founder of Qualcomm, spearheaded an aggressive lobbying campaign in Washington and Beijing, promoting the technology’s potential to transform wireless communication markets.
“We knew China would be important, and they didn’t have their own system,” said Perry LaForge, a former Qualcomm executive. 

“We also told them this system would give them an opportunity to manufacture their own handsets, and not rely on buying them from other countries.”
When Qualcomm first entered China in the late 1990s, it was slow to gain traction. 

The company struggled to find Chinese partners to produce mobile phones that worked with its network. 

China also tried to develop its own wireless standard.
Qualcomm eventually won out, helping write the standards for next-generation mobile technology, 3G and 4G service. 

The standard championed by European telecom providers faded rapidly. 

And China’s homegrown technology struggled.
By 2013, virtually every wireless device around the world was reliant on either Qualcomm’s chips or its patents — enough to provide some of the technology industry’s fattest profit margins.
With its dominance rising, global brands like Apple and Samsung began complaining to regulators around the world, citing “discriminatory” pricing practices and high royalty fees. 

In China, a trade group made up of the country’s major handset makers complained about patent holders levying “exorbitant licensing fees.”
“These days a smartphone is covered by about 250,000 patents,” said Dieter Ernst, a senior fellow at the East-West Center, a research and educational center based in Honolulu. 

“A Chinese smartphone maker needs to negotiate license agreements with companies like Qualcomm that own the essential patents.”
“The Chinese government was worried about this,” he added. 

“That all these costs could constrain Chinese companies.”
The raids began at dawn, in late November 2013. 

Investigators descended upon Qualcomm’s offices in Beijing and Shanghai, questioning the staff and hauling away laptops and documents.
At the time of the raids, the San Diego-based company’s senior managers were at the Ritz-Carlton Hotel in New York, attending an investor conference. 

The executives were planning to talk about the company’s strategy. 

Instead, they began fielding frantic phone calls from China.
The China business, which accounted for more than half of its global revenue, was in trouble.
A week later, one of the country’s most powerful regulatory agencies, the National Development and Reform Commission (N.D.R.C.), announced that it was looking into whether Qualcomm had abused its power in the sale of mobile phone chips. 

“Qualcomm came to control so much of the chip market in China,” said Louie Ming, a former Qualcomm executive in China. 

“It was clear they were eventually going to run into antitrust problems.”
While Qualcomm agreed to fully cooperate with the investigation, some senior executives appealed to the Obama administration, pressing the White House to raise the issue with China’s senior leaders, according to a former administration official.
Qualcomm’s troubles went beyond China. 

The company was also under scrutiny by antitrust regulators in the European Union and South Korea, as well as by the United States Federal Trade Commission.
China didn’t back down. 

The head of the N.D.R.C. branded Qualcomm a monopoly.
In February 2015, after a 15-month-long investigation, Qualcomm settled allegations in China that it had charged unfairly high prices for its chips and patents. 

The company agreed to pay the $975 million fine — about 8 percent of its annual revenue in China — and to lower the prices for chips sold in the country.
“We are pleased that the resolution has removed the uncertainty surrounding our business in China, and we will now focus our full attention and resources on supporting our customers and partners in China,” said Steve Mollenkopf, the company’s chief executive, said at the time.
Qualcomm then went into business with the Chinese government.
There was a $150 million investment fund to help Chinese start-ups; new research and design facilities set up with Chinese companies such as Huawei and Tencent; and a partnership with a Beijing-based company called Thundersoft to develop drones, virtual reality goggles and internet-connected devices.
Qualcomm is also helping the Chinese government develop supercomputers, a technology the United States government has discouraged American companies from supporting overseas. 

In May, Qualcomm agreed to form a joint venture with other state-backed firms to design and sell mass-market smartphone chips. 

And to help make Chinese chip manufacturing more competitive, Qualcomm has pledged to shift more of its high-end production — long done by outside contractors in Taiwan and South Korea — to China.Continue reading the main story

Continue reading the main story

The Price of Access to a Big Market

Beijing is pressing American technology giants to form joint ventures or partnerships with Chinese companies and transfer advanced technology. The enterprises, in which American companies usually take a minority stake, are backed by the government.

Company	Partner	Date	Product	Investment
AMD	Tianjin Haiguang Advanced Technology Investment Company	2016	Server chips	$293 million
Qualcomm	Guizhou government	2016	High-end server chips	$280 million
Brocade	Guizhou government	2016	Data center networking solutions	unknown
VMWare	Sugon Information	2016	Cloud computing and virtualization software	$50 million
Hewlett Packard Enterprise	Tsinghua Holdings Unisplendour Group	2016	Networking servers and storage systems	$4.5 billion
Microsoft	C.E.T.C. Group	2015	Software	$40 million
Western Digital	Tsinghua Holdings Unisplendour Group	2016	Data center storage systems	$300 million
Cisco Systems	Inspur Group	2016	Networking systems	$100 million
Intel	Spreadtrum/ RDA Microelectronics	2014	Mobile phone chips	$1.5 billion

The investment figure is either the initial investment in the venture or the U.S. company's investment in it. | By THE NEW YORK TIMES

“This is what China does better than anyone else,” said Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a think tank focused on technology policy that has conducted studies detailing the Chinese government’s pressure on technology companies.
“They have a large carrot and a large stick,” he said. 

“And they have a market no C.E.O. can walk away from.”
Qualcomm’s biggest new venture is taking shape in southwest China’s Guizhou Province. Determined to leap into advanced technology, China has designated a large parcel of land in the provincial capital of Guiyang as the home of a new industrial park for supercomputing, data centers and cloud computing. 

The country’s large state-run telecom operators and its internet behemoths, including Alibaba and Tencent, are moving in, to build massive server farms. 

The region offers lower energy costs and abundant supplies of water, necessary to cool server farms.
A year ago, Qualcomm set up a joint venture with the Guizhou government and pledged to invest about $140 million for a minority stake in the business, situated in a development zone that has also attracted the interest of Microsoft and Dell. 

Qualcomm says it received American government approval for the deal.
The new Qualcomm joint venture, Huaxintong Semiconductor, broke ground on the site in 2016, and now operates in a 46,000-square-foot design and engineering center. 

A major test of the partnership will come when the joint venture’s first server chips are released — helping Qualcomm and the Chinese government stake out new ground. 

The Chinese government will control the chips and reap most of the profits.
In late March, Qualcomm’s president, Derek K. Aberle, flew to Guizhou to meet a powerful local government leader, Chen Min'er, a confidant of the Chinese president. 

Seated in a government hall, before an enormous landscape painting, Mr. Aberle pledged to “continually cooperate” with the Chinese government.

Apple the Traitor

Apple Sues Qualcomm In China, Harms U.S. National Security
By Gordon G. Chang

Wednesday, Beijing’s Intellectual Property Court announced that Apple had instituted two lawsuits against Qualcomm.
In one of the cases, the Cupertino-based giant alleges Qualcomm did not license “standard essential patents” properly.
In the other case—the far more significant of the two—Apple is seeking 1 billion yuan ($145.3 million) for violations of China’s Anti-Monopoly Law.
Whatever the merits of the anti-monopoly case—and I am expressing no view on merits here—an Apple win will almost certainly undermine U.S. national security.
As an initial matter, Apple vs. Qualcomm is an ordinary dispute between two giants over—what else?—money. 

Qualcomm’s general counsel, Don Rosenberg, who denied the validity of his adversary’s claims, said the two cases in China “are just part of Apple’s efforts to find ways to pay less for Qualcomm’s technology.”
He’s undoubtedly correct on that score as companies always seek to reduce costs. 

The issue is whether Qualcomm, the world’s leader in chips for mobile phones, violated the Anti-Monopoly Law.
Yet to speak about compliance or violation of the AML, as the antimonopoly law is sometimes called, mischaracterizes the situation.
Yes, the AML is technically a law as it was enacted by the National People’s Congress, the highest organ of state power in China, in 2007. 

The law, however, is a fiction, at least in practical terms, because it is less a legal rule than a club Chinese officials consistently use on foreign companies. 

While Xi Jinping, China’s supremo, has presided over the combination of state enterprises and the recreation of formal monopolies without challenge, Chinese competition officials have been using the AML to undermine the competitiveness of foreign companies, especially American ones.
It should be no surprise, then, that the first known application of the law was against Coca-Cola, when it tried to buy domestically owned Huiyuan Juice Group. 

The deal was blocked in March 2009.
Back then, the AML was best seen as an attempt to provide a statutory justification for what officials had already been doing, stopping acquisitions of local businesses. 

In the months before the AML became effective in August 2008, Beijing had arbitrarily used its power to stop, most notably, Microsoft, Goldman Sachs, and Carlyle in proposed high-profile acquisitions.
Having protected domestic enterprises from takeover, officials in the Xi era have adapted the AML to further Beijing’s goal of fostering domestic technology companies — by injuring foreign ones.
The most notable instance of the use of the AML for this purpose involves, perhaps coincidentally, Qualcomm. 

The San Diego-based business in 2015 both paid a 6.1 billion yuan ($975 million) fine for deemed violations of the AML and agreed in a rectification plan to reduce royalties.
Qualcomm’s business model, largely based on royalty streams, has been under attack in the last half decade in, most importantly, South Korea and the U.S. 

In the U.S. this month, the Federal Trade Commission filed a complaint against Qualcomm on the 17th and Apple brought suit against the company in Federal court, in the Southern District of California, on the 20th.
Whatever the merits of these actions in the U.S.—and I express no opinion on these either—the plundering of an American tech company in China can only undermine the United States. 

And that is exactly what will happen because Apple filed suit in China.
The Chinese central government, led by the Communist Party, will do whatever it thinks best for China’s interests in deciding Apple vs. Qualcomm, and it’s clear Beijing will side with Apple. 

If it sides with Apple, it will undermine protection of intellectual property. 

If it undermines intellectual property, it erodes the American economy. 

The American economy, of course, is increasingly dependent on creating such property and licensing it around the world. 

And these days, economic issues ultimately have national security implications, especially when they involve technology. 

So don’t expect Qualcomm to get a fair trial in the Beijing Intellectual Property Court. 

There can be no impartial adjudication in China when the Communist Party believes it has an interest.
In fact, this month China’s top judge effectively confirmed the unfairness of the Chinese court system and even boasted about it. 

On the 14th, Chief Justice Zhou Qiang of the Supreme People’s Court told top provincial judges to reject “erroneous” Western notions of judicial independence. 

Speaking of the “trap” of Western ideas, he rejected criticism of the Party’s leading role. 

“Bare your swords towards false Western ideals like judicial independence,” he demanded.
Zhou’s statement is notably not because it breaks new ideological ground—it does not— but because it is reflective of regressive trends in the Chinese capital. 

As the Financial Times noted, Zhou, once a reformist figure, “fired a warning shot at judicial reformers by formally acknowledging that China’s court system is not independent of the Communist Party and rejecting attempts to make it so.”

Jerome Cohen, perhaps the world’s leading expert on the Chinese judicial system, put it this way: “This statement is the most enormous ideological setback for decades of halting, uneven progress toward the creation of a professional, impartial judiciary.”
In short, because Party interference in the court system is increasing, Apple has an excellent chance in prevailing in its anti-monopoly suit in China.
And every American—even Apple shareholders, who also benefit from the protection of intellectual property—should be rooting for the other side.

Nation of Thieves

Chinese man going to prison for stealing US corn seeds, DuPont trade secrets
www.foxnews.com

Corn theft is taken seriously in United States.

A naturalized American citizen originally from China has been sentenced to three years in prison for his part in stealing corn scientifically-enhanced seeds and sending them to a corporation in Beijing.
Businessman Mo Hailong, employed by Beijing’s Kings Nower Seed, worked with five other Chinese nationals to rob trade secrets from a pair of American agricultural heavyweights: Dupont Pioneer and Monsanto.
Working side by side, the team reportedly smuggled around 1,000 pounds of corn seeds to Beijing (some of which were discovered by custom officers hidden in manila envelopes surrounded by boxes of microwaveable popcorn). 

Those samples that made it through customs were sent out to scientists at Beijing Dabeinong Technology Group Co., the parent company of Kings Nower Seed, to be studied and duplicated in the country.
“We need to send a message to China that this kind of criminal behavior is not tolerated in the United States,” said US District Court Judge Stephanie Rose, who presided over the case, on Wednesday when handing over the ruling decision.
But stealing these patented seeds isn't something either of these companies take likely.

And the U.S. government agrees. 

According to the FBI a “parent” or “inbred” seed “constitutes valuable intellectual property of a seed producer.” 

Based on a press release the bureau released related to a seed theft in 2013, “the estimated loss on an inbred line of seed is approximately five to eight years of research and a minimum of 30 to 40 million dollars.”
Monsanto has previously aggressively protected its technology, and has been known to sue farmers who saved seeds from prior plantings for reuse. 

That action violates a contract farmers using Monsanto seeds are required to sign.
Now Hailong, who lived in America for two decades and has a wife and two children who are all U.S. citizens, will likely face deportation when he’s released. 

He’ll also have to pay restitution to Monsanto and Dupont Pioneer for the theft.