China is Playing the Long Game as US Tech Firms Cash In

The United States has long assured itself that closed societies simply cannot compete with the ingenuity of open ones. To this, there is much to be said of the so-called imagination economy and the way the U.S. has benefited from creating a system in which there are enormous incentives for dreaming big and shooting for the stars. However, China has proven increasingly adept at using its wealth, autocratic power, and access to its massive, tightly-regulated domestic market to largely circumvent what might be called the billion-dollar-idea phase of international competition.

The U.S. has long been the place in which the next big thing has been born. The personal computer, the internet, the smartphone, social media, and so many more revolutionary products of our current era were invented and introduced to the market by American companies. But while China’s closed society may not be nearly as conducive to the invention of such market-disrupting technologies, it has used those other strengths to considerable advantage. In the United States, its largest corporations, and most influential politicians and public figures, China has also found many partners eager to play the short game so long as they can stuff their pockets.

The United States' trade gap with China widened considerably last year. In fact, it was the second-largest gap on record between the two nations. Flush with all those U.S. dollars, China has been investing in our domestic economy for years, buying up everything from mining operations to manufacturing plants. However, China has also used its strengths to close what we might call the creativity gap by enforcing stringent requirements on U.S. companies seeking access to the Chinese consumer market to essentially allow the state to take a look under the hood, so to speak.

Known in economics as "forced technology transfer,“ China routinely requires foreign companies that want to operate in China to form joint ventures with Chinese firms, sharing everything from proprietary software code to product research and other sensitive trade secrets. Because there really is no such thing as a private enterprise in China, that means that the tech can easily find its way into central planning projects at the state level.

Yes, many of these companies are sowing the seeds of their own demise, but unlike Chinese corporations for whom both trivial and critical matters enjoy state oversight, U.S. corporations and their CEOs are foremost incentivized by short-term, quarter-to-quarter results that are heavily weighted toward share price. Access to both Chinese consumer markets and its cheap labor markets are powerful incentives to play the short game, especially when your compensation is largely realized in stock options.

Tesla CEO Elon Musk, who on any given day might be the richest man on the planet, heard the siren call from the East and now builds half of the company’s electric cars in China. Chinese regulations require all businesses to retain all digital records of data it collects from customers in China. In fact, Tesla cannot even perform software updates to vehicles in China without government approval. Musk, who is notoriously anti-Big Brother in his adopted homeland of the United States, not only accepted the requirement but praised it.

On one level, it may seem like a small price to pay. Chinese President Xi Jinping made significant regulatory concessions to encourage Musk to bet much of the company’s future on its relationship with China by way of massive tax breaks, access to below-market, low-interest loans, and, of course, access to all that cheap labor in a country with relatively lax environmental rules. However, there’s already evidence that it may have been a devil’s bargain.

China’s main interest in Tesla is to help create a domestic supply chain for the growing electric vehicle market. Tesla, the preeminent player in the EV sector, will surely create a domestic market and supply chain. However, once that has been established, it will be domestic companies that benefit, especially once the Chinese government grants them favoritism in the markets, as is typical. Xpeng, a Chinese electric car company, is already targeting Tesla in the European market with the G9 electric SUV, which seems to blend Tesla-like properties with the design style of Mercedes Benz, even lifting the latter’s G designation for luxury SUVs.

Musk has also demonstrated an alarming amount of fealty to Xi and the political agenda of the Chinese Communist Party. The native South African and U.S. citizen has more than 60 million followers on Twitter. He is, hands down, the most visible CEO in the world, with a cult following of tech fans that rivals even the late Apple founder Steve Jobs. But while his Tweets about American policy and leadership tend to be rather combative and libertarian, Musk routinely showers Xi and China's business practices with praise, demonstrating an almost robotic fealty.

In perhaps his biggest knee-bend to date, Musk even agreed to open a showroom in the country's Xinjiang Province, where China is holding about a million of its Uyghur Muslims in concentration camps. An unlikely market for an early showroom, to say the least, the move was clearly a tacit endorsement of China’s right to do so, or, at the very least, a signal that he would not allow Chinese human rights abuses to interfere with his business there.

Musk may be the most high-profile American CEO to kowtow to China, but he’s far from alone. In 2016, Apple, despite having made highly profitable use of China’s cheap labor markets, was nevertheless struggling to sell its phones in Chinese markets. Chinese officials reportedly feared that the company was not doing enough to contribute to local economies and used a campaign of bad publicity within the state-controlled media’s propaganda channels to dampen domestic enthusiasm about its products while simultaneously hampering the company with regulatory crackdowns, and threats to target Apple Pay, iCloud, and the Apple App Store with additional regulations.

Apple CEO Tim Cook signed a "memorandum of understanding" between Apple and China's National Development and Reform Commission, agreeing to a number of concessions by Apple in return for regulatory exemptions. The agreement, reportedly worth $275 billion, included a pledge from Apple to help the Chinese domestic manufacturers develop "the most advanced manufacturing technologies," "support the training of high-quality Chinese talents," use more components and software from Chinese suppliers, collaborate with universities, and directly invest in domestic tech companies. Almost immediately, Apple announced a $1 billion investment in a Chinese Uber competitor.

Now, these sorts of investments aren’t entirely unusual when multinational companies seek entrance to new markets, as the corporations often have a vested interest in developing the supply chains for their products and the talent to deliver them. However, given China’s penchant for both using tech developed elsewhere for authoritarian domestic purposes and stealing the tech of companies that do business there, the capitulation of such a massive U.S. corporation is beyond noteworthy. Apple famously stood up to the FBI when it wanted access to Apple’s ultra-secure encryption in a terrorism case. Will it do the same when the Chinese Communist Party asks for the key?

To better understand Apple’s dilemma, the earlier experience of companies like Yahoo and Google are instructive. In the early 2000s, Yahoo, which preceded Google as the world’s number one search engine, went all-in on China, agreeing to censor the search results delivered to Chinese users in order to please the Chinese Communist Party. That support culminated in an infamous incident in 2007, during which it was revealed that the company had turned over private information on two journalists who were subsequently given 10-year prison sentences. Yahoo eventually settled a lawsuit with the families of the two men and established a $17 million fund to support Chinese dissidents, but never recovered its reputation.

Google had also made the devil’s bargain, rationalizing that expanding access to information among the Chinese citizenry was worth acquiescing to the government’s demands, which included scrubbing search engine results to exclude material that was critical of the Chinese Communist Party. Google famously shut down its Chinese search engine in 2010, but it never left the country, pouring billions of dollars into other ventures under the Alphabet umbrella, including its self-driving car project.

In 2018, having sufficiently repaired its relationship with CCP officials, Google got back in the search game, helping China to develop a more authoritarian search engine. Dubbed Dragonfly, it reportedly linked user phone numbers to their web searches and censored websites like Wikipedia and others that contained information deemed detrimental by the CCP. When word of the project was leaked to the media, Google received swift backlash and claims to have shut the project down. However, it is unknown how much of that tech remained in the hands of Chinese companies, and it is noteworthy that Google’s parent company continues to invest heavily in the market. In fact, Alphabet had significant ties to Chinese tech company Huawei Technologies until the latter was added to a list of Chinese tech companies on a U.S. trade black list after it was caught acting as a conduit for Iran in circumventing trade sanctions in order to acquire U.S. technologies.

There is no question that tech companies will continue to attempt to find a way to do business in China, which has the largest online market in the world, with a user base comparable to the United States and India combined and worth about $100 billion and growing. But corporations must essentially accept the theft of their IP in order to play, with one in five North American-based corporations on the CNBC Global CFO Council reporting in 2019 that Chinese companies had stolen their intellectual property within the last year.

In an extreme example of what this can look like, consider the case of semiconductor giant ARM, once a British corporation (Apple was an initial investor) that was acquired by Japanese monolith SoftBank in 2016. As per its typical strategy, SoftBank’s plans to increase ARM’s profitability included expanding into the Chinese market, where it had to take on a domestic partner that would hold 51 percent of the joint venture, including control of valuable intellectual property (ARM doesn't actually produce chips, rather, it licenses its design tech to companies like Intel and holds the most ubiquitous semiconductor tech in the world).

When the Chinese CEO of that venture was caught giving discounts to customers who would invest in his other corporation, ARM’s board moved to fire him. However, he essentially refused. Because his name was on the license to operate in China, Chinese law gave him control of the company, and he brazenly spun off ARM China as a separate corporation that would sell the very tech it had acquired control of in the partnership.

The company, or at least its Chinese operation, was essentially stolen in plain sight and there have been no repercussions, possibly because SoftBank thought better of the consequences making a fuss may have on its intent to sell ARM to U.S.-based Nvidia in a deal worth $66 billion that regulators in both China and the U.S. were looking closely at. That deal collapsed this week.

Even when U.S. tech companies do not get into bed with Chinese partners, they are still at risk of China attempting to pirate their tech and build nearly-identical products that can be grown in its massive and rigged domestic market before taking on their progenitors in international competition. Douyin, China’s domestic version of its TikTok app, was essentially a copycat product of U.S. app Dubsmash. Alibaba was the Chinese answer to Amazon. And while tech may be dominated by companies like Facebook, Google, Apple, and Amazon, 7 of the top 20 online companies in the world are Chinese, a share that has been steadily growing.

The lesson to be learned is that sitting back and relying on the continuation of a trend in which our collective creative genius maintains our competitive advantages in the decades to come is foolhardy at best. As China rises, more and more of our top tech companies will continue to make the devil’s bargain. This, combined with China’s continuing domestic tech growth and refusal to respect the entire concept of intellectual property rights will only hasten our decline in coming decades. Much of the answer lies in domestic regulation and cultural campaigns. However, as I’ll explain in future columns on the subjects, these are equally treacherous terrains on which China has been doing far more than we have in terms of building advantages.

Dennis "Mitch" Maley is an editor and columnist for The Bradenton Times and the host of ourweekly podcast. With over two decades of experience as a journalist, he has covered Manatee County governmentsince 2010. He is a graduate of Shippensburg University and later served as a Captain in the U.S. Army. Clickherefor his bio. His 4th novel, Burn Black Wall Street Burn, was released in 2021 and is availablehere.