TELECOMS: China In New Steps Against Foreign Tech
Bottom line: Foreign technology suppliers will complain about new requirements for them to reveal source codes to Beijing for selling to Chinese banks, but will ultimately comply over fears of being shut out of the market.
China’s sudden obsession with national security risks posed by foreign technology has taken yet another step forward, with word that Beijing is preparing to place yet more restrictions on foreign firms that supply networking products and services to Chinese banks. As a longtime industry watcher, I need to quickly add my own view that this particular move isn’t really discriminatory against firms like IBM (NYSE: IBM), Cisco (Nasdaq: CSCO) and Hewlett-Packard (NYSE: HPQ), which are likely to feel the biggest effects.
The reality is that Chinese suppliers like Huawei and ZTE (HKEx: 763; Shenzhen: 000063) are also likely to get just as much scrutiny from Beijing about the safety of their equipment being installed in the nation’s banks. The big difference lies in access. Whereas the domestic players are all based in China and thus have no choice but to comply with any Beijing demands to audit their products, the foreign companies are all based offshore and thus are far more difficult to control.
The result is that Beijing is getting increasingly assertive in demanding that foreign tech firms make much of their core technology and China-related data accessible to the government in case it wants to conduct investigations. That kind of thinking appears to be behind the latest development, which will reportedly see foreign technology companies that sell to Chinese banks required to hand over source codes for their products to Beijing. (English article) Those same companies will also be required to subject their products to government audits, and set up R&D centers in China.
Beijing wants 75 percent of the technology used in the nation’s financial institutions to be “secure and controllable” by 2019, according to the reports, which cite an official document expected to be circulated to banks in the next few months. The document was approved late last year, though the definition of “secure and controllable” wasn’t defined, meaning banks and their technology suppliers will have to apply their own interpretations.
This is hardly the first time we’ve seen this kind of demand from Beijing in the last year, amid escalating tensions between China and the West over cybersecurity following the Edward Snowden scandal of 2013. Previous reports had indicated that Beijing was pressuring big domestic banks to stop buying foreign networking equipment completely, so this latest move may even be a compromise to an outright ban. (previous post)
We’ve also seen a number of moves on this issue in the telecoms and Internet sectors. In telecoms, iPhone maker Apple (Nasdaq: AAPL) last year agreed to store data related to its Chinese users on China-based computers. This week reports also emerged that the company has agreed to allow audits for all its products by Chinese national security officials. (previous post) Other earlier reports had indicated that networking equipment maker Cisco was also being shunned by at least one of China’s 3 big telcos, though other global suppliers are still doing big business in the market.
China certainly isn’t the only country playing this kind of national security game. The most notable case of similar behavior comes from the US, which in 2012 informally banned the sale of all Chinese telecoms equipment to American network operators. Australia has also largely banned the use of Chinese telecoms equipment in government-supported networks.
So, where is all this going? I’m sure the US companies will put up some resistance to the new requirements, calling them both intrusive and burdensome. But it will be hard for American firms like IBM and HP to get help from Washington, following the US ban on Chinese telecoms equipment. At the end of the day, the companies will have no choice but to comply with Beijing the same way that Apple has done, since the Chinese banking market is too big for them to lose.
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