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Why China Can Never Challenge Silicon Valley

Night Skyline with bright lights in Shanghai, China
Night Skyline with bright lights in Shanghai, China . Image via GoodFreePhotos
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Like many challengers before it, China is trying to position the new Nanjing research park as the next Silicon Valley. But unlike other global challengers, China is a hub of theft, and they are not following any of the ideals which built Silicon Valley into the greatest hub of technological innovation on earth. As I wrote earlier on this topic, this strategy will prevent China from ever becoming a global innovator.

China skirts around intellectual property protections in a variety of ways including manufacturing using stolen tech-product blueprints. The White House released a 35-page document describing their tactics and ultimate goal, which is to steal the “crown jewels” of American tech.

Theft and Espionage

We see China’s efforts furthered with “state-sponsored IP theft through physical theft, cyber-enabled espionage and theft, evasion of U.S. export control laws, and counterfeiting and piracy,” as described by the White House report.

The emergence of cyber tools for economic espionage is a “larger threat than more traditional espionage methods.” Closely related to hyper-effective espionage campaigns are China’s State-backed efforts to evade export control laws.

For example, state-backed Chinese companies take advantage of the duality of export control. As different laws apply to exports depending on their utility, technologies like aero-engine technologies are exported as commercial products but then adopted for Chinese military use.

The Trump administration claims that China has stolen American technologies and intellectual property through “company insiders” or others with access to trade secrets. Like a mix of the CIA and FBI, the Ministry of State Security is China’s spy agency. It is said to recruit U.S. intelligence officers to conduct espionage against America.

The White House report cites one instance in 2016 when Amin Yu, a Florida woman, was found guilty of illegally exporting American submarine parts to a Chinese University. It was later found that the university was associated with the Chinese Navy.

Forced Joint Ventures

China requires foreign companies to team up with local competitor-partners in some industries, like car production. Industry giants manufacture products in Chinese factories that are jointly owned by Chinese partners.

Many companies entrapped in these joint ventures have complained that they are simply training future rivals. Japanese and European businesses have stated that Chinese rail companies took technology from these “partnerships” to grow into high-speed rail giants.

Trade rules limit the amount of intellectual property that can be acquired from these joint ventures, but the Trump administration and some American businesses claim that Chinese officials often coercively demand technology under the table.

Bureaucratic Licensing

Chinese officials used bureaucratic licensing and approvals to gain control over sensitive data. A New York Times article gives an example in cloud computing. “New Chinese rules require companies running cloud-computing operations to be locally controlled. To comply, Apple and Amazon have handed stewardship of their Chinese data to local companies.”

Chinese officials also pressure foreign companies to hand over access to sensitive technology to comply with their review process which purports to assure product safety. The White House report cites a 2017 survey conducted by the US-China Business Council which found that many American companies have been forced to transfer tech to Chinese companies.

China denies that it requires technology transfer from foreign companies, Li Keqiang stated in March that “there will be no mandatory requirement for technology transfer.” This demonstrates a relaxation in rules of foreign ownership conveniently around the time that the White House began gearing up its anti-China protectionist trade moves.

However, China relaxes these rules, though, technology and knowledge are still to be exchanged for market access in China.

Buying When All Else Fails

If tech companies do not want to come to China, China will buy them. The White House report accuses the Chinese government of directing private Chinese companies to purchase American knowledge through corporate deals.

Chinese Communist Party has a mandated role in corporate governance. Through this role, the country invests in advanced technology sectors. This is governmental overinvolvement with the goal to gain control over sensitive data.

The most common form of Chinese investment in the U.S. is controlling stakes in those companies. This is one of the most direct ways that Chinese companies acquire U.S. technology. Meanwhile, China does not allow foreign companies to own a majority stake in most of their own sectors. This forms the aforementioned forced joint ventures.

America’s Response

Now, the Trump administration plans to levy tariffs and penalties on $60 billion in Chinese imports. But do not think this is a political problem. When Chinese companies bought some American semiconductor companies three years ago, the Obama administration rejected other Chinese deals citing threats to national security.

China has worked to position itself as the next Silicon Valley for decades. This tradition of theft and coercion is wrong and a detriment to American innovation and success.

The Long-Term Costs of Shortcuts

Shortcuts are a strategy to reduce the gap with a leader, not to overcome one. You cannot buy or steal a culture of innovation and its institutions. Real innovation is a discipline that must be built through hard work, investment, research and trial and error. It is competition and the struggle to innovate which builds the ability to innovate.

People, instructions and governments will not freely collaborate or share ideas. Real innovators will avoid working in or with China as much as possible. China is robbing itself of any future to build an actual Silicon Valley and dooming itself to permanent challenger status.

 

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