Seeking Alpha

U.S. Tech Firms Protest Beijing Security Rules

|
Includes: AUDVF, CSCO, HPQ, IBM
by: Doug Young

Bottom line: China's new rules for technology manufacturers over cybersecurity concerns will erupt into a war of words between Beijing and the West this year, and could result in one or more formal complaints to the WTO.

After clashing for much of 2014 over a series of antitrust probes that seemed to target big multinationals, China and the West look set for a new showdown in 2015 over broadening rules by Beijing aimed at protecting national security. The growing clash saw the foreign companies, many from the U.S., take the unusual step of formally complaining last week over new Beijing rules that they suggest are increasingly intrusive and opaque. Beijing fired back by saying the rights of foreign technology firms would be protected in accordance with Chinese law.

This latest clash highlights a worrisome trend in China's relations with western companies. That trend is seeing China launch new initiatives aimed at protecting its national interests, and then taking relatively extreme steps to execute its agenda. At least part of the extremeness is due to lack of experience, since China had few antitrust or national security concerns when it was a closed society and all companies were state-owned. Chinese regulators are often also quick to implement new instructions from Beijing, and craft plans without thorough reviews and consideration of how their orders might affect companies and other affected parties.

The big source of this latest clash is the Edward Snowden scandal of 2013, which exposed the huge vulnerability of Chinese companies and government computer systems to cyberspying. Beijing has reacted by assuming that foreign tech companies work hand-in-hand with their local governments since that was how China itself did business until the 1990s when nearly all major firms were state-owned.

Of course, it didn't help that the U.S. and other western governments made similar assumptions, prompting Washington to ban the import of all Chinese telecoms networking equipment from major exporters Huawei and ZTE in 2013. China has imposed several smaller but similar restrictions on foreign tech equipment sellers over the last two years. But the move gained momentum last month when Beijing said all foreign firms that sold networking equipment to Chinese banks would have to make their products available for government audits and also give their source code to Beijing (previous post).

American firms responded by formally issuing a protest letter through the U.S. Chamber of Commerce last week, calling the new rules "intrusive" and calling China's approach to cybersecurity "opaque" and "discriminatory." (English article). I previously commented that these rules really aren't discriminatory against foreign firms, since China already has similar access to products manufactured by domestic companies.

But all that really doesn't matter to big names like IBM (NYSE:IBM), Cisco (NASDAQ:CSCO) and Hewlett-Packard (NYSE:HPQ), which feel like China is overreacting to their role in the cybersecurity threat. I've been covering the China business scene for more than a decade now and can say with relative certainty that this kind of joint complaint from the major multinationals is quite rare, as these companies don't like to upset Beijing. We saw companies from both the U.S. and Europe issue similar joint complaints last year when China conducted antitrust probes that seemed to target a wide range of big multinationals like Audi (OTCPK:AUDVF), Microsoft (NASDAQ:MSFT) and Qualcomm (NASDAQ:QCOM) (previous post).

In this new case, China responded to the latest complaints by simply saying that it would "protect the legitimate interests of foreign companies in accordance with the law" (English article). This kind of broad response lacking details is typical of China, and it almost certainly won't satisfy any of the foreign companies. Accordingly, look for this clash to heat up as we head into the spring and summer months, with Beijing and western governments likely to exchange harsh words that could ultimately result in one or more formal complaints to the World Trade Organization by year end.

Disclosure: Author has holdings in CSCO.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.