It’s been a bad week or so for wagers that a quickie deal will settle the escalating US-China trade war. Beijing offering bigger sorghum purchases isn’t going to cut it anymore. While President Trump has long focused on the trade imbalance between the two nations, the economic and national security implications of technology theft have become paramount.
Last week, The Wall Street Journal published “How China Systematically Pries Technology From US Companies,” a piece documenting in fascinating detail how China steals American know-how. One vignette: DuPont accused its Chinese partner of ripping off technology used to make textile polymers made from corn. After battling for a year in arbitration, 20 investigators from China’s antitrust authority raided DuPont’s Shanghai offices. They demanded computer passwords, printed documents, and seized computers.
But what Bloomberg has apparently found is far more disturbing. In “The Big Hack: How China Used a Tiny Chip to Infiltrate US Companies,” reporters Jordan Robertson and Michael Riley tell how “Chinese hackers implanted tiny microchips in servers that made their way into data centers of some of the world’s biggest companies, including Amazon and Apple . . . It was aimed at scooping up sensitive company trade secrets and national security data stored in government contractors’ computer networks, a US official says.”
Understand what happened here if Bloomberg’s reporting is accurate (and it should be noted that the companies involved deny such an attack took place) about this audacious hardware hack: China is sending its spies to infiltrate mainland companies that form a critical part of the global tech supply chain for the US and other countries. The thinking used to be that China wouldn’t risk losing the business from global tech players by conducting such espionage. And remember that the company involved, Supermicro, is an American company, based in San Jose. Previous government concerns about hardware tampering concerned Chinese telecoms, Huawei and ZTE.
It’s easy to imagine Washington — already greatly concerned about Chinese tech theft — pushing American tech companies to move critical bits of their supply chains out of China and, if not back to America, to lower-cost NAFTA or TPP members. Indeed, some trade warriors would keep expanded China tariffs in place for years to force such a switch. Read what Jorge Guajardo, Mexico’s former ambassador to China, tweeted this morning: “This will also speed up the process of moving the supply chain out of China, quickly. Nothing coming out of China will be trusted, especially after seeing how the PLA could force a private company into doing its dirty work. There is nothing within China that the PLA can’t soil. . . . So any company seeking to move out of China is more than welcome in Mexico.”
And recall that former Google executive chairman Eric Schmidt predicted “a bifurcation into a Chinese-led internet and a non-Chinese internet led by America.” This vision was echoed on CNBC today when former Federal Governor Kevin Warsh speculated, “Five or 10 years from now we might see two poles: a Chinese-centric world and an American-centric world. And the [other global] economies and countries will have to plug into one or both.”
This is also probably a world where American tech companies are less profitable and tech products are more expensive. Is the $2,000 iPhone on its way? Remember that the advantage of assembling gear in China isn’t just cheaper labor. As The New York Times wrote in 2012 on why the iPhone is assembled over there and not here:
Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.
A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day. “The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”