Internet security in China is drastically different than in the United States. The two cultures have very different ideas of what is and isn’t allowed. This can create a lot of issues for American companies that want to do business in China (especially those which deal with technology or the internet).
As an investor, it’s important to be aware of how the Chinese government handles Internet security and what their expectations are for American companies. This can help you identify future potential problems associated with he various opportunities for companies available in China.
Through this article, we will take a look at what Internet security in China is like and how it can impact American companies.
The New Internet Security Program
One of the top projects of the Chinese government over the past several years has been a new comprehensive Internet security/surveillance system. To review a more detailed outline of the new system, click here. Otherwise, here are the main takeaways:
➢ The main goal is for the system to provide “full coverage”. This means that the government wants the system to cover every industry, every district and every institution or business, including foreign-owned businesses. Essentially, Internet privacy will be a thing of the past
➢ All foreign-owned businesses will be treated with the same regard as Chinese businesses or citizens. This essentially means 100% transparency. There will be no VPNs (Virtual Private Network), no private or encrypted messages, no anonymous online accounts, and no confidential data. All data that is transmitted or communicated will be available for the Chinese government to view
➢ Additionally, China announced that they will be placing government officials inside 100 private companies, including Alibaba (China’s largest eCommerce company). This is akin to Donald Trump putting Jared Kushner (Trump’s son-in-law and advisor) on the board of directors at Facebook, Google or Amazon. You can imagine how that would go over.
It’s worth noting this type of all-inclusive access by the Chinese government is unique to China. No other country in the world is set up like this regardless of their government structure. This will make it more difficult for U.S. companies to enter the Chinese market and could potentially pose a risk to U.S. companies that are already operating in China because their current systems may not be set up to adhere to the new guidelines.
For example, say they use a specific cloud-computing software to handle their documents. Now, after the new system is released, the Chinese government can come in and say that the software isn’t acceptable because it’s not licensed by the Chinese government. That company will be forced to either shut down their business or transition over to a China-friendly cloud-computing system. Now, they will be required to turn over their information to the government. This is a less-than-ideal situation for a lot of companies because they could be at risk of having proprietary information stolen. This is something that China has already been accused of in the past (see Microsoft) and was a significant motivational factor behind Donald Trump’s trade war and vendetta against China.
The following bullets reflect daily realities for the citizens of China:
● Chinese citizens are under near-constant surveillance by about 20 million security cameras every day
● Many of these cameras are outfitted with facial recognition and that information is stored in data warehouses. This means that the government is always aware of who is going where and what they’re doing
● In some regions, citizens are forced to download software on their phone that scans their pictures and texts
● China blocks many American tech companies such as Netflix, Hulu and Google
China puts essentially no emphasis on protecting their citizen’s personal information and instead, treats them all as personal outlets for monitoring.
In the United States, although they aren’t the picture of protecting data themselves, there is still very much an idea of digital privacy. Companies can (and do) get in a fair bit of trouble for revealing sensitive information about their users.
Expectations from the Chinese Government
American technology companies have had a historically tough time making the jump into Chinese markets. Apple is the exception that proves the rule here and is one of the few companies that has been able to create a strong foothold in the country. On the other hand, Microsoft has had quite a tough time, mainly due to their products being ripped off.
In an interview with Geekwire, the company’s president, Brad Smith, complained that “It’s not hard to find Microsoft software in China and even in Chinese government institutions. It’s a lot harder to find Microsoft software that Microsoft has been paid for.” Despite the gigantic market that China offers for Microsoft, the country only makes up 1.8% of their revenue.
China’s reputation for swooping American technology is nothing new. In fact, one of the major motivations behind Donald Trump’s trade war was to get China to start using more fair business practices when it comes to how they interact with U.S. tech companies.
This lack of digital privacy in China means that any U.S. technology company which wants to enter the attractive Chinese market will need to succumb to the whims of the Chinese government. They will need to disclose everything they’re doing, which puts them at risk of having valuable digital property rights stolen. They can also potentially be put in an awkward spot if the government demands that they act in a way that goes against their core values.
This raises an interesting question: is it worth it?
On one hand, China is the most ideal new market for most companies:
However, does this mean it’s a good idea for American companies to try and enter the market? Well, that probably depends on the company. There are a few things that these companies will need to keep in mind:
● They will have to toe a political line between the United States government and Chinese government, as these two bodies are becoming less and less friendly by the day
● They will also need to keep their customers’ best interests in mind while also attempting to make a profit
● They will need to be 100% compliant with the Chinese government
● They could risk alienating their United States client/user base or that associated with other markets if they sacrifice their morals for profits
Is it worth risking their reputation or alienating American consumers just to enter a new market? Some companies might actually consider these risks greater than the potential rewards.
Issues for American/Chinese Tech Companies
There are already plenty of examples of US and Chinese companies butting heads over digital privacy with their own government or opposing governments. To get a feel for the current business-scape between the two countries, let’s take a look at a few of the top disputes.
In the United States, there is generally strong pressure on technology companies to protect their customer’s digital privacy rights. In one example, the United States government (specifically the FBI) approached Apple asking them to open up an iPhone that was encrypted and could potentially have information with regards to a shooting in San Bernardino. Apple had a decision to make: do they crack into the iPhone and help the FBI get information or do they make a statement about protecting all users’ privacy?
In this case, Apple generally held firm about denying the FBI’s request. Eventually, they found a middle ground and created a software that allowed the FBI to guess the passcode to the phone as many times as they wanted (which is only about 10,000 guesses for a standard 4 digit iPhone passcode)
Facebook is another company that seems to constantly be under fire in the United States for not protecting their users’ data. It is relatively common knowledge that Facebook collects data about all of their users and uses it to sell hyper-targeted advertisements.
More recently, they got in trouble for allowing the political consulting firm Cambridge Analytica to harvest users’ profiles and use this data during the 2016 presidential election. Facebook CEO Mark Zuckerberg testified before Congress for 5.5 hours over the matter and will ultimately pay $5 billion worth of fines.
Facebook has also stated that they will not monitor (or fact check) what is posted on their site, which could make it a feeding ground for misleading news.
The lack of digital privacy concerns doesn’t just impact companies thinking about entering the Chinese market. It has also taken a toll on a few Chinese companies and how they can operate in the United States. Specifically, the Chinese telecommunications giant Huawei has been under scrutiny.
The issue at hand is 5G technology. 5G represents the future of telecommunications and the United States is currently leading a push to ban Huawei equipment from getting access to 5G frameworks.
The U.S. government has even gone so far as to urge allies to bar the company from their networks as well. The main reasoning for this anti-Huawei push pertains to national security risks. While there may be some risks involved, the ban could also hurt U.S. companies, for whom Huawei represents a huge customer.
Another interesting digital security case involved the short-video social media app TikTok. While this app appears to just be good fun where friends can make interesting videos and share them with one another, they’re actually under investigation by the FBI.
For some background, TikTok was originally Musical.ly until they were bought by the Beijing company Bytedance and then re-branded as TikTok. TikTok is one of the fastest-growing apps ever, with over 738 million downloads in just 2019 alone. As the app is downloaded over 110 million times in the U.S. and 60% of its users are U.S. based, members of Congress view it as a potential counterintelligence threat.
We hope that you’ve found this article valuable when it comes to understanding Internet security in China and how it impacts companies. If you’re interested in more of our work, we would strongly recommend heading over to our “New Here” section.