Foreign firms revolting over Chinese government interference

Since agreeing to Chinese government censorship requests in 2006, Google has become increasingly frustrated with government-imposed censorship. And, recently, Google became enraged by a “highly sophisticated and targeted attack” on its computers, almost certainly launched by the Chinese government itself because the apparent target was the private Gmail accounts of Chinese dissidents and the attacks originated from government computers in China:

“Two independent, anonymous iDefense sources in the defence contracting and intelligence consulting community confirmed that both the source IPs and drop server of the attack correspond to a single foreign entity consisting either of agents of the Chinese state or proxies thereof,” said an iDefense statement.

In the wake of Google’s remarkable threat to withdraw from China, many informative articles on Chinese government interference with business are being published. These articles make clear that more foreign businesses are on the verge of revolt. It’s remarkable so many companies are so angry, given how large and important China’s economy has become and how quickly it’s expanding. But that’s proof of how infurating Chinese government (a.k.a. Chinese Communist Party) interference with the “free” market has become:

“A less welcoming attitude is alienating big business, which has been the greatest natural ally of the Communist party in the past,” said one western official who works closely with foreign companies in China.

“Previously, when politicians in the west wanted to criticise China for its human rights abuses or other issues, multinationals would quietly lobby governments not to make a big fuss. But that appears to be changing.”

…In its latest position paper, released late last year, the EU Chamber observed that “operating conditions in the Chinese market have become increasingly challenging”. It noted that the most pressing concerns for European businesses included rising Chinese protectionism, lack of market access, lack of legal and political transparency and lax protection of intellectual property rights.

Beijing’s rejection last year of Coca-Cola’s bid for a Chinese juice-maker on anti-monopoly grounds and a “buy China” policy for government procurement were seen as examples of rising protectionism.

And in August multinationals were shocked by the arrest of Rio Tinto executives during sensitive iron ore price negotiations – a move that was widely perceived as a warning to foreign businesses operating in the country….

European delegates… [summarized] a 300-page report on the various problems facing European businesses operating in China but when they came to the end of their presentation, Mr Wang’s response was dismissive: “Whatever you tell me doesn’t really make a difference; you’re going to invest in China anyway.”

“Foreign Companies Resent China’s Rules ”:

China has long restricted the sale of foreign movies, books, songs and other media, and it continues to do so while appealing a World Trade Organization ruling in August that these policies violate China’s legally binding commitments to the international free trade system. More recently, China has sought to strengthen its domestic encryption industry — for which the government has easy access to all the decryption codes — while withholding the government certification that foreign-owned encryption companies in China need to sell their products to many users…

When China joined the W.T.O. in November 2001, it promised to negotiate as quickly as possible to join the W.T.O.’s side agreement requiring free trade in procurement. But it has never actually done so, leaving the Chinese government free to use its enormous buying power to steer contracts to Chinese-owned companies.

The National Development and Reform Commission, country’s top economic planning agency, ordered national, provincial and local government agencies on June 4 to buy only Chinese-made products as part of the country’s nearly $600 billion economic stimulus program; imports were only allowed when no suitable Chinese products were available.

China has also restricted exports of a long list of minerals for which it mines much of the world’s supply, like zinc for making galvanized steel and so-called rare earth elements for manufacturing hybrid gasoline-electric cars.

Those restrictions, from steep export tariffs to tonnage quotas and even export bans, have made it cheaper for many manufacturers to locate their factories in China so as to make sure they have a plentiful supply of raw materials free from export taxes.

“Google’s Threat Echoed Everywhere, Except China ”:

Google said the attacks took place last week and were directed at about 34 companies or entities, most of them in Silicon Valley in California, according to people with knowledge of Google’s investigation. The attackers may have penetrated elaborate computer security systems and obtained crucial corporate data and software source codes…

Adobe Systems, announced that it, too, had endured a cyberattack….

In the past year, Google has been increasingly constricted by the Chinese government. In June, after briefly blocking access nationwide to its main search engine and other services like Gmail, the government forced the company to disable a function that lets the search engine suggest terms. At the time, the government said it was simply seeking to remove pornographic material from the search engine results.

Some Google executives suggested then that the campaign was a concerted effort to stain the company’s image. Since its entry into China, the company has steadily lost market share to Baidu.

Nicholas Kristof offers an excellent guess about Google’s motivation:

I think that Google truly was nervous about the damage to its principles and credibility from its China policy, but it may also be that Google thinks that if it shows backbone and principles, it will be rewarded internationally in other ways. Image matters. And a company with an improved image does better recruiting staff and retaining them, and this move certainly makes Google stand out from other technology companies that have been largely caving to China. I’m glad Google is demonstrating that businesses can have a China policy more sophisticated than just a kowtow.

Sadly, Google’s stance remains the exception to the rule. China’s government has seen little to refute its apparent belief that it’s too important for businesses to ignore. China will continue exploiting its monopoly power — arising from its size — for domestic political and economic gain unless and until more businesses prove willing to vote with their feet.

Posted by James on Wednesday, January 13, 2010