A very important conversation needs to start happening. American military, intelligence and security officials are recognizing that China is intent on dominating technologies of the future and that because of its “military-civilian fusion,” the increasingly fused Chinese party-state-military apparatus will use those technologies both for commercial and military gains around the world. Yet American CEOs are selling advanced technologies to China’s leading state-owned enterprises and companies that were once private but that have come under Communist Party sway. That is setting up an increasingly urgent question: do American CEOs have a responsibility that goes beyond maximizing their earnings?
There are several cases where this underlying tension is manifesting itself. One obviously is Huawei. The administration is fighting to keep the Chinese provider of advanced 5G wireless networks out of the United States even as it appears to have lost the battle to prevent its closest allies in Europe from allowing Huawei in to their systems. The administration wants to limit the sales of semiconductors to Huawei and other advanced Chinese companies, as per this article in the New York Times. Another hot issue is advanced avionics, which General Electric is proposing to sell as part of a joint venture with Safran, a French company. The Chinese Ministry of State Security was caught seeking to steal GE jet engine technology but avionics is another piece of the equation where the Chinese have lagged.
We don’t know how the coronavirus is going to affect China and its relations with the world. But assuming for a moment that it is a passing phenomenon, the administration needs to create a conversation with American CEOs about an integrated American strategy. This flies in the face of the prevailing assumption that government and business in the United States must operate at arm’s length distance. That was successful for a long time but now we are confronting the world’s largest populated country as it bids for supremacy. Pure and simple. We need to change gears as I argue in The New Art of War: China’s Deep Strategy Inside the United States, seen here.
Take the issue of semiconductors. The United States still dominates this field and sells tens of billions of dollars a year worth of chips to China. Intel sells more chips in China than it does in the United States. About half of Qualcomm’s sales are in China and it sells heavily to Huawei. Some in the administration want to cut off or greatly limit these sales. That could have two unintended consequences: the Chinese would simply spend whatever it takes to develop their own semiconductor industry and American pioneers in the field would be crippled by the loss of sales. Their shares would tank. Their future R&D would be compromised. America loses.
These semiconductors also are going into the police state that the Chinese government has created for a million Uighurs and other Islamic peoples in its far western region of Xinjiang.
Rather than engaging in blows and counterblows, government and business should create a strategy that allows U.S. companies to continue selling in China, but perhaps there is a slight cutback. Perhaps there’s a lag on key innovations. America retains access to the absolutely latest technologies and provides technologies that are a half-step behind to Chinese entities. Certainly, government and business should cooperate in seeking to dominate Artificial Intelligence, quantum computing and other foundational technologies. The White House has allocated modest amounts of money in these fields, but the efforts fall short of a Manhattan Project-style initiative to retain American leadership. We haven’t done this because of the old bug-a-boos about “industrial policy.” But the fact is that U.S. government spending has been critical in creating the biotech industry, the Internet, GPS location services, and the semiconductor and computer industries. Any and all of an American response should happen gradually over a period of years, not overnight.
Another area where it is essential for American government and business leaders to get serious is about Chinese hacking of American computer systems. The latest was the blast from the Department of Justice about the Chinese People’s Liberation Army being responsible for the hack of Equifax’s systems, resulting in personal financial information for nearly 150 million Americans to be stolen, is a case in point. See what Justice said here. The PLA demonstrated remarkable sophistication in the techniques it used to hack Equifax’s systems. They have made dramatic strides. They also know how to insert malware and even chips into motherboards made in China and sold widely in the United States, as chronicled by Bloomberg Business Week in 2018. Inevitably, it seems, American companies either deny that their systems were hacked or say they can find no evidence of it.
It seems to me that CEOs are deciding that they will turn a blind eye to the Chinese penetration of their systems because it would be extremely expensive to try to keep the Chinese out. It would require tougher systems and smarter administrators. That would hurt earnings (and their own compensation.) And if they made a fuss about Chinese penetration, how might that affect their sales in China?
But clearly the Chinese are demonstrating that they derive strategic value from the penetration of American computer systems. The FBI and others are deeply concerned about it, but once again, we are tripped up by the conviction that CEOs only exist to create profit. It’s time they recognized that allowing Chinese penetration of their systems is a matter of national security. That needs to be part of the conversation between the U.S. government and CEOs.
