Dragon bites back: China looks to homegrown tech

While the U.S. wrings its hands over the bruising Sony Pictures Entertainment hack and mulls a "proportional response", China is making good on promises to rid its critical infrastructure of foreign-made gear.

The Chinese effort to bolster security by limiting critical systems to home-grown technology could represent a major blow to the fortunes of IT vendors in the west.

Companies like Cisco, IBM, Intel and Hewlett-Packard have invested heavily in recent years to boost capacity in the communist nation as it emerged into one of the few remaining growth markets in global tech.

Ranking second in IT spending only to the U.S., China's technology investments jumped 8.1 percent last year to $182bn, according to IDC.

Pundits and analysts say China has recently stepped up efforts to eliminate foreign-built tech from the military, key government agencies and banks within five years. China President Xi Jinping has promoted the move away from foreign suppliers as necessary for national security.

According to published reports, Chinese officials recently completed a trial of home-grown alternatives in the city of Siping. As part of the program, Microsoft Windows was replaced with the China-made NeoKylin OS, and U.S.-built servers were swapped out for domestic gear from China's Inspur Group.

"The shift is real," Charlie Dai, a Beijing-based analyst for Forrester Research told Bloomberg News. "We have seen emerging cases of replacing foreign products at all layers from application, middleware down to the infrastructure software and hardware."

The moves by China are the flip-side of an issue that was thrust into play in October 2012 when the U.S. House Permanent Select Committee on Intelligence issued a report citing Chinese networking giant Huawei and fellow China-based telecommunications company ZTE for secretive business practices, ties to the Chinese communist government and claims that its equipment could be used to spy on U.S. companies and government agencies.

"If I were an American company today and looking at Huawei, I would find another vendor if you care about your intellectual property, if you care about your consumers' privacy, and you care about the national security of the United States of America," committee chair and former FBI agent Rep. Mike Rogers, (R-Mich.), said at the time.

Other countries, including Canada, Australia and New Zealand, have expressed similar concerns about Huawei - which was founded by a former Chinese military officer in 1987 - bidding on government contracts.

Rogers' inflammatory comments were backed up several months later by former CIA and NSA head Michael Hayden, who told the Australian Financial Review that Huawei has "shared with the Chinese state intimate and extensive knowledge of the foreign telecommunications systems it is involved with. I think that goes without saying".

"It is simply not acceptable for Huawei to be creating the backbone of the domestic telecommunications network in the United States; period," said Hayden, now a director for Huawei competitor Motorola Solutions Inc. "This is where I think the state has a role to play: to ensure we don't make decisions that compromise the foundations of our national security."

The international tussle was further complicated when earlier this year NSA internal documents leaked by former contractor Edward Snowden showed the American agency was deeply involved in efforts to spy on Huawei as early as 2007.

The NSA operation, code-named "Shotgiant", began as an effort to prove the Shenzhen-based vendor had ties to China's People's Liberation Army, but evolved into a significant espionage and hacking campaign that leveraged stolen source code from Huawei gear to build backdoors that would leave the critical infrastructure equipment vulnerable to additional NSA surveillance when it was deployed in other countries including "high-priority targets [such as] Iran, Afghanistan, Pakistan, Kenya, Cuba".

"Many of our targets communicate over Huawei-produced products," one leaked NSA document read. "We want to make sure that we know how to exploit these products [to] gain access to networks of interest."

National security gives China a powerful rallying cry, but what began as a matter of diplomatic finger pointing could turn into a business battle very quickly, say analysts who note that the government is trying hard to bring China up from low-end manufacturing to high-end technology infrastructure.

In September, the China Banking Regulatory Commission ordered banks to ensure that 75 percent of their systems used "safe" technology by 2019. The regulator called on financial institutions to dedicate at least five percent of their IT budgets toward that goal.

"The technology gap is closing," Ray Mota, CEO of ACG Research, who advises Cisco and HP, as well as Huawei and ZTE, told Bloomberg. "In China, they have the patience to figure it out.

"I see a trade war happening. This could get ugly fast, and it has," he said, adding that he expects the matter to result in direct talks between the U.S. and China.

"It's not going to be a technology discussion. It's going to be a political discussion."

 

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