6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 1/15

Techtensions:WhatbeganasatariffspatbetweentheU.S.andChinaappearstobeturningintoatechnologywar,onethatsomefearcouldsplittheworldalongalastingdigitaldivide.(IllustrationbyEricChow)

COVER STORY

Fearsof'digitalironcurtain'spreadasUSandChinadigin

PressurefromTrumpunitesChinesetechindustryinself-sufficiencypush

YASU OTA, Nikkei Asian Review columnistJUNE19,201914:06JST

GUIYANG/TOKYO/HONGKONG/PALOALTO,U.S.--ThemountainousregionofGuizhouhaslongbeenthepoorestofChina's31provinces,knownmostlyforproducingafewherbsusedintraditionalChinesemedicine,andmaotai,apopulardistilledChineseliquor.Itsgrossdomesticproductpercapitawas$6,233in2018,lessthanonethirdofBeijing's.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 2/15

ButGuiyang,theprovincialcapitalcityof4.6millionpeople,hasgrandambitionstotransformitselfintoChina'snewestdigitalhub.Itsgoalisneatlysummedupbyathree-letterChineseword,dashuju,or"bigdata,"andresidentsareunlikelytoforgetit.Dashujuisplasteredalloverthecity:Thereisthe"PlazaofDashuju,"the"HumanResourceCenterforDashuju,""DashujuPark"andeven"DashujuApartments."

Guiyang'sleadersarehopingthatthisfocusonbigdata--thebackboneofnext-generation5Gmobileandcloudcomputingservices--willmakethecityastrongholdforBeijing'sDigitalSilkRoadstrategy.Andwhileitsremotegeographyhasbeenoneofthereasonsithasremainedsopoorforsolong,itofferssomedistinctadvantagesinthedatabusiness.Theamplewaterresourcesnearbywillprovideplentyofcheaphydropowertorungiantcomputerservers,whilethemountainousregion'ssteadyclimatewillhelpkeepthemcool.

"ThebiggestdatacentersinChinaarebeingbuiltintheareabygiantsinthedigitalindustry,"saysLiHaibo,directoroftheInternationalCooperationPromotionCenterofGuiyangHigh-TechIndustrialZone.Twooftheworld'sleadingtechcompanies,TencentHoldingsandApple,areamongthem.

Applebrokegroundona$1billiondatacenterinGuiyanginMay2018,withtheprojectexpectedtobecompletednextyear.TheU.S.techcompanyplanstocombineitsiCloudcomputingservicewiththeoneoperatedbytheprovincialgovernment,allowingittoprovidestorageservicestoChina'senormousmarketof1.4billionpeople.AppleplanstoeventuallyexpanditsofferingtonationsparticipatinginChina'sBeltandRoadInitiative,accordingtoLi,whoisoverseeingGuiyang'sdatacenterpush.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 3/15

Askedaboutthecity'sdigitalambitions,Lidemurred."We,governmentofficials,cannottalkaboutthedream;wecanonlytalkabout[howto]planandexecuteit."

ButGuiyang'sdream--andApple'sbusinessopportunity--representthesortofU.S.-Chinatechnologicalpartnershipthathasthrivedforyears,andwhichnowfacesanalmostexistentialthreat.WhatbeganasatariffspatbetweentheU.S.andChinanowappearstobemorphingintoanationalisticbattlefortechnologicalsupremacy,onethatsomesaycoulddrawa"digitalironcurtain"betweenAppleanditsGuiyangoperations.

AschairmanofTaiwan'sHonHaiPrecisionIndustry--betterknownasFoxconnTechnologyGroup--TerryGouhasplayedamajorroleintheintertwiningoftheU.S.techindustryandmanufacturinginmainlandChina.HiscompanyhasbeenthebiggestproductionpartnerforApple'siPhone,butnowheseesthetradewarunwindingthesecloseties.

"Inthefuture,therewillbenoG-20,butonlyG-2--theU.S.andChina,"saidGou.

VisitorsatChina'sInternationalBigDataExpo,heldinGuiyangintheruralprovinceofGuizhousince2015.Ambitionsarehighfortheregiontobecomeadigitalhub,withtechgiantslikeAppleandTencentsettingupdatacentersthereinrecentyears.©GettyImages

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 4/15

"Theworldwillhavetolivewiththetwo[technology]standards,createdbytheU.S.andChinaseparatelyafterthetwobigpowers'fiercecompetition....It'slikelythatitwillbecome'OneWorld,TwoSystems.'"

SuchdirepredictionshavestemmedfromtheU.S.decisionunderPresidentDonaldTrumptobanAmericancompaniesfromdoingbusinesswithHuaweiTechnologies,citingathreattoU.S.nationalsecurity.Ifthebanholds,iteffectivelystarvesoneofChina'stechnologicalsuccessstoriesfromcomponentsthatareessentialtoitsbusiness.OnJune17,Huaweisaidithasslasheditssalesexpectationsforthenexttwoyearsby$30billionduetotheTrumpban.

ChinesePresidentXiJinpinghascomparedthetechconflictwiththeU.S.totheRedArmy's"LongMarch"underMaointhe1930s--whichmanyobserverssayindicatesthatthecountryisgirdingforaprolongedbattle.

FoxconnChairmanTerryGou,center,hasplayedamajorroleintheintertwiningoftheU.S.techindustryandmanufacturinginmainlandChina."Inthefuture,therewillbenoG-20,butonlyG-2--U.S.andChina,"hepredicts.©GettyImages

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 5/15

"EveniftheChinesetechindustryisnotready,wewillhavenochoicebuttotakethe'newLongMarch,"'saidWangHuiyao,presidentoftheCenterforChinaandGlobalization,anindependentthinktankinBeijing."TheChinesetechindustryisatacriticalmomentandwecan'tjustsitandwatchitdie.Weusedtorelyonglobalsuppliers,lettingothercountriesdowhattheycandothebest.Now,wewillhavetobuildourownsupplychain."

Bipolarworld

HuaweihasrootsinGuizhou.Thecompany'sfounder,RenZhengfei,migratedfromGuizhoutoShenzhen,GuangdongProvince,andsetupHuaweitherein1987.Forhim,thetechwarhasbecomeapersonalmatter:MengWanzhou,Ren'sdaughterandHuawei'schieffinancialofficer,wasarrestedinCanadalastDecemberaspartofaproberelatedtoallegedattemptsbyHuaweitosellU.S.-madeequipmenttoIraninviolationofsanctions.

TheU.S.claims--withoutprovidingmuchevidencepublicly--thattheuseofHuaweismartphonesandtelecommunicationsequipmentresultsintheleakageofinformationtotheChinesegovernment.ChancesofsuchespionageriskwillincreaseifHuawei,whichisleadingAmericanandEuropeancompaniesintherolloutof5Gmobilecommunicationstechnology,monopolizestheglobaltelecominfrastructure,theU.S.argues.

China'sinternetsecurityandnationalsecuritylawsmakeitmandatoryforbusinessestosubmitinformationtothegovernmentwhendeemednecessary.RensaidinaninterviewwiththeNikkeiAsianReviewinJanuarythathewouldrefusetosubmitinformationevenifrequestedbythegovernment.Inreality,however,hesimplycannot.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 6/15

Trump'sattacksonHuaweifitwithhis"AmericaFirst"campaigntheme,andhisbroaderaccusationsthatChinahasbeen"rippingoff"theU.S.fordecades.ButU.S.suspicionofHuaweipredatestheTrumpadministration:In2008,theU.S.blockedHuawei'sattempttobuyastakeinU.S.rival3Comonsecuritygrounds.

TheU.S.administration'sbashingofChinahasalsoprovedpopularwithAmericanlawmakersandcitizens,whethertheyareRepublicansorDemocrats.And,thoughthereissupportfortheTrumpadministration'sattemptstoenforceintellectualpropertyrightsinChina,U.S.businesses--especiallyinthetechindustry--worryabouttheadministration'sbarefistedapproach.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 7/15

TocountertheU.S.movesonHuawei,Xihassuggestedimposingrestrictionsonexportsofrare-earthelements,whichareindispensableforAmericanhigh-technologycompanies,andannouncedaplantobantheoverseastransferofadvancedtechnologiesfromChina.

Theuncertaintyisalreadyhavinganeffectonhigh-techcompaniesonbothsidesofthePacific."Manyofmyclients--especiallytheonesinHuawei'ssupplychain,orcompaniesinthebusinessofhigh-tech--arepostponingtheirplanstoexpandtotheU.S.,orcuttingbudgets,"saidonebusinessconsultantbasedontheU.S.WestCoast.

Trump'sexecutiveorderhasdisabledHuaweifromgainingaccesstoupdatesofGoogle'sAndroidmobileoperatingsystem,andfromprocuringpartsmadebyQualcomm,themarketleaderfortelecommodemchips.MobilecarriersinJapanhavecompliedwiththeTrumpadministration'srequestsbyhaltingtheprocurementoftelecomequipmentfromHuaweiandpostponingsalesofitsnewP30seriessmartphones.AustraliaandNewZealandhavealsohaltedthegovernmentprocurementofequipmentfromHuawei.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 8/15

Againstanincreasinglytensebackdrop,TrumpandChinesePresidentXiJinpingagreedinanemergencytelephoneconversationonJune18tomeetface-to-faceonthesidelinesoftheGroupof20summit,tobeheldinOsakainlateJune.Intherunup,discussionisrisingastowhetheratechnology"coldwar"willresultinabipolarworld:onewhereseparatedigitalpoliciesandstandardswilldividetheChineseandU.S.spheresofinfluence.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 9/15

LuFang-Ming,chairmanofAsiaPacificTelecom,Foxconn'stelecomunit,saidpreviousgenerationsofmobiletechnologywerebuiltalongavarietyofstandards,but5Gisdifferent.IftheChina-U.S.tensionsreversedthat,itwouldbeasetbackfortheindustry,hesaid.

"5Gistheveryfirsttimethat,sofar,theworldagreedtoonlyone[mobiletechnology]standard,butwedon'tknowwhetherthatwillchangeafterallthesetensions....Ipersonallybelieveopensourcesandacommonstandardreallyhelptechnologydevelopmentandnewadoptions[tooccur]morequickly,"saidLu.

Valueoverpolitics

Thefearisthatatechcoldwar,splittingtheworldintoChina-andU.S.-ledspheres,couldendthebenefitsthathavecomefromhavingglobalstandardsforcomponents.Butitisfarfromclearhowthesedivisionswouldbedrawn.Forastart,theattitudesofAsiannationslocatedintheareacoveredbyChina'sBeltandRoadarenotaspredictableasWashingtonmayhaveexpected.

"Huawei'sresearchisfarbiggerthanMalaysia'scapability.Wetrytomakeuseoftheirtechnologyasmuchaspossible,"MalaysianPrimeMinisterMahathirMohamadsaidinhisaddresstotheannualFutureofAsiaconferencehostedbyNikkeiinTokyoinlateMay.

PichetDurongkaveroj,Thailand'sministerofdigitaleconomyandsociety,toldtheconferencethatthecountrywouldnotjointhecamptoexcludeHuawei,saying,"Bangkokisfriendlytoplayersofallcountries."

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 10/15

OtherSoutheastAsiancountriesarealsounlikelytosidewiththeU.S.inshuttingoutHuawei.EvenSouthKorea,anallyoftheU.S.,hasnotclarifieditsstance,possiblybecauseofpressurefromChina.Asia,therefore,isnotasclear-cutastheU.Smayhavethought.

Onethingisclear,however:InareaswhereHuaweiisalreadyused,telecominfrastructurecostsarelowerthaninplaceswhereitisnot.Inthe5Gmarket,HuaweileadsitsrivalsEricssonandNokiainpriceandtechnologicalcompetitiveness,andissetapartbyitsaggressivemanagementstyle.

Somecountriesare"finewithpotentialsecurityissues,ifthepriceisright,"saysJeffreyTowson,aprivateequityinvestorandprofessorofinvestmentatPekingUniversityinBeijing."Theyaremoreinterestedingettingamoderntelconetworkatagreatprice.Inthesenon-sensitivemarkets,Huaweishouldbeverysuccessful."

MengWanzhou,Huaweichieffinancialofficeranddaughterofthecompany'sfounder,leavestheSupremeCourtafterahearinginVancouverinMay.©GettyImages

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 11/15

DiggingininShenzhen

ThemoodinShenzhen,knownas"China'sSiliconValley,"haschangeddramaticallysinceMay."Shenzhenianshavebeenstrengtheningasenseofunityandemotionofnationalism,feelingthatShenzhenisbeingattackedbytheU.S.,"saidaninformationtechnologyconsultant,whofrequentlyshuttlesbetweenthecityandTokyo,onconditionofanonymity.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 12/15

SomeintheWesthaveheldthebeliefthatthetradepressurecanchangeChina'spolitical,economicandindustrialstructure.Thereversemay,infact,betrue.PressurefromtheU.S."isthedrivingpowerunitingChinesetechcompaniestore-inventthewheelandbreakfreefrom...[Google's]Android,QualcommorIntel,"saidaventurecapitalistbasedinShenzhen.

UnlikeZTE,whichwasdriventothebrinkofcollapseduetoaU.S.-imposedtradeban,Huaweihasitsownsemiconductorsubsidiary,HiSilicon.Huaweiislikelytobeabletodevelopitsownoperatingsystem,onethatwouldlooklikeAndroid.

China's"MadeinChina2025"initiativewaslaunchedtoreduceitsdependenceonforeignsuppliersofsemiconductorsandotherkeytechnologies.ButPaulTriolo,headofgeotechnologyresearchatU.S.-basedresearchfirmEurasiaGroup,isskepticalaboutChina'sabilitytoachievetechnologicalindependence.China,hesays,"willremainheavilydependentonU.S.,Japanese,andEuropeansuppliers,andonTaiwanforthefabricationofcutting-edgechips,"hesaid.

ThebeliefinBeijingthattheU.S.isloweringa"digitalironcurtain"betweenthetwocountriesispromptinganevenmoreintensefocusonbecomingself-sufficient,Triolonotes.Buthesaysitis"simplynotpossibleforChinatocompletelydisengage"fromglobalsupplychains.

"Therealityisthatnocountrycanbecomeself-sufficientinthetechnologiesneededtomaintainanddevelopamoderntechnology-basedeconomy,"hesaid.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 13/15

SomeofChina'smaintechpartnersintheregionarestandingwithit,atleastfornow.TaiwanSemiconductorManufacturingCo.,theworld'slargestfoundry,announcedinMaythatitwillcontinueshipmentstoHuawei,sayingthatithasconcludeditwon'tbreachtheexportbanaslongasU.S.-derivedtechnologyaccountsforlessthan25%oftheproductvalue.SouthKorea'sSKHynixandSonyofJapanapparentlyintendtokeepsupplyingsemiconductors.ContainingChinainthedigitalsector,wheresupplychainshavediversified,appearsfarmoredifficultthanbanningIranianoilimports.

BackinGuiyang,ApplehaslittlechoicefornowbuttocontinueworkonitsdatacenterprojectaccordingtorulessetbeforeTrump'stechwar.ThisincludescomplyingwithChina'slawthatforeigncompanies,likeApple,mustpartnerwithlocalChinesecompaniestobuildthefacilitiestheyneedtohostdatainthecountry.

ButApplecanalsofeelconfidentthat,shouldChinahaltthedatacenterjointventureasretaliationforTrump'sattacks,itwouldlikelyhurttheChinesepartnersmorethanApple.Thisdynamicmaywellbewhatheadsoffatechcoldwar,notesthestrategyconsultantworkingwithtechcompaniesonbothsidesofthePacific.

6/19/2019 Fears of 'digital iron curtain' spread as US and China dig in - Nikkei Asian Review

https://asia.nikkei.com/Spotlight/Cover-Story/Fears-of-digital-iron-curtain-spread-as-US-and-China-dig-in 14/15

"TrumpneedsatradedealmorethanXidoes.So,ifthereisgoingtobeatechcoldwar,itmightbemorelikelytobeinitiatedfromtheChinaside,"henoted."But,givenChinastillhasalongwaytogointermsofcompetingwiththeU.S.intechnologydevelopment,Idon'tthinkthatwouldbealogicalmove."

NikkeistaffwritersChengTing-FangandLaulyLiinTaipei,CocoLiuinHongKongandYifanYuinPaloAltocontributedtothisreport.

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