In 2017, Silicon Valley Got Cozier with China. In 2018, Washington Will Get Frostier

Beijing, China

Beijing, China junrong/

Here are some of the most significant moves by U.S. tech firms and Washington over the past year.

Over the past year, as the Chinese government continued to police the domestic internet and tech industry with its signature mix of protectionism and censorship, Silicon Valley and Washington responded differently.

In 2017, Silicon Valley’s major technology companies continued to look to China for growth and partnerships, arguing continued engagement is better than withdrawal. As the country’s cyber authorities suppressed discussion over thorny societal issues with shocking efficiency, foreign companies adapted to China’s cyber regime by investing, and complying with censorship demands. Washington, meanwhile, is sounding the alarm, with Donald Trump torpedoing the acquisition of a U.S. semiconductor firm by a China government-linked fund.

Here are some of the most significant moves by U.S. tech firms and Washington over the past year, and signs that their divergence of approach to China will continue to deepen.

Complying with Censorship

One of the largest concessions in the year was perceived to come from Apple, when it removed VPNs from its China-facing app store in July. The software is necessary for most Chinese internet users to jump the country’s Great Firewall, which restricts access to foreign websites like Google, Facebook, and GitHub, and the decision was met with dismay from human rights advocates and U.S. politicians.

During an earnings call, Apple CEO Tim Cook defended the decision by saying the company was merely following the law in China. And at an event in Guangzhou, after attending China’s World Internet Conference in Wuzhen—an event that heralded the virtues of an open internet in a year that saw China’s become more closed than ever—he said he believed the apps would likely return someday. He urged companies(paywall) in Apple’s position to participate in China’s tech world rather than “stand on the sidelines and yell at how things should be.”

Meanwhile, starting around July, authorities steadily cut access to WhatsApp from within China—first by barring images and videos, and later texts as well (paywall). Vaughan Smith, vice president of parent company Facebook, still spoke at the Wuzhen conference this month.

Tailored Products

Microsoft, which powers nearly every PC in China with its Windows software (either through legal purchases or pirated software), launched a version of its operating system tailored specifically for the Chinese government. Titled “Windows 10 China Government Edition” and created in partnership with state-owned enterprise China Electronics Technology Group, Microsoft said that the software will let the government manage all updates and telemetry—which loosely refers to the information collected about how a system is running—without elaborating further.

Microsoft announced the new product just weeks before the formal implementation of China’s new Cybersecurity Law—which had already caused great consternation (paywall) among tech companies when it was still in draft mode. Among other things, the law requires foreign companies to store data from China within the country’s borders. To ensure systems are secure, the law also says companies must undergo periodic reviews and authorities can request source code (paywall). These requirements mean greater expenses as companies put in place special China-specific arrangements.

Investing in Surveillance—and Other Stuff

Qualcomm, the San Diego-based chipmaker, went all-in on China this year. Most notably, the company invested in SenseTime, a Hong Kong company specializing in facial-recognition software that has aided public surveillance efforts in China.

The chipmaker also inked a number of partnerships with high-profile Chinese consumer tech companies. While the US president was on a state visit to Beijing in November, Qualcomm announced it signed a non-binding memorandum of understanding with Chinese phone brands Xiaomi, Oppo, and Vivo to supply $12 billion in components to them. It also invested in bike-sharing company Mobike, and signed a strategic collaboration with search giant Baidu.

Earlier in the year, Qualcomm put millions more into what is now a more than $400 million joint-venture formed with the local government of Guizhou province to make chips for servers in China. Chipmakers Hewlett-Packard Enterprise and AMD have similar joint ventures in China. These ventures line up with a 2014 policy directive from Beijing calling for China to become a global leader in semiconductors by 2030. Apple is opening a data center (paywall) in the same region, an announcement it made in July, soon after the implementation of the new cybersecurity law.

Even Google, which has mostly been absent in China since shutting down its local search engine in 2010, made deeper inroads back into the country. Earlier this month it announced it plans to establish an R&D center in Beijing for AI. While the center won’t be used to develop consumer-facing products, it will nevertheless help Google tap China’s vast pool of talent specializing in AI research. The company also revamped its Translate service for mobile in China this year.

A Coming Freeze

For all of Silicon Valley’s coziness with Beijing, the business ties between U.S. and Chinese companies will grow more complicated as relations between Beijing and Washington become tenser, spurred by China’s trade practices as well as general anxiety about China’s global economic reach and use of surveillance.

Beijing has stated it intends to wean itself off of foreign technology, and become a world leader in AI by 2030, and some of its investments overseas are going to go toward supporting that. One key use of AI in China involves collecting and analyzing as much data as possible from its own citizens, using technology that would make privacy advocates quiver. As Chinese companies continue to invest in and buy U.S. companies, albeit in a less flashy way than in years past, some might fear that data and technology originating in the U.S. could be used to bolster China’s surveillance state.

In March, the Pentagon issued a report (paywall) about China’s growing investment in U.S. startups specializing in AI and other data-rich industries, warning that in some instances cutting-edge technology with military applications could be involved.

A big red signal in the past year on Chinese investment in U.S. tech came in September, when the Trump administration blocked a planned acquisition of California-based chipmaker Lattice Semiconductor over concerns the deal might “impair the national security of the United States.” While Lattice does not sell to the military, its rivals do, which caused some U.S. lawmakers to speak out against the proposed deal soon after it was first reported.

The veto marks a rare instance in which the White House directly barred a pending acquisition. Often, an acquisition effort ends once the inter-agency Committee on Foreign Investment in the United States, which is chaired by the Treasury Department and vets major deals for their impact on national security, has signaled it is against the deal.

On Nov. 8, a bipartisan group of lawmakers introduced a bill (pdf) to widen the scope of CFIUS. The bill’s leading sponsor in the Senate, Republican John Cornyn of Texas, said in a statement at the time that because of gaps in the existing review process “potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies.”

According to a report this month from Philadelphia-based law firm Dechert, the bill, if passed, would significantly raise the number of reviews CFIUS conducts over investment, from around 200 in 2017 to almost 1,000 each year (pdf, p. 7). These additional reviews are likely to slow the pace of Chinese investments into the U.S. The Dechert report says Congress is expected to hold hearings in the next few months and that the law could pass as soon as early 2018 because it enjoys strong bipartisan support.

One deal to watch in the coming year is the hoped-for acquisition of U.S.-based remittance company MoneyGram by Ant Financial Services, China’s biggest e-payments firm, controlled by Jack Ma, the founder of e-commerce giant Alibaba. The deal was first announced in January, and Ant Financial later agreed to increase the offer to $1.2 billion. But the acquisition has yet to be completed—again, it appears, due to the CFIUS review, although this takeover appears to have little connection to national security.

A larger freeze on Chinese investment into U.S. tech companies could see a backlash against foreign tech firms that are already in China. Apple might face more pressure to censor content. For Qualcomm and other U.S.-based chipmakers, their joint-ventures might get jeopardized.

But in the coming years, concerns about how China’s tech ambitions will hinder the U.S. economy—and perhaps national security toolook set to trump concerns about how U.S. companies can make money inside China.