The old dream still burns. In the 19th century, British textile merchants used to fantasise about the vast fortunes they would make if only they could “add an inch of material to every Chinaman’s shirt tail”.
Almost 200 years later, the modern equivalents of the industrialised textile factories of 19th century Britain are the great internet technology giants of the US: companies like Facebook and Google. And like their forebears they still dream of breaking into the China market.
They may succeed one day in establishing a toehold, but they will pay a heavy price to do so. And they are highly unlikely ever to make the great fortunes from China that they have long dreamt about.
Both Facebook and Google, along with other US tech giants including Amazon, have long been shut out of China. Google itself pulled out of China in 2010 rather than manipulate its search engine’s results to suit Communist Party censors.
Since then, the market has changed beyond all recognition. Today China boasts some 770 million internet users – more than the populations of western Europe and the United States combined – and Google and others want a slice of the pie.
This month it emerged that Google is developing a search engine app for smartphones that will comply with China’s strict censorship rules. Meanwhile Facebook has been attempting to set up a subsidiary in China.
With their “platform company” business model, in which additional scale offers vast network benefits at zero marginal cost, they hope to replicate in China the successes they have scored in international markets.
It will be tough. One of the reasons Beijing has kept the US internet giants out of China for so long has been to allow home-grown companies to establish near-unassailable positions in the domestic market. For example, while Google commands close to 90 per cent of the search market in the US and Europe, in Google’s absence, Baidu has captured three-quarters of all searches behind China’s great firewall.
What’s more, Beijing has an impressive array of regulatory instruments it can apply to ensure Chinese companies retain dominant positions in their own domestic market. For example, the authorities fully recognise the economic value of big data, and to make sure foreign players capture as little of that value as possible, all data generated in China must be managed inside the country, and only by Chinese-owned and operated companies.
On top of that, technology companies are subject to multiple layers of labyrinthine national security regulations, the almost total opacity of which, say critics, allows the authorities all the room they could possibly want to apply them for commercial rather than security purposes.
So foreign internet companies will find it hard to make competitive headway in China. Nevertheless, Beijing has a clear incentive to let the likes of Google and Facebook into the country, and to encourage them to think they stand to make handsome returns on their investments in China’s domestic market. This is because, once foreign companies have made a commitment to the Chinese market, Beijing will be in a much stronger position to exert greater influence over their international operations.
If a company is prepared to compromise its much-vaunted principles to operate inside China, it is no great stretch to imagine it might be prepared to make concessions on its international operations to further its ambitions for its new Chinese business.
So, for example, an internet user in Kansas tapping “East Turkestan” into his or her favourite search engine might turn up little or nothing about the ethnic Uygur separatist movement calling for independence from China. A German doing an image search for “Tiananmen” might find no pictures of columns of tanks. And an Indian scanning his news feed may no longer see sympathetic stories about the Dalai Lama, but plenty extolling the merits of the Belt and Road.
If all this sounds far-fetched, it shouldn’t do. The Chinese government has already showed no compunction about exercising powers ostensibly intended to ensure fair competition to support purely political objectives.
Consider the case of Qualcomm. In October 2016, the US chip maker announced its intention to merge with Dutch semiconductor company NXP. The US and European competition regulators both approved the deal. But because Chinese factories are major customers of each company, authorities in Beijing also got their say.
As recently as March, the Chinese Ministry of Commerce was signalling that it would approve the merger. Much of the rationale for the deal was to strengthen the merged company’s ability to develop chips for fifth generation “5G” mobile technology, an area where Chinese equipment-makers have major international ambitions. As a result, the deal was judged to be favourable to Chinese interests.
But as the US administration ramped up its economic cold war, proposing punitive measures aimed at Beijing’s mercantilist tech sector policies, China’s leaders revised their opinion.
If Chinese companies were to be denied access to advanced US semiconductors, the Qualcomm-NXP merger would no longer be in China’s interests. On the contrary, with Beijing’s policy response to double down on its investment in home-grown alternatives, it would be in Beijing’s interests to ensure foreign chip-makers were as weak as possible. Last month, the commerce ministry failed to approve the merger, skewering the deal for its own political ends.
As for the Chinese government attempting to exert influence over international search engines and social media news feeds, the prospect can surely surprise no one. Revelations over recent months have exposed the scale of Beijing’s efforts to silence critics around the world, and even to manipulate elections – most notoriously in Australia. After that, no one can doubt that the Chinese government would leap at the chance to influence international search engine results.
So at some point in the near future, international internet giants may well find themselves granted limited access to China’s domestic market. Rather than rushing in, they should consider carefully the price of admission they may be called on to pay. Rather than adding an inch to Chinese shirt tails, in ethical terms, they might end up losing their shirts.