The complaints were strident. Measures taken by the Chinese government to boost domestic procurement were unfair. Overseas firms were being squeezed out. China was making a mockery of its own WTO pledges. Foreign business associations wrote angry letters demanding action and released sober reports analyzing the implications.
That was 2005. And 2007. And 2008. And 2009.
And now, 2010. The latest episode of this long-running soap opera came in late April. China’s standards-setting body, AQSIQ, announced new regulations requiring foreign firms to obtain certification for security-related software and networking products in order to sell them to Chinese government agencies.
Well and good, one might think. Governments have a right to qualify products for procurement, and security is a serious issue. The problem is that the regulations require manufacturers to disclose such sensitive information as proprietary source code and encryption keys for secure communication.
For foreign manufacturers, there were two ways to interpret this move, neither of them good. One was as a grab for commercial secrets. The other was as a vanishingly small fig leaf for a policy designed to make it impossible for foreign companies to bid for certain kinds of government procurement contracts.
The new regulations are descended from tougher policies first proposed by AQSIQ in 2008, so to some extent they represent progress. However annoying the implementation, they also reflect the government’s priority to boost domestic innovation. This was included in the 11th Five-Year Plan and shouldn’t be a surprise to anyone in the industry.
There is a serious argument to be made in favor of open-source security software (although not for revealing encryption keys). There is also a constructive role for government to play in fostering industry. Nevertheless, Beijing should reconsider both this recent policy and its ongoing, serial flirtation with IT protectionism. This would not be for the benefit of foreign IT companies. It would be for the benefit of China’s own IT industry.
Copiers, not inventors
The government is right to be concerned about domestic innovation and competitiveness. Chinese IT firms are, by and large, excellent at adapting existing products and technologies for the domestic market and using cost-competitiveness to make inroads into existing global IT markets, especially hardware. Telecommunications equipment maker Huawei is the national poster-child for the latter.
But they are not generally good at new product categories or primary technology R&D. Many of the few Chinese technology darlings lose some shine when scratched beneath the surface. This was the case with auto and battery maker BYD (1211.HK), whose much-hyped electric car was poorly received last year.
This is not a talent problem; it is a policy and commercial problem. Chinese engineers are doing world-class work in the labs of foreign companies that have big software development organizations in China. They’re also doing top-flight R&D in overseas companies and universities.
The Chinese government, however, is expending far too much energy on also-ran versions of foreign technologies and not nearly enough on encouraging real innovation that can be globally competitive. The Godson chip, the WAPI wireless networking protocol, TD-SCDMA – the list of misfires goes on.
A new course
The prescription for Chinese innovation is two-fold. The medicine will be bitter, but the results will make it worthwhile.
First, adopt tried and tested global standards that ensure Chinese industries will be able to develop for the broadest possible platforms with the most commercial potential. Concentrate on contributing to new global standards through international standards bodies. Despite some difficulties in the past few years, such as with the IEEE’s resistance to WAPI in 2003, China can and should have a major voice in these organizations.
Second, and most important, let Chinese firms compete on a level playing field with foreign companies, even at home. The last thing that the country needs is regulations that encourage opacity or limit choice in procurement deals. Not only will this drive the price of procurement up and lead to Chinese taxpayers paying more for what they get, but it will lower the quality of what is available to Chinese government customers.
For an example of this, look no further than the ill-fated Green Dam Youth Escort software, which was prescribed by the Ministry of Industry and Information Technology (MIIT) last year and then withdrawn. Regardless of your opinion of government-mandated nanny-ware, the reality was that Green Dam was a wretched product. It was buggy, insecure and allegedly a rip-off of US company Solid Oak’s "Cybersitter" product.
MIIT’s announcement of Green Dam specifically invoked procurement regulations, noting that the selection of a provider was transparent and non-exclusive. If this is the best they can get within the system, then it is time to rethink the system. Green Dam was easy to jettison. A mass rollout of networking gear or enterprise software that goes bad will be much harder to unwind. Just ask China Mobile (CHL.NYSE, 0941.HK), which is already thinking past its expensive, nationwide TD-SCDMA millstone.
If Chinese firms are going to get better, they must learn how to compete as genuine innovators as well as on price, and on equal footing with foreign companies. If they are able to operate in an environment where they can get by with second-rate products, then that is what the Chinese government will get, along with the mediocre IT industry it deserves.