By Eva Dou
BEIJING -- A year ago, Hewlett-Packard Co.'s enterprise business
head Bill Veghte sat at China's elite Tsinghua University, a bowl
of hydrangea arranged before him in keeping with Chinese meeting
style.
Against a purple backdrop announcing the arrival of a "Chinese
Technology Powerhouse," Mr. Veghte said, "Today we start the next
chapter."
And with that, an American business became a Chinese one.
Since H-P sold 51% of its China networking business to Tsinghua
Unigroup, sales have revived. They're up 40% in the first four
months of this year, compared with a 1% decline last year, said
Tony Yu, chief executive of the unit's reincarnation, the New H3C
Group.
"Once we became Chinese, some hurdles were gone," Mr. Yu said in
an interview.
Western companies have struggled with China's increasingly stiff
cybersecurity regulations and many U.S. tech firms are now finding
that their best way to go forward in China is by strengthening
joint ventures and conducting more of their business through
Chinese partners.
Microsoft Corp., Qualcomm Inc. and Cisco Systems Inc. -- which
all have faced headwinds in China from antitrust probes to
espionage accusations -- have formed new Chinese joint ventures in
the past year tailored to meet Chinese security requirements. Newer
companies like Uber Technologies Co. have chosen to enter China
through purely Chinese ventures with all their data stored in the
country.
Beijing has recently shifted to a softer sell. At a tech meeting
last week in China's south, Premier Li Keqiang reiterated that
security rules apply equally to all companies registered in China
and pledged "a more fair, transparent and predictable investment
environment."
In practice, China has shown little sign of letting up; earlier
this year it further tightened restrictions on online publishing by
foreign companies. In April, Chinese regulators blocked Apple
Inc.'s iBook and iMovie services.
New technologies have connected the world more than ever, but in
something of a paradox they grow increasingly dissimilar between
regions as governments dictate local terms. In Europe, websites
like Google and Wikipedia increasingly diverge from their U.S.
versions as European courts uphold individuals' "right to be
forgotten." The same model of a smartphone bought in India and
Indonesia will likely soon contain different components due to
local sourcing regulations.
Following Edward Snowden's revelations about U.S. government
spying in 2013, Chinese regulators have used both carrots and
sticks to push foreign tech suppliers to localize product
development and data.
A slate of new cybersecurity laws requires technology companies
to store their data in China, submit to security checks and help
the government with decryption if requested. Government agencies
and key industries have been urged to adopt "secure and
controllable" technologies, a term widely interpreted to mean
Chinese products.
Companies have also been prodded individually: Last month after
a visit from Apple Chief Executive Tim Cook, China's technology
ministry urged the iPhone maker to deepen its local partnerships
and provide a "more secure user experience" to Chinese
customers.
Qualcomm President Derek Aberle said in a recent interview in
Beijing that its new China-controlled joint-venture for server
chips would likely develop "something very specific to China" in
the security area.
"They can take our platform and innovate on top of it and
provide those components that wouldn't necessarily be coming from
us," he said.
Qualcomm announced several new investments in China after it
agreed to pay a roughly $1 billion antitrust fine and renegotiate
its licensing agreements with Chinese companies.
Foreign trade groups say China's cybersecurity rules make it
difficult to do business except through a Chinese company. More
than 20 American and international associations signed a letter to
China's insurance regulator on Wednesday to protest draft security
rules with data provisions and other requirements for the sector
that they said would be an obstacle to trade.
Neither the insurance regulator nor the commerce ministry
responded to requests for comment on the letter.
While big firms have moved forward with joint ventures, the
obstacles have put a damper on deals overall. The number of
investments where a U.S. tech company acquired more than 50% in a
Chinese firm fell from 15 in 2011 to only one in 2015, according to
research firm Dealogic.
To be sure, mistrust goes both ways. Huawei Technologies Co., in
particular, has been virtually shut out of the U.S.
telecommunications sector after a U.S. congressional report in 2012
suggested Beijing could use the company's equipment for spying.
Huawei has repeatedly said it doesn't assist China's government
in espionage and has aligned itself with U.S. companies on security
issues as it expands internationally. Huawei's rotating chief
executive took the unusual step last year of publicly urging
Beijing to stay open to the best global technology.
In an effort to stem the two-way damage, Huawei and Microsoft --
which faces an ongoing antitrust investigation in China -- are
partners in a "Breakthrough Group" that is writing a "buyer's
guide" for commercial enterprises to help them evaluate potential
risks of various technology products, said the project coordinator,
Bruce McConnell, a former U.S. Department of Homeland Security
cyberspace expert who is now vice president at New York-based
advisory EastWest Institute.
U.S. trade lobbyists say the global supply-chain fragmentation
increases cost and vulnerability. "By trying to wall off your
network, you have untested systems and that increases the risk of
security flaws," said Erin Ennis, senior vice president of the
U.S.-China Business Council.
China's officials have acknowledged the need to balance security
imperatives with the economic value generated from open information
flow.
"We must strictly control data flow across borders," said Liu
Yong, a tech-industry researcher with China's main economic
planning agency at a recent conference. "But at the same time, we
must be aware that data can only reach its greatest value through
its flow."
At New H3C, Mr. Yu said the company is better poised to land
orders from China's government and other sensitive sectors under
local ownership.
"The fields we can plow have broadened," he said.
Yang Jie and James T. Areddy contributed to this article.
Write to Eva Dou at eva.dou@wsj.com
(END) Dow Jones Newswires
June 02, 2016 08:42 ET (12:42 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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