In the last part of this series, I highlighted a number of Chinese companies floating IPOs in the U.S. While Alibaba was the one with the greatest promise and some of the others might not do as good, the trend indicates that Americans are looking for a bite of the growth in China.
At the same time, American companies doing business in China are finding the going rough, as the Chinese government continues to do all it can to strengthen domestic companies. This year was particularly difficult due to increased sanctions related to the U.S. government’s spying actions with technology companies being some of the worst affected. So following the indictment of five Chinese military officers who had been accused of hacking into computers belonging to some U.S. companies, the Chinese government decided that two could play at the game.
Accordingly, Chinese dailies started carrying stories about how servers and networking equipment from IBM (IBM) and Cisco (CSCO) could put Chinese banking and government data at risk and how the government was advising its procurement agencies not to purchase such equipment. Beijing's municipal government also pointed to the high costs of using Windows 8 and Microsoft’s dominance in operating systems, leading several local governments to go for cheaper home-grown systems. Xinhua reported thereafter that a new Chinese operating system was in the works that would take on rival systems from U.S. companies.
China Central Television (CCTV) also quoted a local security expert as saying that Apple’s location-tracking feature made it possible for the company to track people’s movement and could lead to the leaking of state secrets (never mind that it isn’t a default feature and could be turned off, something Apple pointed out in its defense). A local Chinese company also sued Apple saying that its Siri infringed on its patents.
In July, China told state-owned wireless carriers to cut marketing expenses because they were overspending on subsidies and promotions of some devices. Within a couple of months, China Mobile announced a $2 billion reduction in subsidies, with other carriers making further reductions totaling $1.9 billion. The announcement came just ahead of new product launches, such as the iPhone 6 from Apple and Note 4 from Samsung.
Also in July, a microblog on the People’s Daily said that Apple, Microsoft, Google and Facebook were involved in a U.S. program to monitor China.
The attack on Qualcomm was perhaps the most direct with China laying the groundwork to declare the company a monopoly and turning a blind eye to Chinese manufacturers under-reporting sales and making it hard for Qualcomm to collect royalties.
After seven rounds of talks between Qualcomm (QCOM) and China’s National Development and Reform Commission (NDRC), which deals with antitrust matters in the country, and President Obama’s conversations with the Chinese head of state Xi Jinping regarding unfair use of the country’s antitrust policies to limit royalty payments to foreign companies, The NDRC has finally said that a settlement will be reached soon. Qualcomm executives continue to describe the talks as “difficult”. NDRC is likely in the process of determining a fine, which could amount to over a billion dollars.
U.S. companies realized that they need to befriend the Chinese government if they were to operate in China or sell devices/services in the country. So each has reacted in its own way to deal with the situation:
Apple (AAPL) started storing user information on Chinese servers for the first time in August this year. Governments of countries where data servers are located generally have the right to demand information from such servers, so Apple has been looking for a person to manage and handle data requests and issue appropriate responses to the Chinese government.
Facebook (FB) CEO Mark Zuckerberg secured a position on the board of China’s leading business school, Tsinghua University School of Economics and Management. Facebook and many other sites have been blocked in China for long now but the company’s plans to enter the market remain in place.
Facebook has leased office space in Beijing’s prime business district, and is hiring Chinese university students to positions in the U.S. that could be a workforce in the making. Additionally, Zuckerberg’s visit to China in October included meetings with advertising partners and China experts.
Intel (INTC) put $28 million into companies that could strengthen its position in the emerging mobile and IoT markets in China. The companies it invested in include the creator of a forked Android OS for low-cost devices called LeWa; a provider of healthcare solutions and management for the elderly, the fashionable or those inclined to sports called Appscomm; a creator of iris recognition technology called EyeSmart; cloud-based communications solutions provider Gotye and Fibocom, a maker of communications and geolocation modules facilitating machine-to-machine apps connecting smart grids or healthcare or even automotive.
Moreover, its Intel factory in Chengdu, West China is going to see a cash infusion of $1.6 billion. Local and regional governments will support construction to take Intel’s most advanced chip testing technology to China. It also entered into a relationship with Rockchip for the joint development of SoCs and to leverage Rockchip’s marketing relationships in China.
After the Chinese government lifted the 14-year ban on foreign-made game consoles, Microsoft (MSFT) was the first to launch its Xbox One in the country. The company got together with Shanghai Media Group subsidiary BesTV for the launch and distribution of the system, which is now available in 4,000 retail outlets across 37 Chinese cities.
Game titles are few, however, since the Chinese censorship board doesn’t allow violent games like Destiny and Call of Duty. It’s not clear yet how the game console will do, since Chinese players are in the habit of downloading free content and buying during the game (since most currently play through their smartphones).
China and Google (GOOGL) have been at loggerheads in the past, since the government asked Google to censor search results, which it refused. The Google search engine was then blocked in China. Even now that its Android OS powers more than 90% of the phones in the country, its search engine and Play Store remain blocked.
But this year saw some interesting developments, indicating that the two have been in talks for mutual benefit. First, Google announced that it had opened its Play Store for Chinese developers so they could use the platform to sell their apps to international customers. Second was the announcement by China Business News that China UnionPay, the largest card distributor in China and second largest payments network in the world behind Visa, was developing a new mobile payment service called Android Pay.
The service may be expected to launch with a larger number of partners and greater support from Chinese regulators than Apple Pay since it’s being developed by a local player. Android dominates the Chinese mobile market, so a payments service supporting transactions from Android devices could be a big positive. Not much more is known right now, but the next year or so could prove very interesting for Google Play store sales.
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E-commerce companies in the U.S. fetch an average of 2.5 times last year’s sales, while Internet services companies trade at over 6 times, data compiled by Bloomberg show.
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