By Andrew Browne
SHANGHAI -- In his 2005 book "One Billion Customers," a how-to
guide for navigating the China market, James McGregor offered this
advice: "Never 'tremble and obey' if doing so will damage or
destroy your business in China."
Tell that to today's American CEOs.
When authorities ordered Apple Inc. to pull unauthorized apps
that help internet users get around censorship controls, it agreed.
Chief Executive Tim Cook defended the move by saying the company
was merely following Chinese law. His compliance, though,
illustrates a challenge that the Trump administration faces as it
builds a case against unfair Chinese trading practices.
Washington has a CEO problem. U.S. corporate chiefs are focused
on preserving their short-term profits in China by trying to stay
on the right side of a hard-line -- and increasingly antiforeign --
regulatory regime. If, as expected, the White House goes after
China's rampant intellectual property abuses, the companies will be
torn.
Just about everybody in the U.S. capital is complaining about
how China forces foreign companies to give up technology in return
for market access.
Everybody, that is, except the immediate targets of the
state-directed heist -- the companies themselves.
CEOs of U.S. high-tech companies have been notably silent.
That's the case even though their operations are highly vulnerable:
China makes no secret of wanting their technology so it can replace
them on its way to building itself into a manufacturing
superpower.
Yet, not only do they refrain from criticism, some actively
cooperate.
Call it the Stockholm syndrome, whereby hostages start to
identify with their captors. U.S. tech giants have invested
billions of dollars in tie-ups with state entities at the forefront
of projects like "Made in China 2025" aimed at gaining Chinese
dominance in emerging industries from driverless cars to
robotics.
Among U.S. companies that have fallen in behind China's
ambitions to make leading-edge computer chips are Qualcomm, Intel
and AMD.
For a long time, U.S. tech executives have been reluctant to
admit the scale of their intellectual property losses in China.
In 2011, then Microsoft Chief Executive Steve Ballmer put a
figure on it in comments he thought were off-the-record. That year,
he predicted, China revenues would be about 5% of the U.S., even
though personal-computer sales back then were almost equal in the
two markets.
Why the passivity? China now owns the world's fastest-growing
consumer markets by far, and U.S. CEOs believe they must be there
come what may. They expect retaliation for complaining.
But there is also a psychology at work that reflects the new
dynamics of power in the global economy.
A China making rapid technological strides is feeling supremely
confident, and this is reflected in its attitudes toward
international investors. A figure like Mr. Cook commands a great
deal of respect, even deference, in Washington. In Beijing, he's
treated like any other business executive -- as a supplicant,
angling for favors to keep his market hopes alive.
Mr. Cook addressed the difficult business environment in China
last week on an earnings call with analysts, saying: "We believe in
engaging with governments even when we disagree."
In any U.S.-China trade conflict, U.S. CEOs will be caught in a
tough bind between two arch-nationalists -- U.S. President Donald
Trump and Chinese President Xi Jinping. And it's not at all clear
how the companies will position themselves.
"Actually, you can say that Xi Jinping is more important than
Trump to many U.S. CEOs," says Mr. McGregor, the book author who is
also chairman for greater China of business consulting firm APCO.
Previously he worked as The Wall Street Journal's bureau chief in
Beijing, and later ran Dow Jones's business operations in
China.
There is virtually no recent precedent for U.S. corporate
resistance in China. Those who point to Google as a brave exemplar
-- it exited the country in 2010 rather than censor its searches --
miss quite a bit of nuance. Google pulled its search engine only
after Chinese hackers broke into its systems in search of source
code. In other words, it fled an existential threat as much as an
ethical dilemma.
Now Google and its parent company, Alphabet, want back in, even
going so far as to holding major public events in China in efforts
to endear itself with government officials, raise its public
profile and attract Chinese engineering talent.
If Google gets its wish -- or Facebook Chief Executive Mark
Zuckerberg makes the entry he so clearly craves -- it will be on
Chinese censorship terms more onerous than ever. As Lu Wei, the
former head of the Cyberspace Administration of China, once put it:
"I have a choice about who comes to be a guest at my home."
And for how long they can stay: Increasingly, high-tech
companies assume that, in the end, all their products are in mortal
danger; once they've achieved a certain market share, and Chinese
companies are strong enough to compete, the technology is liable to
be nationalized in one form or another, or shoved aside.
By this logic, Apple is on a risky trajectory. Local smartphone
brands like Vivo and Oppo are closing in.
Apple's decision to pull apps that circumvent the Great Firewall
drew sharp condemnation from a key group of consumers. Research by
Molly Roberts, a professor at the University of California San
Diego, shows that up to 20% of Chinese internet users in their 20s
rely on such devices. Many buy them from the iPhone store.
In his earnings call last week, Mr. Cook said he hoped for fewer
restrictions in China in the future. Apple declined to comment
further.
But obedience, in this case, has damaged Apple's public image if
not its bottom line. And the rewards for compliance are far from
certain.
Write to Andrew Browne at andrew.browne@wsj.com
(END) Dow Jones Newswires
August 08, 2017 14:13 ET (18:13 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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