Apple's profits slid 18% last quarter. Gross margins dropped from 38.44% in 2012 to 37.5% in 2013. While there are a number of reasons for this, the biggest seems to be consumer preference for lower-priced products like the iPad Mini.

While Apple investors have spanked the stock in response, in reality they should be cheering. 

After all, we're still in the early stages of the global mobile revolution, not the end, and Apple's high-price, high-margin business model was never going to win outside North America and Western Europe. Indeed, could not win. While Apple is Apple and will never truly go down-market to make sales, it needs to be more price competitive in price-sensitive markets. Getting bullied on price by Android, thereby pushing Apple to introduce lower-priced (and lower-margin) products, is good for Apple, however much it may spook investors in the short term.

In other words, Apple needs to be a bit more like Google with Android.

Learning From Android

And what's the Android strategy? Make smartphones affordable for everyone, as Google chairman Eric Schmidt declared at a recent mobile conference:

Our goal with Android is to reach everyone. We’ll cross one billion Android devices in six to nine months. In a year or two, we’ll hit two billion. And the way that’s going to happen is with the debut of low-end devices from manufacturers, primarily in Asia. If low-end smartphones are inexpensive now, imagine just how inexpensive they’ll be a few years from now... A relatively inexpensive smartphone with a browser is all you need to get the world’s information. And that’s how we’re going to hit the next billion devices.

Apple seems to be learning this lesson. While it claims a whopping 80% tablet market share in China, this is always how the company begins in a market. Remember when Apple could claim 90% of the smartphone market and then 90% of the tablet market in the US? At its premium prices, those statistics have a very short shelf life.

Selling To Both Rich And Poor

Plus, it's very possible that Apple hit the high-end Chinese consumers first, but will struggle to claim the mass market. As Tom Christian Gotschalksen suggests, emerging markets are always comprised of both mature and emerging income brackets. Apple has done well with these mature demographics. It needs help on the emerging side.

In China, Apple seems to be holding off Samsung and the other Android vendors much better than it has before, even as it keeps slipping in smartphones. Why? Credit the lower-priced iPad Mini, as Haydn Shaughnessy argues. Apple did well with more affluent Chinese consumers in smartphones but then lost its lead as the mass-market adopted Android. With tablets, Apple is able to serve both markets.

That's smart.

Pyramid Research has modeled the effects of Apple knocking down prices in China through carrier subsidies (especially China Mobile) and lower-priced offerings like the iPad Mini. The difference between the status quo and a lower-price market strategy is stark. This is something Apple must do.

And it is. Again, investors may not like it, but Apple is playing for long-term success in emerging markets. Finally. 

Image courtesy of feiyuezhangjie/Shutterstock.

Cyberespionage is usually considered a threat to government agencies and large corporations such as defense contractors and banks. But a new Verizon report on data breaches finds that cyberspies are going after small organizations with the same enthusiasm they once reserved for big outfits.

It's A Small Cyberworld

Not surprisingly, 95% of the state-affiliated attacks aimed at stealing intellectual property, which included classified information, trade secrets and technical resources, originated from China last year, according to the 2013 Data Breach Investigations Report. No organization, no matter how small, was safe.

"The big surprise for us was that there were a lot of small organizations being targeted for cyberespionage," Jay Jacobs, senior analyst with the Verizon RISK team, told ReadWrite. The targets included manufacturing companies, computer and engineering consultants and professional services firms that were "relatively small, even under 10 employees kind of small."

The attackers went after small outfits using the same tactics waged against big companies. In a way, the hacker strategy parallels the way investigators go after the small players in a criminal enterprise, hoping to flip them in order to implicate higher-ups. Only in this case, the hackers are frequently targeting small companies to lay hands on the trade secrets of their larger partners.

Roughly one in five cyberattacks in 2012 were to steal intellectual property in order to further a country's national and economic interests. The most common mode of attack was spearphishing, which involves sending an email disguised as coming from a colleague of the recipient. The message typically contains a malicious link or attachment.

Chinese hacking of American computer networks has placed a damper on relations between China and the Obama administration, which has demanded the country curtail its hacker army. On Monday, Joint Chiefs of Staff chairman, Gen. Martin E. Dempsey, and Gen. Fang Fenghui of China met to discuss cybersecurity.

Other Attacks

Despite all the attention, cyberespionage was a distant second in terms of attacker motivation. Three quarters of data breaches committed last year was for financial gain, with the remaining 5% a result of hactivism, the report found. Verizon confirmed a total of 621 data breaches and more than 47,000 reported "security incidents," which included denial-of-service attacks.

Among the companies that suffered data breaches, 37% were financial services firms, 24% restaurants and retailers, 20% manufacturers, transportation organizations or utilities, and the remainder classified as "information and professional services firms." Malware was used in 40% of breaches. Three quarters of the compromises involved exploiting weak or stolen user names and passwords.

Discovering data breaches was not easy for most organizations. Verizon found that the time from compromise to discovery took months, and sometimes years.

Verizon worked with 18 organizations worldwide in gathering data for the report. The groups included national computer emergency response teams and law enforcement agencies.

No one found any cutting-edge methods used by attackers to break into networks, so organizations can go a long ways toward protecting themselves by focusing on the basics, such as stronger passwords and educating employees about bogus email.

Image courtesy of Shutterstock

Apple recently apologized after a blistering public attack by several outlets within China's state-controlled media over its iPhone warranty and returns policies. Microsoft is now facing a similar attack, albeit presently far more muted, over its Surface tablet warranty policies.

(See also What's Really Behind China's Attacks On Apple.)

According to Bloomberg, China's state-owned radio criticized Microsoft because its Surface Pro does not adhere to the nation's "notebook computers" law, which requires a one-year repair warranty for the device and a two-year warranty for parts.

Microsoft, whch promotes the Surface Pro as "a laptop in tablet form," offers only a one-year warranty, according to Bloomberg.

Will Steve Ballmer Have To Apologize Like Tim Cook Did?

While the issue regarding warranty policies for the Surface Pro in China may ultimately prove minor, the potential for a far larger dust-up between Microsoft and China is very real. Recently, Apple faced withering criticism from China's state-run network television, CCTV, and state-run press, The People's Daily. Faced with a potential loss of sales in Apple's second-largest market, Apple CEO Tim Cook quickly offered a public apology and promised to alter the company's policies. 

Quoting a China media specialist, Bloomberg suggests that, as with Apple, this initial Surface Pro story could become "the opening shot against the world's largest software maker."

While Surface sales have not been spectacular, Microsoft still has high hopes for the device. The company has been selling Surface tablets in China since October 2012. China was the second market, after the U.S., where Microsoft rolled-out the Surface line.

Microsoft has yet to publicly respond to this issue. Whatever Microsoft's response, however, it may not end how China's state-run media depicts the company and its products. A contrite statement from Steve Ballmer may ultimately be necessary. 

As I noted earlier this month regarding Tim Cook's apology:

Cook's apology is a wise move. Apple needed to let the public know that the company was committed to the China market and that it treats its China customers the same way it treats others — by, for instance, offering new replacement phones instead of refurbished models.

Image of Surface Pro courtesy of Microsoft. 

Apple's formal apology yesterday to the people of China may not be enough to dissuade China's government from its continued attacks on the company. But if the immediate response is any guide, it should be enough to let Apple keep building out its business in the world's largest mobile computing market.

Following a damning and highly visible attack by state-owned China Central Television that accused Apple of "arrogance" for allegedly providing shoddy service to its Chinese customers, CEO Tim Cook publicly apologized.

According to Bloomberg, Apple's apology is a rather common "rite of passage" for large foreign businesses in China. 

Corporate mea culpas have become a rite of passage for international companies criticized by China Central Television, including Volkswagen AG, Carrefour SA (CA) and Yum! Brands Inc (YUM).

The network beamed its program on Apple to more than 1 billion people just hours after Li Keqiang, who has pledged to root out consumer abuses, was named premier. The state-run People’s Daily followed with more than a dozen articles at a time when China struggles to cope with poisonous food, air pollution, government corruption and thousands of dead pigs floating in Shanghai’s drinking water.

The importance of the Chinese market to Apple is hard to understate:

While the iPhone has only a small share of the Chinese smartphone market, Apple has been moving aggressively into the country. In the last fiscal quarter alone, Apple generated $6.83 billion in revenues from the Chinese market (including Hong Kong and Taiwan). China is currently Apple's second largest market by revenue, though CEO Tim Cook has predicted that China will become Apple’s number one market soon.  

Everyone Hates Apple... Until They Don't

Apple needed to defuse this situation as best it could. In addition to Tim Cook's apology, Apple pledged to improve its customer support policies, better train its official Apple resellers in the country and to enhance warranty policies for the iPhone 4 and 4S.

Moreover, Cook's apology was noticeably personal:

In the process of studying the issues, we recognize that some people may have viewed our lack of communication as arrogant, or as a sign that we didn’t care about or value their feedback. We sincerely apologize to our customers for any concern or confusion we may have caused.

This may be enough to satisfy Apple's customers and potential customers in China, and could limit anger and complaints about the company across popular social media sites as Weibo. As Reuters noted, shortly after the apology, another official Chinese newspaper, the Global Times, remarked that Apple's reaction is "worth respect compared with other American companies."

Perhaps, though Bloomberg notes that the many attacks on Apple from official Chinese government outlets were "more severe" than in the cases of other foreign companies.

Cook, who has visited the country twice already during his short tenure as Apple CEO, will likely make additional visits to smooth official feathers. He will no doubt also remind the government of Apple's contribution to the Chinese economy. During his last visit to China, for example, Cook singled out for praise the many Chinese partners and manufacturers that Apple relies on to manufacture its products for sale around the world. 

Tim Cook, PR Man

Cook's apology is a wise move. Apple needed to let the public know that the company was committed to the China market and that it treats its China customers the same way it treats others — by, for instance, offering new replacement phones instead of refurbished models.

The timing of the apology was also critical. Apple could not afford to lose the narrative. According to CNN, even after the many negative stories by state-run media, Apple's customers and admirers within the country are still unsure what to make of the situation. 

Many Chinese are wondering what the episode was really all about: Government payback against the popular American company? Apple's arrogance? Or was it legitimate criticism of Apple's service in China?

CNN also noted that reactions to the original CCTV broadcast were "mixed on social media." While many sided with the government, others thought "state media was overreaching."

Image courtesy of Shutterstock

Early Monday morning, Apple CEO Tim Cook issued an apology letter, written in Chinese and posted to Apple's corporate site in China, in which the company promised to improve its customer support and warranty policies in China. The mea culpa came after several public attacks by official China media.

(See also What's Really Behind China's Attacks On Apple.)

"Sincere Apologies"

According to The Wall Street Journal, which offered a translation, the Cook letter read, in part:

We are aware that a lack of communications... led to the perception that Apple is arrogant and doesn't care or attach enough importance to consumer feedback. We express our sincere apologies for any concerns or misunderstandings this gave consumers.

Cook's contrite, rapid response ws not unexpected. Just last week, in "Nobody Likes Tim Cook. Oh, Except Apple Customers And His Peers," I praised Cook for his willingness to quickly get in front of issues like Apple Maps and Foxconn labor concerns. And given that Apple's 2012 sales in China were $23.8 billion and China is Apple's second largest market, Cook really didn't have much choice but to make nice.

Will The Apology Help?

Of continuing concern, though, is whether or not the China government is singling out Apple. Last month ReadWrite noted that actions taken across multiple organizations within China's government could be part of a concerted effort to either limit Apple's potential within the country or to help China build it's own viable smartphone platform - to compete against Apple's iOS and Google's Android. 

While this remains supposition, China's aggressive pressure on Apple has clearly had an impact. Again, from the Journal:

Apple has been the target of criticism in China's state-run media since the middle of last month. China's powerful national broadcaster, China Central Television, and The People's Daily—the official mouthpiece of the Chinese Communist Party—have accused Apple of skirting warranty periods, adopting customer-service policies that discriminate against Chinese customers, and formulating an inadequate and arrogant response to the reports.

As ReadWrite detailed last month, a widely viewed China Central Television (CCTV) report that accused Apple of not fully meeting its product warranty obligations generated a significant social media backlash within the country. Per the Cook letter, Apple will extend warranty coverage on the iPhone 4 and 4S and will replace any broken iPhone 4 or 4S with a new phone - not a refurbished device, as was the previous practice. The company will also provide additional training to Apple authorized resellers regarding company warranty policy and make its product warranty policies more clear to prospective buyers.  

Image of Tim Cook courtesy of Reuters.

Microsoft has been accused of bribing officials in China, Italy and Romania to receive favorable treatment. That's not really news. Given the long list of companies accused of bribery in these countries, particularly China, it's actually more newsworthy to report on who isn't allegedly doling out bribes.

After all, some pretty amazing brands are under fire for alleged bribery in China. Rolls-Royce, The Wall Street Journal, IBM, Siemens, Wal-Mart, Hollywood and many tech firms have all been accused of bribery. Some may even be guilty.

Or not. As Microsoft Vice President & Deputy General Counsel John Frank notes, "It is also important to remember that it is not unusual for such reviews to find that an allegation was without merit."

Just Doing Business?

My hunch, however, is that none of these corporations would risk their reputations over a few yuan. Or even a billion yuan. More likely is that isolated individuals within these corporations may have felt the pressure of doing business in a culture that accepts bribery as a default, where even a front-row seat in one's elementary school class is up for sale, according to a report by The New York Times. 

Or maybe they simply didn't know better?

I don't mean that in any naive way. While attorney Dan Harris makes it clear that bribery is not a requirement for succeeding in China, for a newbie this might not be readily apparent.

As an example, several years ago my wife and I were driving to church in Costa Rica, where we were vacationing. I was speeding (it happens), and got pulled over. I don't speak Spanish, so was struggling to understand the officer as he explained how much I owed, and where to pay it. Finally it became clear that I'd owe something like $100, and would have to pay it at a bank (or post office or something - I couldn't understand him very well) before leaving the country. I had no idea where I could find a bank, or how to pay the ticket, but he very helpfully explained to me in broken English: "You pay $100 at bank. Or you pay me $50. You choose." I'm not very bright, so it took me repeating him a few times ("So, if I go to the bank, I need to pay $100, but I can pay you $50 right now and be done with it?") to finally grasp his meaning, pull out the $50, and drive on.

Was I dishonest? I suppose so. But I wasn't really trying to avoid a $100 fine. I simply had no idea how to find a bank (we were in a remote coastal area), and didn't think I'd be able to do so before catching our flight a day later. I wasn't trying to evade the law: I was trying to pay the ticket in the only way I thought feasible.

It's Complicated

I'm in no way trying to defend bribery or dishonesty in any form. I just wonder if so many good companies could be caught up in intentional, illegal activity.

Yes, even Microsoft, which has a history of competing hard and running afoul of antitrust measures, and more recently has been accused of buying favor with the European Parliament by giving away free software licenses:

Corporate perk or monopolist bribery? - bit.ly/GQqfkG European Parliament behaving badly; #microsoft up to its old tricks #eu

— Glyn Moody (@glynmoody) March 23, 2012

I know a few of the Microsoft executives who would be involved in acquiescing to bribery in China or elsewhere, and I simply don't believe them capable of it. These are good people. These are not criminals.

Yes, good people sometimes do bad things. But I struggle to believe that the companies accused of bribery in China - some of the best brands in the U.S. and Europe - would bless bribery in China or elsewhere. It's possible that a few bad actors within these companies succumbed to the temptation of buying favor, and it's also possible that these or others simply thought there was no other way to do business in China. 

Again, Dan Harris points to a better way:

"I am convinced that there are companies that almost want to pay bribes so they can act like they 'really know the system.'  I am also convinced that there are companies that make clear from day one that they will never ever ever under any circumstances pay a bribe so don’t even bother asking.  Which of those two types of companies becomes most susceptible to being hit up for a bribe?  I am not saying that all companies can function in China without paying a bribe at some point, but I am saying that most foreign companies can and do function in China just fine without ever paying a bribe."

"Most foreign companies can and do...", but even an expert China watcher like Harris acknowledges some may not be able to escape demands for bribes in China.

Which, of course, means they shouldn't be doing business there. That's the solution, but the temptation to make it work, to live within the system, may be too great for some companies. That's a pity, albeit an understandable one.

Image courtesy of Shutterstock.

American technology is winning the smartphone wars. Apple's iPhone captures the lion's share of the industry's profits and Google's Android operating system easily dominates smartphone market share. Is this a cause for concern in China - which has grown accustomed to dominating tech manufacturing?

Clearly, something is bothering the Chinese establishment. 

Two weeks ago, China's Ministry of Industry and Information Technology (MIIT) sounded an alarm about Android's dominance:

While the Android system is open source, the core technology and technology roadmap is strictly controlled by Google.

According to the Ministry's statement, China's “mobile operating system research and development is too dependent on Android.” While Android is the world's dominant smartphone platform, with an estimated 70% market share, Android commands an estimated 90% of the Chinese smartphone market.

This is a big deal. There are more than one billion smartphones in use around the world - and billions more are expected to be activated over the next several years. China is the world's largest smartphone market, but nearly every new smartphone made is based on technology developed and controlled by North American companies. 

The top smartphone operating systems in the world are American, with Google's Android and Apple's iPhone leading by a wide margin. Android commands 48% of the market and iPhone has 19%. Blackberry owns 8% of the market and Microsoft's Windows Phone has 2%. (Legacy devices running on the outmoded Symbian OS still control 15% of the current market.) Just as important, services, applications, businesses and innovation gravitate to the winning platforms. 

(See also America's Mobile Comeback.)

Android And iPhone Rising

Earlier this month, I suggested that a de facto threat to Android could certainly benefit China's 'homegrown' platforms, such as Alibaba's Aliyun operating system, for example. I also said that such a move might benefit Apple's iPhone and other competing platforms. But that may no longer be a valid assumption.

Late last week, China's official media, China Central Television  (CCTV), went after Apple. According to The Wall Street Journal:

China Central Television accused Apple of skirting warranty periods and adopting customer-service policies for Chinese customers that differ from its practices in other countries.

During the two-hour broadcast, watched by millions, the network accused Apple of not fully meeting product warranty requirements and of engaging in customer-service practices that differ from Apple's standard practices in other countries. For example, Chinese customers, the broadcast said, are more likely to receive a refurbished product instead of a new device when their original fails.  

"This is too unfair to Chinese consumers," one customer said in the report.

While the iPhone has only a small share of the Chinese smartphone market, Apple has been moving aggressively into the country. In the last fiscal quarter alone, Apple generated $6.83 billion in revenues from the Chinese market (including Hong Kong and Taiwan). China is currently Apple's second largest market by revenue, though CEO Tim Cook has predicted that China will become Apple’s number one market soon.  

Cook was in China earlier this year, where he met with several government officials and the chairman of China Mobile, the country's largest mobile carrier.

Any actions undertaken by the Chinese government that limit or otherwise diminish the prospects of Apple's iPhone and Google's Android platform would likely be felt immediately. As The Wall Street Journal stated in its CCTV report:

China's consumers flooded social-media sites after the CCTV report. Zheng Yuanjie, a famous Beijing-based children's author, wrote on the Sina Weibo microblogging service, "By paying the same or even a higher price for Apple products, Chinese consumers have received even lower standards of after-sales service than those in developed countries. I hope the part Apple is missing [in its products] is not its conscience." The comment received nearly 8,000 comments and was forwarded nearly 10,000 times by late Friday night. 

Smoke But No Fire

Not everyone is convinced. Steven Millward, who covers the mobile market in Asia out of Shanghai, said the moves by China's state-run broadcaster and Ministry may not be coordinated:

Coming just two weeks after China's MIIT warned of the country being too dependent on Google-controlled Android, the CCTV attack on Apple might seem to be a co-ordinated attack on the two leading smartphone platforms in the country, iOS and Android, but i'm not convinced. 

There could be other factors for CCTV's attack on Apple: it was, after all, World Consumer Rights Day, and major foreign companies are often (though not exclusively) the ones at whom the brickbats are thrown.

Apple, Millward notes, is also a "prestigious target" for a television broadcaster to go after. Indeed, as The Wall Street Journal reported, the CCTV report was "hyperbolic" if not necessarily effective. 

Similarly, while there may be some legitimate cause for concern over Android's near-monopoly in the China smartphone market, Millward notes that "Chinese authorities must realize that their leading Web companies - from Baidu to Tencent, Sina to startups - badly need iOS and Android as the basis of their entire mobile strategy." 

China's Sputnik Moment?

Even if the broadsides launched against Apple and Google are indeed coincidental, they could still be signs of China's own 'Sputnik moment' over American domination of smartphone technology, 

For non-history-buffs, back in 1957 the Soviet Union launched Sputnik, the world's first successful artificial satellite. Reaction in the United States was dramatic, with warnings that American technological leadership was being squandered and hysterical fears of a deadly "missile gap." The Sputnik issue became a central to the 1960 U.S. presidential election. Soon after his election, John F. Kennedy Jr. committed the United States to sending a man to the moon.

It's probably hyperbole to claim that the rise of Android and iPhone will inspire new efforts by the Chinese in the smartphone sphere. But it's equally clear that China has noticed that there's a key technology category where it doesn't lead the way. And no one should be surprised if they decide to do something about it in a big way. 

Nobody's Talking

Apple did not respond to requests for comment, nor did the U.S. Chamber of Commerce. Google responded with the following statement:

Android is an open source mobile platform freely available to everyone. It is available in its entirety at http://source.android.com, allowing device manufacturers to customize and offer new user experiences, driving innovation and consumer choice.

Image of Chinese flag courtesy of Wikipedia. Graphic image by Nick Statt.

While media and government source continue to allude to China as the biggest source of cyber attacks hitting innocent servers on the Internet, recent evidence instead suggests it's actually the Russian Federation that's king of the cyber attack mountain.

The evidence comes from German telecommunications giant Deutsche Telekom (DT), which has set up a new portal to monitor real-time cyber attacks against its network. According to the data on the sicherheitstacho.eu (loosely translated as "security tachometer") site, Russia was responsible for 2.4 million attacks against DT last month.

The People's Republic of China, the current bugaboo of security mavens, ranked 12th on the same list, its 168,000 attacks coming in far behind nations like Germany, Ukraine and the United States. Curiously, it was Taiwan that held the number two slot, with 907,000 tracked cyber attacks, seemingly dispelling the notion that it's the Commies out to get Western corporate interests.

Security Whack-a-Mole

The monitored attacks are not actually hurting DT - at least, not directly. The incoming volleys are instead hitting a network of 97 sensored machines deliberately designed to be tempting targets on the Internet, a concept known as honeypots. According to DT, these honeypots are built to "feign weaknesses to provoke attacks and as such act as early warning systems."

"Our honeypot systems show that once attackers have identified weaknesses, they exploit them immediately," said Thomas Kremer, Board Member responsible for Data Privacy, Legal Affairs and Compliance in a statement to the press.

"If, for example, a provider announces an update for its operating system, attackers launch themselves at the old system to find the gap that the update is intended to close." Kremer said. "For this reason, customers should install updates immediately - this successfully prevents 90 percent of attacks. Apart from up-to-date virus protection, that is the most important security precaution for all IT users."

The honeypots are programmed to mimic a wide variety of Internet-facing systems, such as servers, desktops and even vulnerable smartphones.

Hardening Against 24/7 Attacks

The security tachometer site itself is definitely an eye-opener, even in DT's soothing trademark pink tones (DT is the parent company of U.S. carrier T-Mobile). According to the information provided by DT, most of the attacks are in the form of automated bots, which probe a potentially weak system for holes. If a human hacker wants to come back later and investigate further, they may, or the bot may simply call in other bots to further infiltrate the system.

Security experts won't find this map much of a surprise, since it's long been known that Russia remains a big source of cyber trouble - far more, in sheer numbers, than China. Of course, this map could be interpreted as contrarian evidence, too: perhaps the bot handlers in the other countries recognize the DT honeypots for what they are and have moved on to real targets. Or perhaps the targets presented simply aren't interesting.

Whatever the explanation, Deutsche Telekom's security tachometer makes it clear that the Internet is far from safe, and vulnerabilities on any platform - from any source - can be discovered at any moment.

Image courtesy of Deutsche Telekom.

A white paper issued last week by China’s Ministry of Industry and Information Technology could pose a significant threat to Android. According to the government paper, China's “mobile operating system research and development is too dependent on Android.” Reuters broke the story Tuesday. Should the Ministry take action to limit Android within the country, there could be a major impact on the world's most popular smartphone OS - and a potential big win for Apple and others.

As Reuters noted, the China Ministry was quite direct in its concern about Android:

While the Android system is open source, the core technology and technology roadmap is strictly controlled by Google.

What's behind  China's fears?

The world’s largest smartphone market could be worried that its homegrown companies will be unable to develop their own viable mobile OS. Or that Google’s control of Android might ultimately favor their Motorola division or other partners. While Android has become the dominant smartphone platform around the world, with an estimated 70% market share, Android commands an estimated 90% of the Chinese smartphone market.

Android's Bumpy Road To China

This is not the first time Google and China have locked horns over Android. Last May, China officially approved Google’s purchase of Motorola Mobility. As the Wall Street Journal noted at the time, the Chinese government required Google to keep the Android service open source and to make it broadly available to China’s handset manufacturers, including ZTE and Huawei. Despite this requirement, South Korea’s Samsung remains by far the dominant Android handset maker, both overall and inside China.

Late last year there was a highly publicized spat over Android between Google and China’s Alibaba Group, one of the world's largest e-commerce platforms. Alibaba had developed its own Aliyun mobile operating system and inked a deal with Acer to offer smarpthones using the new OS. At the time, more than 90% of Acer's smartphones ran on Google's Android. Under pressure from Google, however, Acer nixed the project right before launch.

Alibaba claimed that Aliyun was developed in-house using Linux, while Google claimed it was a "non-compatible" version  of Android. As a member of Google's Open Handset Alliance (OHA), Acer was prohibited from supporting non-compatible versions of Android. Andy Rubin, Google’s head of Android, posted comments on his public Google+ page that no doubt inflamed the situation:

The fact is, Aliyun uses the Android runtime, framework and tools. And your app store contains Android apps (including pirated Google apps). So there's really no disputing that Aliyun is based on the Android platform and takes advantage of all the hard work that's gone into that platform by the OHA.  

What Could Happen Next

This latest Ministry white paper could be a signal that the government will officially support Alibaba or other solutions over Google’s Android, or possibly seek ways to limit Android’s dominance of the Chinese market.

If so, this could have a significant impact on both the Android ecosystem and Google itself. Google’s hope is that Android will spur widespread adoption of Google services and generate significant mobile ad and mobile search revenues. Forbes, for example, estimates that mobile search ads contribute 35% to Google’s overall market value, “primarily because we expect mobile advertising revenues to increase.”

The latest actions by China could limit that potential. Google's services have a limited footprint in China even as China's low-cost smartphone manufacturers have helped quickly spread Android - and Google's mobile services - throughout the world. Should China take action to limit Android within the country, this could cause Chinese manufacturers to pull back on Android in China and around the world, perhaps opening doors for new operating systems.

Meanwhile, Apple continues its efforts to grow its sales in China. Earlier this year, Apple CEO Tim Cook predicted that China would become Apple’s number one market. "China is currently our second largest market, Cook said. "I believe it will become our first. I believe strongly that it will."

While in China, Cook met with a number of government officials and with China Mobile Chairman Xi Guohua. China Mobile is the world’s largest mobile phone carrier, with over 700 million subscribers. Anything that limits Android's appeal inside China will most likely help Apple. 

Along with Apple, of course, other smartphone OS companies may also benefit from China's growing concern over Android's market dominance. As TechCrunch has noted, for example, Jolla, the Finnish start-up whose OS is built atop the failed MeeGo operating system, is focusing its efforts on the massive China market. 

Top image courtesy of Android's Google+ page. 

In the past few weeks, I have written two stories about the menace the Internet represents, particularly in view of the hacking attacks almost certainly perpetrated by the Chinese Red Army. In particular, my contention that we need to develop a next generation Internet that's more secure and, preferably, walled in, drew a lot of heated commentary.

Here are just a few of the choicest ones:

• This is unmitigated isolationist idiocy.
• Seriously... is this a spoof article?
• This post should not appear in readwriteweb.

(See World War III Is Already Here - And We're Losing and Cyberwar Imperative: We Need A Next-Generation Internet.)

Hacking As Retaliation?

That's great, and maybe there really isn't any problem here. But the fact is that about 10 days after the first story ran - I got hacked.

A coincidence? I think not.

Or maybe it was my own doing, astutely observed one reader: "I asked for it." Now where have I heard that blame game before?

So what happened? Someone hacked my email password and sent thousands for spam messages using my account. I knew something was wrong when I suddenly was inundated with "Mail delivery failed" subject lines. My Twitter account was hacked, too, but that could just be Twitter's lax security measures.

Of course, there's no way to tell if the dirty deed was done by the Chinese, or even whether it was in retaliation for the articles. But the timing certainly seems suspect.

In his State of the Union address, President Obama ranked hackers and cyber attacks among the greatest economic and national U.S. security threats. The President's response was to issue an executive order calling for more sharing of cyber-attack and threat information between private and public sectors. Naturally, civil libertarians object to this executive order due to potential invasions of privacy.

Solution: Fix the Internet Itself

A far more practical idea comes form New England Complex Systems Institute, which is set to publish a report next week that agrees with my stated principles. The NECSI report blames the problem on the Internet itself, and says that the only solution is to redesign it.

"The current design of the Internet is inherently insecure," says NECSI President and co-author Yaneer Bar-Yam in a press release. "Any node can be attacked from any other node, requiring the entire network to be fortified against all possible attacks, an unrealistic goal," adds Bar-Yam.

That would require redesigning the Internet's architecture itself. The report proposes substantial changes to routers in charge of switching data packets between network nodes.

"Collective security-preventing attacks would require that the routers of the Internet themselves would need to have protocols that allow refusal of transmission based upon content or extrinsic information such as point of origin," according to the study's authors.

The study, Principles of Security: Human, Cyber and Biological, was developed at the request of a long-term military planning group, the Strategic Studies Group, which reports to the Chief of Naval Operations. The report is being released for the first time to the public next week.

As for me, I'm glad to see that other people are thinking about realistic solutions to make our Internet less vulnerable to attacks of all kinds.

Image of alleged Chinese hackers compound courtesy of Reuters.

China's economy is still on fire, with expected GDP growth of 8 percent in the first quarter of 2013. So it's no surprise that e-commerce is also soaring. According to compiled industry research from Alibaba Group, 2013 will mark the first time Chinese online spending exceeds that of the U.S.

Alibaba expects e-commerce in China to reach $265 billion this year, up from roughly $194 billion in 2012. The U.S., which generated $209 billion in e-commerce sales last year, will add a mere $21 billion this year, according to the projection. 

Of course, China's 242 million online shoppers (out of an overall population of more than 1.34 billion) outnumber their U.S. counterparts by a cool 75 million. They buy lots of clothing and accessories, but relatively little in the way of household goods, digital media and electronics. Surveys show that China's online shoppers like the fact that they can save money on the Web, but still worry about product quality. product quality). 

For the full breakdown of Chinese e-commerce projections and behavior, check the infographic below: 

Recent reports of Chinese cyberspying have revealed hacking operations with a shocking scale and level of sophistication. China's hackers appear to be stealing massive amounts of intellectual property and proprietary information from U.S. companies, including those connected to the nation's critical infrastructure, such as waterworks, the electrical power grid and oil and gas pipelines. A recent study  by security company Mandiant has shown that, in all probability, some of the snooping has been done by an arm of the Chinese military.

The revelations of China's misbehavior have led some writers to rashly declare that the U.S. is at war with our Asian rival, at least in cyberspace. This could not be further from the truth, and here's why.

There's No War

First, something obviously needs to be done to punish China for its thievery. But to describe the current state as war or cyberwar draws emotions at the expense of rational thinking. We are not at war with China, either in or out of cyberspace.

Real cyberwar would start with an attack that destroys something valuable or vital, kills people, or both. If the recipient labels the strike an act of war then time for negotiations is over. "Reacting diplomatically and legally to an act of cyberwar is inadequate," says Stewart Baker, a partner at Steptoe & Johnson and a former assistant secretary for policy at the Department of Homeland Security. "It's an act of war, we need to treat it as such and respond with our own acts of war."

An example of a true cyberattack was the Stuxnet malware that destroyed centrifuges in Iran's nuclear facilities. Discovered in 2010, Stuxnet was designed by the U.S. and Israel, according to media reports.

We are not under attack by China. The country is not our enemy. It is our economic and political rival. There is no evidence China wants to destroy anything. What it wants is information that provides a trade advantage, and at the moment there's no better way to get data from U.S. competitors than to let your spies loose on the Internet.

Most experts assume the U.S. also hacks China's computers to gather intelligence. The Brookings Institution, a Washington think tank, has identified two growth areas in the U.S. defense industry, drone manufacturing and the development of malware capable of exploiting software vulnerabilities not yet known to the developer.

Governments have always spied on each other, so it's no surprise that China, the U.S. and many other countries are using the Internet to steal information. Where China goes too far is in hacking U.S. companies. By law, the U.S. government cannot break into the computers of private companies for the sole purpose of taking intellectual property. China has no such restrictions.

What We Can Do

So the U.S. is within its rights to use every diplomatic, political, legal and economic tool at its disposal to pressure China to stop hacking private companies – or to at least negotiate an informal agreement that sets limits. While it's true China holds $1.2 trillion in U.S. debt, the U.S. is also the biggest buyer of Chinese goods. The U.S. is not without leverage here.

The Obama administration has already put China on notice. On Wednesday, the White House released its strategy for preventing the theft of U.S. trade secrets. The plan includes ratcheting up diplomatic efforts and making prosecution of foreign companies a top priority.

Such pressure could eventually lead to informal agreements that start small and grow in scope as trust builds. A starting point for the U.S. and China could be a ban on the destruction or disruption of critical infrastructure or technology driving the global economic system.

In the past, nations have reached understandings governing maritime transportation, air transport, the behavior of navies and international trade well in advance of formal treaties on these subjects, according to a recent paper by Richard Clarke, a former White House adviser on cybersecurity and cyberterrorism, entitled "Securing Cyberspace Through International Norms." For example, the U.S. and Russia are in discussions to establish a cyber hotline in order to prevent cyberspace activity from escalating into a conflict.

In the meantime, the U.S. should move much faster to adopt regulations for securing critical infrastructure and corporate networks. A good start would be passage of the Cyber Intelligence Sharing and Protection Act (CISPA), which would establish rules for sharing cyberthreat information between private industry and government agencies. Such information is important in strengthening defenses.

Eventually, China and the U.S. will draw lines in cyberspace that neither will cross. To get there, we should avoid nonsensical discussions of war that paint China as the enemy, and look for areas of agreement from which we can move forward.

Photo by Shutterstock

So Burger King's Twitter account got hacked on Monday. Apple and Facebook got attacked too. And so it goes. Within a few years, the Internet will be engulfed by "nuclear" warfare, but the bombs will be entirely created in plain ASCII text. What can be done?

We need a new Internet, that’s all. One designed from the ground up to be far more secure than what we have today. A few weeks ago, I wrote an article about the Chinese hacking into The New York Times, The Wall Street Journal and Bloomberg. All because they delved too deeply into the affairs of some Chinese government officials.

On Tuesday, Mandiant released two reports that not only provided more evidence to support its allegations that many hacking attacks originate in China, but also pinpointed the exact location, a 12-story building on the outskirts of Shanghai. As The New York Times put it, that building is the “People’s Liberation Army base for China’s growing corps of cyberwarriors.”

The hacking underground is teeming with activity, as witnessed by the Apple and Facebook attacks. In Apple’s case, a worm was unleashed when employees visited a site called iPhoneDevSDK.

No Evidence?

I shuddered at the foregone conclusion of some media outlets: “there was no evidence that any data left Apple.”

Really?

They can break in at will but they have to leave evidence that they took stuff? Then there was the wholesale hacking of the Burger King Twitter account, which resulted in a string of profane tweets.

Like I wrote in World War III Is Already Here - And We're Losing, we’re smiling the enemy in the face. In that article, I proposed that America ramp up its investment spending in cyber security and robotics dramatically, by boosting cyber-security investment to $5 billion and robotics to $20 billion, annually.

As Steve Blank observes, “We are getting our asses handed to us by the Chinese. Almost irrationally we have decided not to have a National Industrial policy — leaving that to private capital.”

Who Will Lead The Charge?

So it’s up to us pundits in the media to lead the charge for disruptive change. And one thing that clearly has to go, in its current form, is the Internet. I propose the U.S. create a next-generation Internet, a superset, or n-th layer if you will, that make our critical Internet infrastructure, which is now largely powering the U.S. economy, less massively vulnerable to hacking attacks.

We have already seen what Russia did to Estonia in 2007 and to Georgia in 2008. Now imagine what a full-blown war would look like today - or in 2015?

Way back in August 2006, Bloomberg BusinessWeek cited a counterintelligence report that found at least 108 countries engaged in “collection efforts against sensitive and protected U.S. technologies),” up from 37 a decade ago. Now that’s a trend. Among the few countries specifically mentioned, China and Russia were among “the most aggressive” in targeting the U.S.

The Fiscal Times, a publication funded by Peter Peterson, agrees with my bleak assessment: Chinese Attacks Reveal an Undeclared Global Cyber War.

Next-Generation Internet: Wants & Needs

So how should this Next-Generation Internet be architected?

I will give you my wish list and you, tech wizards, can write the spec:

• Secure: It should be extremely secure, from day one. I know some will say that anything can be hacked, but let’s put the fence up high enough so that climbing it becomes a relatively esoteric art.
• Real ID: Everyone using it in an official U.S. capacity should be readily identifiable. I propose some type of next-generation eye-recognition technology using a computer or mobile camera. This will help sites like LinkedIn and Facebook in their endless battle against identity fraud. It will also help deter spamming because each business will need to use its “eyeD” to launch a marketing campaign.
• America Only: It should be accessible by Americans only, for obvious reasons. Americans are free to leave the Next Gen Internet, but they do so as their own discretion.

I’m sure many people can’t believe I would even propose such a thing. I know that things are going to have to get a lot worse before anyone takes my proposals seriously.

That's OK. I've already called this World War III, and it's only beginning to escalate. To win, we'll need to innovate. And that means staying ahead of the pack.

Image courtesy of Shutterstock.

The New York Times has a pretty stunning story this morning about Chinese military hackers. A security firm called Mandiant managed to track a huge number of attacks back to a single building near Shanghai that's operated by the Chinese military, a place called Unit 61398. Google Chairman Eric Schmidt linked to the article on his Google+ feed but added no comment, though Google of course has been the target of "highly sophisticated" (cough, government, cough) attacks from China.

The Chinese deny everything, of course. But as Mandiant puts it, either the attacks are all coming from inside this government building, or "a secret, resourced organization full of mainland Chinese speakers with direct access to Shanghai-based telecommunications infrastructure is engaged in a multiyear enterprise-scale computer espionage campaign right outside of Unit 61398's gates." 

Yes, maybe there are thousands of rogue hackers all working right outside this one military building and somehow the Chinese government, which keeps a chokehold on Internet usage, is completely unaware of what's taking place right underneath its nose.

So, okay. It's happening. As we reported earlier this month, World War III is already here, and we're all just pretending that it's not happening, and worst of all, we're losing.

What is to be done? 

(See also World War III Is Already Here - And We're Losing)

We Could Try Fighting Back

Back in August 2011 I interviewed Richard Clarke, a former top U.S. cybersecurity official who now runs a security and risk management company called Good Harbor Consulting.

Clarke complained that U.S. officials didn't even dare to bring up the subject with the Chinese. "We're doing nothing to penalize them. So from their perspective, why not do it?" Clarke said.

He suggested we ought to start fighting back, by zapping malware back into the computers from which the attacks originated. Though that might escalate tensions, "it's better than lying there prostrate having all your research and development and intellectual property stolen and doing nothing about it." 

According to the Times article, the U.S. government intends to start "a more aggressive defense" against the Chinese hackers. But not too tough, because of "huge diplomatic sensitivities," says an unnamed intelligence official. For example, though President Obama mentioned hackers in his recent State of the Union address, he spoke vaguely of "foreign countries and companies," and did not mention China specifically.

Maybe there's nothing we can do. Maybe our economic dependence on China makes it impossible for us to complain. If that's the case, then our troubles have only begun.

Image courtesy of Reuters.

Every day the Pentagon is attacked 3 million times. They’ve infiltrated our banks. They’ve ransacked our technology industry. They’ve breached the networks of the Chamber of Commerce. They’ve read our email by taking down one of America’s pre-eminent technology companies, Google. It’s already World War III, people. And all we do is smile at the enemy.

Last Wednesday, The New York Times announced that its computers had been hacked. That passwords had been stolen. That its private networks had been traversed with impunity by a bunch of brazen hackers. We’re not talking Anonymous here nor a bunch of ethical hackers. No we’re at war with China.

To paraphrase an old newspaper joke, “what’s black and white and red all over?” The Chinese Red Army, that’s who.

How do we know that? As William Gibson might bark, “Pattern Recognition!” Computer security experts consulting with The New York Times identified the malware “as a specific strain associated with computer attacks originating in China.”

There other telltale signs. Like the fact the hackers broke into The Times’ computers starting on Sept. 13, as the newspaper was putting its final touches on a report that the relatives of China’s Prime Minister Wen Jiabao had accumulated a fortune worth several billion dollars through business dealings.

The Definition Of War

In May 2011, the Pentagon promised it would announce a formal strategy to deter cyberattacks by declaring foreign computer hacks an act of war. But despite mounting evidence that Chinese attacks continue relentlessly, there has been no further action. In view of all the recent happenings, that’s tantamount to raising the white flag.

The New York Times was not the only company hacked. That same day, The Wall Street Journal admitted it too had been infiltrated by Chinese hackers who apparently were trying to monitor its China coverage. And Bloomberg computers were infected by Chinese hackers after the company published an article on June 29, 2012 about the wealth accumulated by relatives of Xi Jinping, China’s vice president at the time.

But media companies are not the only ones being breached. An Air Force Cyber Command Recruiting video on YouTube urgently proclaims, “This building will be attacked 3 million times today,” while hovering over the Pentagon. Those are blatant acts of war, people, and the daily siege of the Pentagon is just part of today’s cyber-warfare landscape.

Cyberattacks are exploding. In Jan. 2010, Google, Intel, Adobe and and more than 30 other companies were attacked in a coordinated terrorist campaign. Google said the attacks originated in China, which lead the company to abandon the Chinese market. If Google leaves the world’s largest market, what does that say about the enemy?

In January 2011, Morgan Stanley admitted it too had been hit by the same China-based hackers who attacked Google’s computers, an operation dubbed “Aurora” by cyber-security firm McAfee. Terremark Worldwide estimates that the number of companies known to be hacked in Operation Aurora now exceeds 200.

While government organizations and companies spend vast amounts of money on security precautions, the situation is so dire that the Defense Department, whose Advanced Research Projects Agency (DARPA) developed the Internet in the 1960s, “is beginning to think it created a monster,” reports Bloomberg BusinessWeek.

What Should We Do?

Let me repeat that again, the inventors of the Internet you like and use so much think they’ve created a monster! So what should we do?

I believe we need a serious dose of innovation and reinvention to stem this monster tidal wave.

America today spends about $718 billion on defense and security. Most of that money is spent on resources and equipment designed for old-fashioned warfare.

The reality is that World War III is being fought in cyberspace and most real-life interaction will be handled by robots. And in both sectors our public and private capital spending priorities are completely misaligned.

The global cyber security market was valued at $64 billion in 2011, or less than 10% of what the U.S. spends on defense and security. Major U.S. players include CA Technologies, Cisco Systems, Fortinet, IBM, McAfee and Symantec. International security firms include Check Point Software (Israel) and Kaspersky (Russia).

Our venture capital scenario is not much better. In 2011, VCs collectively invested $935 million in tech security companies, nearly double the $498 million they invested in 2010, according to a MoneyTree report compiled by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters.

Clearly, the U.S. cyber security market is woefully underfunded. As Delaware Senator Thomas Carper puts it, “The issue of Cyber Warfare is not science fiction any more. It’s reality.” Here’s what I believe we should do:

* U.S. Defense Budget – America should reshape its defense budget to reflect the reality that World War III is already here and it’s being fought in the cyber trenches. This means the Pentagon should officially declare Chinese cyber attacks as foreign warfare and treat the matter with the utmost urgency.

* Robotics - The worldwide robotics industry today is a $25 billion global industry, with most R&D activity taking place in South Korea and Japan. How can America allow its next-generation cyber-soldier technology to be based on foreign know-how? My recommendation: put the U.S. on a robotics fast-track with a combined government-private sector investment budget of $20 billion annually.

* Cyber Security – Like the robotics industry, cyber security is in dire need of more attention, but it’s not very sexy. VCs are falling all over themselves to fund the next Facebook or Snapchat, but what if those services could no longer function because the Chinese brought the Internet to its knees with relentless denial-of-service attacks? That $1 billion VCs invested in 2011 in cyber security is a drop in the bucket compared to the Pentagon’s $718 billion budget. We need to ratchet this up to $5 billion, preferably $10 billion, by next year.

* Internet 2 – As the pronouncements of DARPA suggest, the Internet was not designed for what it’s doing today. Please take some time to read this Bloomberg Businessweek story, it’s downright scary. We need to insulate this country from the enemy, and that means designing an all-new Internet, one created from the ground up for secure operations, and preferably one that insulates the U.S. from the rest of the world.

I’m sure this last bit of advice will have free-thinkers around the world cringing. But when the Chinese decide that you’ve had enough freedom, it might be too late to come to your senses. I fully expect to be hacked by the Chinese this week.

I’ve added Mandiant to my address book. I rather be safe than sorry. And please do contribute to my crowdsourced ideation engine to suggest more ideas on how we can protect ourselves in this brave new world.

Image courtesy of Larry Ye / Shutterstock.

One company started in a garage. The other started in a guard shack in China with $25,000, according to The Economist.

The first company took “Computer” out of its name on January 9, 2007. The other is now the leading seller of PCs in the world, by some measures at least.

Who Owns The Computer Market?

We all know that Apple is still a money machine - and the best in the world at it. But observers like Dan Frommer are now predicting that “Mac shipments… seem to have peaked for good." That is a stinging comment.

Lenovo, meanwhile, might be the best in the world at making computers - at least the desktop and laptop versions.

So where will these two behemoths end up over the next few years?

Opposing Approaches

Tom Peters' seminal book, In Search of Excellence, listed eight themes that defined the success of the corporations. One rule was “Stick to the knitting – stay with the business that you know.”

Apple might have rewritten that rule. While there have been questions about the research behind Peters’ book, there are few about Apple's success through creating and mastering new lines of business. The iPod, iPhone and iPad are powerful examples of how a company can define its own future by strking out in new directions.

Still, it is very interesting to speculate on which company’s strategy will win in the end. The question draws me back to my days at Apple - when I watched the company set off in the directions that now define it.

What might surprise some people is that the decisions that Apple made were often not conscious ones. They sometimes just happened in Apple’s unique corporate culture.

I have described trying to manage at Apple as trying to herd a bunch of cats over a wall with a pitchfork. To complete the image, there was one person whose voice would send the all the cats over the wall instantly. That person, of course, was the late Steve Jobs.

Different Paths To Different Places

Let me try to shed a little light on why Apple and Lenovo are fundamentally different.

The first difference is Lenovo’s strategy of making sure there is place to buy one of its computer very close to where the consumers are. Even in an emerging market like China, Lenovo's goal is to be within 30 miles of every consumer.

Apple, meanwhile, got to what I like to call its "metropolitan strategy" through a combination of missteps and vision.

In the early '90s, Apple wanted to strengthen its sales presence in the K-12 education market. Instead of hiring more people, it chose to strengthen the agent model by reducing the number of resellers who could be educations agents. As a manager in Apple’s Education division, I had to make some very difficult calls to small rural dealerships and tell them Apple was changing their contract so that they could no longer sell to education customers. For some of these small resellers, losing Apple's education business was a death knell.

That was a misstep.

The vision part came in when Apple figured out that its now-weakened resellers would never do as good a job as Apple-branded stores could. That was the genesis of the fabulously successful Apple Stores.

Not everything has changed. Apple has a history of disappointing its partners. Former and current Apple resellers have endless stories of Apple not letting them sell iPods to predatory specials at Apple Stores to chronic availability problems on hot products.

For its part, Lenovo has exclusive resellers in China and exclusive territories in India. Both setups are very different than the retail situation in the United States - but they've played a big part in Lenovo’s growth and are now actually targets for Apple.

The Business Market

Another huge difference is Lenovo's focus on corporate PC sales. Lenovo has doubled its success in that market, according to The Economist.

At one point, I actually led Apple’s most successful enterprise sales team. We tripled Apple’s sales into arguably the most Windows-centric market in the world, the United States government. But our tiny team were fish swimming against the tide in a company rapidly transforming itself into a consumer powerhouse.

Price Matters

Here's one final point. Apple has come to believe it cannot make anything worthy of the Apple brand at a low price point. Lenovo believes it can deliver quality and still serve customers looking for a good deal.

If they are both right, that's a big win for Lenovo.

Politics and business can be a capricious combination, and one pawn in a recent game of international brinksmanship, Chinese telecom vendor ZTE Corporation, is looking for a little fairness when judging the merits of its products and services.

It would be folly to suggest that the United States and China were anything like best buds. At best (and this could be a stretch), they're "frenemies" in their political and business relationships. The nations circle warily around each other's interests - while simultaneously depending heavily on the other side for trade and commerce.

In the midst of this friction between the two nations lie companies that claim a desire to just do business, but still find themselves cast in the role of villain based on the winds of political change. That's what happend to telecommunications vendor ZTE last fall, when the U.S. House of Representatives Select Committee on Intelligence fingered ZTE, Huawei and a number of other unnamed Chinese companies as creators of potentially dangerous technology.

Deconstructing And Rebuilding Trust

The October report drafted by the Committee, recommended "…[t]he United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies" as a backdrop to dealing with all Chinese firms in that sector, specifically calling out ZTE and Huawei.

Naturally, ZTE and Huawei denied the allegations at the time, and ZTE is now making further moves to clear its name. The Shenzhen-based firm is proposing a concrete plan to assure both private and governmental U.S. buyers that the components it sells and delivers are free of any code that might "phone home" to ZTE and its alleged connections to government intelligence agencies within the People's Republic of China.

The plan is known as a trusted delivery mechanism, an industry euphemism for pulling in a trusted third-party to check and monitor hardware and software delivered to a customer. In this case, ZTE wants to use Virginia-based Electronic Warfare Associates (EWA), a defense and logistics contractor that performs services such as transportation of toxic materials, electronic signal intelligence and incident response. Think "spook-shop" for hire, and you get the idea.

Most importantly for ZTE, EWA is a known quantity for U.S. companies and could be enough to give ZTE the extra trust factor it needs to get past the accusations of the House Committee.

How It Would Work

Peter Ruffoo, Director of Government Relations for ZTE USA, explained how the trusted delivery mechanism would work, when used with a hypothetical customer, such as a telecommunications carrier in the U.S.

ZTE would ship the materials or code to the carrier, which would then get the products to EWA. Next, EWA would examine the components and source code within the product (be it hardware or software), reporting to the U.S. government, the customer and ZTE of any anomalous code or other problems it might find. Once cleared, the product would be shipped back to the carrier for deployment.

The process Ruffo described would be used for new equipment as well as updates to software.

Ruffo hopes that this solution will be enough to ease the concerns of the Committee as well as any potential customers that might have been alarmed by the recommendations of the Committee.

Uphill Battle Ahead

It will be an uphill battle for the company. According to Ruffo, when ZTE worked with members of the Committee throughout 2012 as the House was working on this report, ZTE offered a briefing to the Committee by EWA, which was declined.

In a broader sense, the company is facing a U.S. industrial and political environment that has grown increasingly cold to Chinese incursions in the U.S. marketplace. This chilling effect, which Ruffo likened to a similar reaction to Japan's strengthening within U.S. markets in the '80s and early '90s, has put a lot of Chinese companies in the position of having to defend themselves as being something other than puppets of the Chinese government.

"There's an assumption that all Chinese companies are the same," Ruffo said, maintaining that is not the case.

In reality, Ruffo emphasized, while some companies in China do have close ties to the PRC government, that is not necessarily true for all private entities in mainland China. Ruffo, as one would expect, firmly defended ZTE as an independent private organization, and pointed to the company's efforts to be transparent and work with U.S. partners to create opportunities for profit and jobs in both companies.

Tip Of The Iceberg?

Ruffo also reiterated a point made by his boss Zhu Jinyun, senior vice president for North America and Europe, when he testified before the Committee in September. Zhu said that if the Committee was worried about espionage from Chinese companies, picking out just ZTE and a few other vendors was short-sighted.

"As the Committee undoubtedly understands, virtually all of the telecom equipment now sold in the United States and throughout the world contains components made, in whole or in part, in China. That includes the equipment manufactured and sold by every Western vendor, much of which is made by Chinese joint-venture partners and suppliers," Zhu testified. "We respectfully suggest that the Committee's focus on ZTE, to the exclusion of the Western telecom vendors, addresses the overall issue of risk so narrowly that it omits from the Committee's inquiry the suppliers of the vast majority of equipment used in the U.S. market."

It was a point Ruffo made this week too. If you ask me, the wisdom of pointing out that the potential for spying exists within virtually every electronic component sold in the U.S. today could be questioned in a political atmosphere that seems to like nothing more than use China as a convenient punching bag, but that seems to be one of ZTE's main defenses.

Overall, ZTE is hoping that the power of the marketplace will get China's companies to be more accepted in the U.S., just as Japan was eventually accepted decades ago. But it recognizes it that's a tough sell in the U.S. these days.

"Right now, we'd like it to be more Tom Friedman and less Tom Clancy," Ruffo lamented, comparing the very different approaches by the authors of The World Is Flat and Red Storm Rising. 

Image courtesy of BartlomiejMagierowski / Shutterstock.

Last week's news that China is planning to restrict the use of true anonymity for its Internet denizens sent collective shudders throughout the human rights community - and may have piqued the interest of Western corporations seeing a huge sales and marketing opportunity.

No one with any sort of soul could have been happy about the news on Friday that the Chinese government would be requiring Internet users to provide their real names to Internet service providers, apparently the latest in another round of crack-downs to push down pesky opinions against a government that continues to crack down on citizens.

Open Is Hard

China is something that I continue to watch with interest. Having watched the zenith and the fall of the old Soviet Union, I have the layman's sense that China is holding on hard because they know full well what happens when restrictions are eased. The Soviet experiment in glasnost made that abundantly clear.

Thirty years after the glasnost policies helped widen the cracks in the Soviet political foundation, China is facing a similar problem. It wants to lock down control of its citizens, but it desperately wants to be a player on the global stage. The problem is, the economy of the world is increasingly dependent on technology and the Internet, something that reeks of openness and transparency. There are differences, of course: the Soviet Union tried glasnost from within, and China is trying to deal with openness from without, but the end result may be the same.

Most China pundits also see this particular round of regulations as a short-term solution to the growing problem of exposed scandals within their government; scandals getting back to the Chinese public at-large through the Internet, who have in turn been commenting on the events with increased vigor. It is expected that requiring real names to be collected by Chinese ISPs, regardless of whether a pseudonym is used online, will put the kibosh on such commentary and more.

Who Else Could Benefit

While we get to watch China pull yet-another smack down on freedom of expression, the cynical side of me also has to wonder is outside corporations might not see these newly strengthened policies as an opportunity. When I first read the news coming across the wire last week, my very first thought was that China's announcement sounded just like Google Plus' identity policies.

I'm not sure Google would appreciate their identity policy being equated with China's, but if you sign up for Google Plus or other Google services, somewhere along the line you're going to have to tell them your true identity - or take great lengths to fake Google out. We can argue the merits of this, but for now if you want to swim in Google's pool, this is the price of admission. We're told it's to keep things civil, but knowing the Internet habits of one Brian Proffitt and what he might like to buy could be worth a lot of money, too.

Looking at the policies for Google, Facebook and other social platforms where identity is the real currency to be sold to advertisers and marketers, how could any such vendor be able to resist an entire nation of identified Internet users? The opportunities would be huge.

To its apparent credit, the Chinese government seems to have already anticipated this issue. When the new rules were announced, strong admonishments were issued for any Internet service provider that might care to start selling this valuable information.

Given its value, one wonders how long this professed practice of protecting Chinese identities will last. It should not surprise anyone to see new policies in the future where China will partner with "friendly" multinationals to allow the sale and trade of identity information for marketing and advertising. It'll either be the Chinese government alone, or a revenue-share plan with the private ISPs to make the deal work for both sides, but it's bound to happen. Corporations have no souls, after all.

History has shown that the Chinese government is no less interested in generating revenue than any other political entity, and if such revenue generation were to come at the expense of monetizing its citizens' identities, well, what are they going to do? Complain?

Image courtesy of Shutterstock.

Just in time for the 18th Communist Party Congress, all Google services have suddenly been blocked in China. Traffic fell off Friday according to the Google Transparency Report.

“We’ve checked and there’s nothing wrong on our end,” Google said in a statement. So what is wrong, then?

Search, Gmail and Maps are all blocked, and searches for Google services are being rerouted via DNS spoofing to another site located in Korea. This blackout kicked in at the outset of the Communist Party Congress, a major event that takes place every ten years at which the government’s new leadership is appointed through a secretive process.

While we don’t yet have comment from Chinese officials, the two possibile causes are government restrictions or a doozie of a job by hackers. Given the timing and the extent of the outage, an official intervention seems more likely. Either way, Google's response will be seen as a test of its character. How much is Google willing to put up with to do business in the Chinese market.

Not The First Time

Google blockages in China are hardly new. YouTube has been blocked in China since 2009, and other services have been blocked on and off for periods of time, usually surrounding politically sensitive world news events. To keep its other properties up and running, Google agreed to censor its services in accordance with Chinese demands. In 2010, Google finally took a stand, pulling out of mainland China and redirecting users to uncensored results from Hong Kong.

It wasn’t an easy decision, though. China’s enormous and growing market is too tempting for an data-driven, ad-supported company like Google to ignore. Even as it was threatening to pull out of the country, it was making deals with Chinese media companies and trying to secure a foothold there. It wasn’t until Chinese hackers started targeting Google users that Google pulled out.

But just two years later, this January, Google headed back to China, hiring engineers, salespeople and product managers, building new consumer Web services, and pushing Android in the country’s booming mobile market.

What Will Google Do?

It will be interesting to see how Google responds to this latest blockade. In 2012, Google has taken great strides to protect its users from state-sponsored attacks, going so far as to create a warning banner for users who are under attack linking to ways for the user to protect his or her account. Google also publishes detailed transparency reports highlighting all government requests for user data as well as disruptions to its traffic around the world.

This latest issue will likely add new scrutiny to the search giant's efforts to balance its global ambitions with geopolitical realities and the need be seen as impartial.

Image courtesy of Shutterstock.

In the presidential debates both candidates focused much of their energy on job creation and the future of America. They missed the third part of that equation, namely, the role immigrant entrepreneurs play in economic growth—and why the exodus of these highly-educated workers is a cause for alarm. (I covered this topic in my book The Immigrant Exodus: Why America Is Losing the Global Race to Capture Entrepreneurial Talent.) But even beyond the obvious, Obama and Romney are missing a number of larger trends that need to be understood in order to plan effective policies. 

China Is Not The Real Issue

First, they both have seemed to be focused on nailing China up as a currency manipulator. This may have been an issue in the past, but is going to become decreasingly important. That’s because China is well down the path to Japanification. The central government has bet the farm on last-generation technologies in solar, transportation, and batteries.

Beijing has flooded the economy with infrastructure projects and financing for construction. Now this is coming home to roost with rampant inflation and soaring wages. Already factory jobs are leaving China for cheaper locales like Vietnam and Bangladesh. So Mitt and Barack, please forget about China. That’s the wrong target.

Instead, focus on our education system. The U.S. education system is actually quite underrated. The university system remains, despite all the cutbacks, the envy of the world. And our public education system, for all its faults, continues to turn out high quality graduates.

But we are in the midst of a revolution in education. Technology has eliminated the need for students to sit and listen to teachers deliver subject matter. Lectures and exercises can be pursued at home, on tablets or PCs, at a student’s own pace. Instead, class time will be used for Socratic study, with teachers answering questions and serving as guides and consultants. 

Rebooting Education

This is a far more efficient way to learn, and numerous startups are jumping on this bandwagon. The question is, how long will it take the U.S. government to get a clue and push down reforms around these new self-paced, Socractic learning methods—replacing the now archaic and largely failed “No Child Left Behind” policies which have shackled schools to arbitrary testing regimes that largely measure rote memorization.

Simultaneously, the rise of the “DIY” and Maker generation will allow students to delve deeper and deeper into functional problem solving as part of education. Yes, chemistry kits have always been available as have model rockets. But today an ambitious high schooler can download Arduino, code up some novel software, and have a unique UAV, or a remote controlled robotic vacuum cleaner. Supporting and encouraging functional, creative learning will help secure our national future.

A New Kind Of Manufacturing

This also ties into another trend that the candidates have missed -- micro and regional manufacturing. Rapid improvements in 3D printing are shrinking the factory to the size of a desktop, blowing up the old advantages of economies of scale. By removing labor from the equation and enabling assembly of small complex objects from CAD files, 3D printing will enable an explosion of boutique manufacturing and unprecedented creativity. What’s more, 3D printing will actually fuel the ongoing revival of big-ticket manufacturing in America.

One of the reasons that Apple builds in China is because all the key fabrication shops and parts suppliers are now over there after the U.S. manufacturing sector hollowed out in Silicon Valley and other technology centers. But when Johnny Ive wants a new enclosure mockup and he can get it from his own desktop or from a high-end 3D printer at a custom fabrication facility, then all of a sudden the benefits of having the people who makes screws and touch screens in the same city goes away because those items can quickly and easily be fabbed anywhere.

Beyond old-line products, these printers will be used for genetic material manufacturing and personalized medicine, medical device manufacturing, micro-solar arrays, and even home building, to name a few. 

What does this have to do with Romney and Obama? 

3D Printers, 2D Regulations

This new style of manufacturing will demand a new, lightweight set of regulations. Just as small farmers have struggled to meet food safety guidelines that larger foodcos can easily digest, small manufacturers using super-clean 3D printing technology could struggle with regulatory burdens born by large factories.

Neither Romney nor Obama seems to have given much thought to the future of manufacturing and that’s not a good thing because the U.S. Federal Government should start crafting economic policies (not subsidies but regulatory changes) designed to suit next generation pint-sized, high-powered factories. 

Granted, our two candidates have a lot to talk about in other areas. But the truth is, nothing else matters if the U.S. economy continues to sputter and growth remains stunted. In that same vein, nothing else matters if our education system fails to produce world-beating graduates (and attract the world-beating immigrant scholars) that have made America the reigning global hegemon.

Focusing scarce energy and political capital on the ghost of China past does not serve our future nor does it provide a viable economic solution to our current woes. America has always won by focusing on the future and clearly seeing where the ball is bouncing, not where it was on the last play. Let’s hope our candidates can refocus forward in time to make the shifts required to keep growing our economy and pay for our profligate past while securing the future for our children and their children. 

Vivek Wadhwa is a Fellow at Stanford Law School and VP of Innovation and Research at Singularity University. Follow him on Twitter: @wadhwa.

Image courtesy of Shutterstock.