Monday, August 27, 2018

China Unflexible Path Forward Guarantees Conflict

This is the second part of a two-part series which explores why China is on a one-track path and blind to other options going forward. The first part, which is linked at the bottom of this article, argues China has little intention of altering its course and will concede nothing in future trade talks, as a state-run economy its business model is geared to expanding by crushing the competition. It can be argued that China's unflexible path forward guarantees conflict and this is one of several reasons they represent more of a threat to America than Russia. Understanding the core nature of China is important to comprehend the lack of flexibility ingrained in their system. This comes in the ideology that directs its actions. China is still very much a communist country, and the Chinese Communist Party (CCP) controls everything. From indoctrinating children with Party slogans to requiring companies with more than 50 employees to have Party liaisons, the military and other areas of the country have similar programs.

China Is All About Growing Stronger
Ranked high among the CCP’s many slogans is “Maintain maximum alignment with the Party’s Central Committee.” There is no doubt economic theft is a key component of the "Made in China 2025" program and others that feed into it. This was confirmed in a 2011 report by the U.S. Office of the National Counterintelligence Executive. The book “China’s Industrial Espionage” by William C. Hannas, James Mulvenon, and Anna B. Puglisi states that “each of these programs looks to foreign collaboration and technologies to cover key gaps” and encourages Western-trained experts to serve the CCP, either by returning to China or by “serving in place.” Let me be perfectly clear, this way of thinking completely permeates the way the Chinese think and a lack of legal enforcement of intellectual property rights only adds to the problem.

While it may appear both State-owned and private firms operate within China's economic system. This is mostly an illusion because the Chinese regime allowed some market principles to be introduced in China following economic reforms in the 1980s. In reality, the communist system does not allow for true private ownership and views all "tech innovation" as essential to its national interests. Thus, private and state-owned Chinese firms act in the interest of the Chinese regime when it comes to foreign investments in the high-tech sectors. This means behind the curtain the regime directs Chinese firms on where to invest and puts a priority upon the areas that benefit China the most over the long-term by increasing their ability to compete. 

Through, “Sovereign investment funds and governmental investment management companies" China plays a large role in foreign direct investment in the tech sector. This could be seen in JAC Capital's acquiring the Dutch semiconductor firm NXP in 2016. Fifty-one percent of JAC is owned by an investment vehicle of China’s State Council, the regime’s chief administrative agency. Also, private equity firms can also be used to fund foreign acquisitions. A Reuters report revealed that partial funding for California-based private equity firm Canyon Bridge’s $1.3 billion bid to purchase American chipmaker Lattice Semiconductor originated from the State Council. This is why in September 2017, President Trump blocked the deal, citing national security concerns. Developing the semiconductor industry is high on the Made in China 2025 priority list and China currently relies heavily on imported chips which is one of its biggest imports.

Research In China Is Hampered By Corruption
Adding to China's ability to steal tech innovation is that its people excel in education. There are more than a quarter of a million university students from China in America's colleges an almost five-fold increase since 2000. The combination of understanding American culture and the lack of independent innovation within China creates a bit of a void that tends to fuel this zealous culture of tech theft. The culture of rampant corruption in China is a big factor adding to the lack of quality research and development. This has forced programs of intellectual property theft to expand. As state funds flow through numerous levels of bureaucracy, Chinese money often fails to reach where it is slated to go or accomplish what is intended. The CCP is aware of this problem and in state-run companies, where there is little prospect of rising through the ranks without engaging in corrupt dealing, it’s common for employees to not apply themselves but rather just put in their time. 

As Chinese companies have been forced to compete for their bottom line the desire to move up the manufacturing food chain has grown stronger. China’s main strength in recent history has been its ability to crank out cheap manufacturing and low-cost goods. This means Chinese companies have had to compete heavily on pricing and they are often forced to reduce costs and cut corners on quality wherever possible. This has only added to the image that Chinese products are shoddily made. All the above factors has increased the CCP’s desire to create respected local brands and added pressure to maintain and ramp-up its already unflexible path forward in its attempt to break into the luxury goods and high-tech markets. When we combine this with China's attitude towards expansion and flexing its growing military might it is easy to envision the potential for conflict ahead.

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To bring up the first part of this series click on the link below. 
http://brucewilds.blogspot.com/2018/08/china-has-no-intention-of-altering-its.html

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