Big Tech Strategies on China are About to Backfire

“Many of the companies that are now concerned about Trump Administration efforts to fend off Chinese intellectual property theft and address other national security concerns are undoubtedly worried because of the all eggs in one basket approach they adopted toward China.”

China - are the tech companies so in love with China? Are they are begging for China to steal their intellectual property? Sometimes it feels that way.

The Wall Street Journal is reporting that U.S. companies that see their fortunes tied to China are raising concerns with the White House over a Trump Administration Executive Order that would ban WeChat from the United States. U.S. companies, including Apple, Ford, Walmart, Walt Disney, Procter & Gamble and Intel “are concerned the administration’s action could effectively cut them off from access to the lucrative China market, for example by ending their ability to accept payments or advertise on WeChat.”

Market Potential Mirage

These U.S. companies that want to do business with China at all costs see a huge country with enormous market potential. They cannot fathom being banned from such a target rich environment. They act as if the Chinese marketplace is fair and open, which is simply not the case despite China going to great effort to paint a different picture for the West over the last decade.

These U.S. companies are focused on China because of the more than 1.4 billion people that make up the Chinese population, and the 109 million that have wealth of between $50,000 and $500,000 ­– a relatively high standard of living  – in China. McKinsey predicts that by 2022 the Chinese middle-class will reach a staggering 550 million. If the Chinese market were fair and open, that would mean a great potential for users and subscribers, and a marketplace that dwarfs the United States.

But how does this potential user base allow executives in the C-suite to convince themselves to ignore the very real risks that exist both to U.S. national security and to the long-term security and viability of the very companies that choose to do business in China? They may, and likely would, make money initially, before Chinese partners swoop in to take control and cut them out. Is the short-term gain really worth the long-term loss?

The ‘Greener Pastures’ Mentality

The Silicon Valley giants in particular are driven by C-suite executives who make decisions based on stock price rather than the long-term sustainability and viability of the company. They are unlikely to be in the C-suite of the company they are with today for more than a few years at most before they are on to bigger, better, greener pastures somewhere else, whether that be in another C-suite at another company or eventually when they retire with a golden parachute. With few long-term, single company C-suite executives anymore, why should it be surprising that they think and act to maximize over the short-term? And given that the acquisition of subscribers and customers is such an important factor for the stock market, and stock price is such a critical piece of compensation for C-suite executives, decisions that maximize the stock price are an easy way to keep shareholders happy and to become fabulously rich. Just days ago, Apple CEO Tim Cook became a billionaire.

The stock must always rise mentality causes tech companies to do whatever they can to exploit new markets, gain subscribers and grow a user base. In a desperate search for dot com bubble stock pricing, C-suite executives are not happy with or rewarded for competently running a strong, sustaining company that is securely set up for long-term growth, with reasonable profitability and happy employees. So, they take great risks with their IP and businesses at large, and today that means doing business in China, even knowing that their crown technology jewels are being stolen and it is only a matter of time before their Chinese partner companies take over, or otherwise start to compete against them globally.

All Apples in One Basket

Many of the companies that are now concerned about Trump Administration efforts to fend off Chinese intellectual property theft and address other national security concerns are undoubtedly worried because of the all eggs in one basket approach they adopted toward China. Tech companies, like Apple, have dramatically over-exposed themselves to the Chinese economy as China seemingly opened up.

In January 2019, patent attorney and Apple expert John Kheit wrote an article highly critical of Apple CEO Tim Cook, explaining that as China moves forward with attempts to strengthen its patent system, Apple could find itself “one patent injunction away from not being able to manufacture any iPhones.”

As has become evident during the COVID-19 pandemic, those leveraged on China for manufacturing have additional worries not tied to patent injunctions. Still, Kheit’s conclusion is quite accurate today.

“In the 8 or so years since Cook has been CEO, he should have formulated—and implemented—a real Plan B, C and D for iPhone production,” Kheit wrote 18-months ago. “Apple has all the money… There is no excuse for not trying to advance manufacturing at home.”

Now that there is growing friction between the U.S. and Chinese governments, the long-term lack of a diversification is looking rather short-sighted. Of course, to be fair, some companies were growing tired of China’s intellectual property theft, rising labor costs as the middle class grew, and growing political instability as the country more firmly moved toward a functional dictatorship with President Xi Jinping to remain in power for life after the removal of term limits. But the fragility of the supply chain that was exposed practically overnight due to the COVID-19 pandemic, coupled with Trump Administration Executive Orders, show the price of complacency and difficulty in pivoting after all eggs have been placed in one basket for so long.

The Final Straw

Where will manufacturing go? Will it leave China? Obviously, China has the advantage of a highly educated work force with much experience in the precise manufacturing these companies need, making the lack of a Plan B diversification strategy all the more negligent. Still, according to the Washington Post, Japan has set aside $2.2 billion to attract companies, President Trump is making his pitch to have U.S. companies bring manufacturing home, and Mexico is now pitching U.S. companies about its advantages and proximity to the U.S. market.

Ironically, it seems the many years of intellectual property theft did little to incentivize companies to leave China. Safeguarding IP assets has been of peculiarly low priority, which is strange given the rise of Chinese companies now competing against U.S. companies with stolen technology and innovation. But the interruption of supply chains and the Trump Administration saying we cannot tolerate the national security risks any longer may be the final straw.

Image Source: Deposit Photos
Author: jpgon
Image ID: 76008441 


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Join the Discussion

10 comments so far.

  • [Avatar for Jonathan R Stroud]
    Jonathan R Stroud
    August 20, 2020 10:39 am

    Also, Irate Patent Attorney’s irony is biting and I am here for it.

  • [Avatar for Jonathan Stroud]
    Jonathan Stroud
    August 20, 2020 10:38 am

    Some of the more colorful rhetoric aside, there are lots of good points in here. I don’t think it’s as much a mirage as it is we are now (at the multinational level) inextricably tied to the Chinese economy not just for customers, but for suppliers, industry partners, devs, certain foods, etc. So while it’s a rational economic response to not want the world economy to splinter, it’s also one that faces the reality of the Chinese state.

    I think it’s really telling that the biggest advocate for net neutrality (and probably one of the smartest people in the world) Professor Tim Wu penned a thoughtful column in the New York Times endorsing the executive action as a proportional response to years of balkanization of China’s internal Internet. The article is well worth a read.

  • [Avatar for MaxDrei]
    August 19, 2020 12:41 pm

    To ipguy: as to your #7 I’m not convinced this is the over-riding issue. After all, boot on the other foot, it is routine for the USPTO to baulk at subject matter which the rest of the world recognises as patentable under GATT-TRIPS.

    For me, the over-riding issue is the Separation of Powers and respect for the Rule of Law. Time was, when the USA exhibited both, and deplored totalitarian regimes all over the world that do not respect The Rule of Law. Now, you have a President that openly praises these countries that find the Rule of Law a joke.

    Of what use to you is the issue of a patent in the PRC? Who knows, for that remains unknown until the Party Chief decides it by fiat, on a personal whim. So operate the world’s “Strong Men” that fascinate your President so much. It turns my stomach.

    Time was, when the USA enjoyed huge “soft power”. It’s more or less all now been squandered. Will the neo-liberal economists put a numerical value on that loss please.

  • [Avatar for ipguy]
    August 18, 2020 06:35 pm

    The question is whether the China National Intellectual Property Administration is willing to grant intellectual property rights in a particular application, even when all other jurisdictions (US, EPO, South Korea, Japan, etc.) have granted an application.

  • [Avatar for Anon]
    August 18, 2020 04:21 pm

    As I have noted previously, “big corporation” (that is, the transnational corporations) are NOT US Citizens and thus have NO sense of loyalty to the US Sovereign.

    Nor would they under any Rational Actor point of view.

    What this does do, however (or at the least SHOULD do), is make us (the royal Us) pause and reconsider the extent of power that juristic persons should have.

    Patent law was, is, and ever shall be, a Sovereign-Centric law. The moment that powers that be are allowed to shape patent law in a way that is NOT Soveriegn-Centric (i.e., Global Harmonization), then the patent power has been diminished from its rightful state.

  • [Avatar for Pro Say]
    Pro Say
    August 18, 2020 01:23 pm

    All your innovations are belong to us.

    — Communist China

  • [Avatar for Night Writer]
    Night Writer
    August 18, 2020 11:14 am

    Thanks those are good points. The big corporations will sell out the USA for personal profit and for their particular corporation.

  • [Avatar for John Fraser]
    John Fraser
    August 18, 2020 11:03 am

    Gene. This is a brutally frank assessment of the situation for one of America’s hero technology companies. There is no downside to Apple diversifying its production as suggested, given its margins and cash in the Bank.

    Thanks for such a clear eyed reinforcement of John Kheit’s opinions.

  • [Avatar for IratePatentAttorney]
    August 18, 2020 05:11 am

    Isn’t it silly how businesses are driven by their desire for profits rather than the purity of their patent principles. Clearly, we should give up 30% of our revenue to show those Chinese what for.

  • [Avatar for IPdude]
    August 17, 2020 09:43 pm

    With a Kamala Harris presidency, we will likely see another Michelle Lee running the patent office. Goodbye patents…for good this time.