AMAC Exclusive – by Daniel Roman
While American credibility is in shreds following the botched withdrawal from Afghanistan, Chinese leader Xi Jinping has moved in broad daylight to steal the intellectual property of Advanced RISC Machines (ARM)—a global technology giant valued at over $50 billion. Absent a major reversal on the part of the Chinese authorities, China will have effectively nationalized the Chinese branch of the U.K.-based company overnight, and with it, staked a claim to all of ARM’s intellectual property worldwide. If Biden and the West fail to stop this theft—which has titanic implications not just for the electronics, telecom, and high-tech manufacturing industries, but for national security itself—the Chinese move will go down as one of the greatest geopolitical coups of the last century.
The precise circumstances of this coup demonstrates both the Chinese approach to business — a process of “chopping,” where the Chinese government requires international firms that wish to operate within the People’s Republic of China to sell a majority stake to Chinese investors — and the Chinese government’s long-term ambition, which is to eventually turn every 51% stake into a totality. There is a direct analogy between the process by which Beijing is seeking to turn a 51% stake in ARM China into a 100% stake, and how they turned what could perhaps be termed a “51% stake” in Hong Kong’s governance into 100% domination.
In the case of ARM, in order to gain access to the Chinese market, the world’s largest in terms of smartphones, ARM was required to create a local subsidiary to which it would transfer rights to all IP it wished to license globally. Such subsidiaries are required to have a majority share owned by Chinese investors. In the case of ARM China, this was 51%, with Softbank, a Japanese conglomerate, holding the other 49%. On paper, the entity was to be independent of the Chinese government, as the Chinese share would be divided between different investors. Furthermore, a majority of the board would be nominated by the parent company. In the end, neither defense against Chinese domination held.
While the board was independent, its Chinese CEO, Allen Wu, was not. He played ball with ARM international as long as there was a prospect of him potentially rising to power at the global level. When ARM entered talks with the American company NVIDIA for a merger, he lost interest, and instead did what many other Chinese executives on joint ventures have done before him. He opened shop across the street at a new firm, Alphatecture, and began transferring ARM China’s assets to that company. When the Board of ARM found out, they voted 7-1 to remove him. This, however, is China, and Wu had the “corporate seal,” the physical stamp or “chop” that confers upon the bearer authority to make deals, transfers, and decisions about the company. In China, possession of the seal is nine tenths of the law (the remainder being the will of Xi Jinping). In this case, Wu used the seal to maintain access to ARM China’s assets, cutting off ARM’s board and employees not just from their accounts but also their own workplaces. The Chinese police looked on with wry amusement, a sentiment that is likely to be echoed by whatever Chinese judges hear the case against Wu.
It is unclear what ARM or anyone else can do, at least within China. It is unlikely Wu would have behaved in this manner without the foreknowledge and support of the CCP leadership. Rogue businessmen tend not to prosper in Xi Jinping’s China, as Jack Ma, the founder of Alibaba, found out the hard way.
Internationally, ARM will clearly refuse to transfer any further IP to ARM China, which thankfully, does not appear to possess the most recent designs. Western countries can and should move immediately to blacklist any products using designs licensed by ARM China or Alphatecture, but there is little they can do about the Chinese market, which is almost certain to be flooded with products using the now stolen IP. Nor is it clear how effective Western efforts will be against the flood of Chinese phones, tablets, and laptops which are likely to arrive in Asia and Africa. With time, and enforcement, the “real” ARM may be able to take advantage of the freer climate of the West to regain the technological lead lost, but it is hard to overstate the importance of what Xi has done. He has quite literally stolen one of the most important technology companies in the world, responsible for the most widely used processor designs on the planet and a firm that has sold over 180 billion processors worldwide for everything from superconductors to phones to computers to servers.
A Growing Threat
In a single move, Xi has emancipated China legally from any dependence on foreign technology for processors. Henceforth, China will be able to contest ownership of IP, thereby being able to claim with disingenuous innocence that China is legally licensing Alphatecture’s IP when challenged on piracy. On a wider level, this reinforces the threat China poses to global supply chains. China already has a stranglehold on iPhone production. And the microchips, whose limited supply are causing shortages in everything ranging from new game consoles to cars, are produced almost exclusively in Taiwan, making the island an even more tempting target for Xi.
Xi’s move against ARM also represents a truth about the new China. There is no place for divided loyalties or ownership in China. Gone is the time when foreigners could wield power in China through either political agreements or ownership. But for Xi, even that is not enough. For China in the 2020s, 51% control is not enough, not of ARM China, nor of Hong Kong. As long as individuals who are not subservient to the CCP exist on the boards of major companies in China, or in the legislative assemblies of Hong Kong, islands of foreign influence and power remain. It is probably not entirely a coincidence that on the same day Mr. Wu made his move to seize control of ARM’s Chinese operations, the last opposition member of the Hong Kong legislative assembly was expelled. Combined with moves against the foreign-dominated private education market, which this spring was legally required to be non-profit, it is clear that China no longer sees a need for foreign workers, or foreigners in general.
This is important. For decades, there was a dream that if capitalism developed in China due to trade and investment, China would democratize. For all but a few delusional fools, this dream died by 2009. For most, it was replaced by a much more modest hope that through investment in China, Western firms could at least gain access to the market and make some profits to balance the trade deficits and provide a limited incentive for Beijing to avoid open confrontation. Now that has been revealed as a false hope, or worse, a lie. In the long run, there is no place for any Western investment in China, or for Westerners. All investment will be allowed solely to serve the interests of the CCP, and when it no longer does so, it will be terminated with scant consideration for legal rights or promises.
A Bamboo Curtain
China’s actions are not without precedent in recent history. In 1946, Sir Winston Churchill similarly warned during a speech in Fulton, Mississippi that the Soviet Union, far from seeking security in the countries it dominated, sought domination, or so entirely associated security with total domination that there was no meaningful difference:
From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia, all these famous cities and the populations around them lie in what I must call the Soviet sphere, and all are subject in one form or another, not only to Soviet influence but to a very high and, in many cases, increasing measure of control from Moscow.
For Stalin, it was not enough that governments in the Soviet sphere of influence be friendly to the Soviet Union, or even Communist dominated. They had to be purely Communist, and furthermore, purely pro-Soviet Communist, with any hints of deviation crushed.
As the ARM affair starkly reveals, the efforts of Xi Jinping to expand China’s sphere of influence represent one of the greatest challenges of the 2020s, and U.S. policymakers of both parties have rightfully focused their attention on the problem. Joe Biden’s National Security Adviser, perhaps as an excuse, justified the withdrawal from Afghanistan on the basis that it allowed for a greater focus on the Chinese threat. But for all the attention levied on the spread of Chinese influence, far less attention is being paid to what is happening behind the “Bamboo Curtain.” For much as Stalin was not content merely to dominate within his zone of influence, but demanded absolute conformity, so too is Xi Jinping making clear that within China’s zone there is no room for anyone who is not Chinese. Nor for any Chinese individual who is not subservient to the CCP. This applies not just to politics but to economics and technology. For China, IP theft is not just about saving money and gaining a competitive advantage. It is about control. As long as China is forced to recognize the rights of any non-Chinese entities to any sort of property or technology within China, then China, in Xi’s view, is not sovereign.
The illusion is dead. It is time to heed Churchill’s call to face the new reality. The Bamboo Curtain is descending across the world.
Daniel Roman is the pen name of a frequent commentator and lecturer on foreign policy and political affairs, both nationally and internationally. He holds a Ph.D. in International Relations from the London School of Economics.
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