China Power | Security | East Asia

Expanding Cyber Demands Embolden China’s Homegrown Cybersecurity Darlings

China is building a welcoming ecosystem for its homegrown tech darlings.

By Mohammed Shihab for
Expanding Cyber Demands Embolden China’s Homegrown Cybersecurity Darlings
Credit: Illustration by Catherine Putz.

In tandem with the rapid growth of internet accessibility over the last decade, the expanding footprint of cyber warfare has meant no absence of new threats and vulnerabilities. From the individual level all the way to corporations and the bureaucracies responsible for managing sovereign states, no party is immune from the perils of our increasingly connected internet landscape. 

Echoing the vast yet still growing population of Chinese internet users, the country has seen no shortage of companies respond to the rallying call for better cyber security. Among its most important initiatives, the country’s leadership has outlined the cyber defense arena as one of specific importance.

Labeling the directives as defensively oriented, China is building a welcoming ecosystem for its homegrown darlings as it seeks to expand its cybersecurity capacities.  As the country’s ambitious Made in China 2025 takes off and the government invests heavily into smart manufacturing and smart cities, tech and cybersecurity are equally vital sides of the same transformative coin.

Harnessing Domestic Potential

Although China is home to some of the largest technology firms in the world, many still rely in some ways on foreign solutions. China’s leadership recognizes the need to develop these technologies domestically, especially given changing trade trends. During a policy address in 2018, Chinese Premier Li Keqiang underscored the importance of nurturing innovation within the nation.

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The remarks dovetailed with a decision in late 2017 to develop a cybersecurity park in Beijing which has attracted notable industry names including Beijing Veda Information Technology Group and 360 Enterprise Security Group. Moreover, the recent decision to streamline listing for tech companies and startups via the newly minted Shanghai Stock Exchange STAR Market is expressly designed to support the domestic cyber security industry vis-à-vis accessible capital.

Apart from hoping to attract Chinese dual-listed companies that enjoy share classes currently unavailable in other mainland exchanges thanks to relaxed listing rules, it also supports the mission to transform China into a global cyber leader. Nevertheless, these moves represent smaller building blocks of a bigger strategy.

Cyber’s Importance Permeates Industries

China’s leadership has created an ambitious technology roadmap that includes significant improvements in manufacturing, consumer technology, and even smart cities. However, without cyber security, many of these dreams will struggle to become a reality. The plan — consisting of mart electric grids, millions of IoT connected devices, automation, and the use of AI and machine learning — creates severe vulnerabilities and security concerns. Moreover, the rising prominence of cyber warfare has added urgency in terms of developing defensive capabilities.

Some Chinese companies have already heeded China’s clarion call. Qihoo 360, one of the biggest cybersecurity firms in the world, has taken up the torch with promising cyber tools that meet several of China’s unique needs. Since delisting from the New York Stock Exchange in 2016, Qihoo 360 relisted in Shanghai in 2018 in part to qualify for government and military contracts.

CEO Zhou Hongyi touted the move as resolving an “identity issue” while paving the way to play a more prominent role in the nation’s cyber security strategy. In the meantime, he has repeatedly addressed the growing penchant for cyberwarfare on a global level, publicizing his ambitious plans to develop a cyberspace radar system designed to detect and thwart major attacks. 

The company already plays an outsized role in the local technology ecosystem, taking a commanding lead as far as domestic market share for antivirus software while delivering other security products for both enterprise and government. Furthermore, Zhou’s comments echo government calls for more companies to come home as the leadership pins the future of economic prosperity squarely on the technology industry, especially when it comes to realizing the benefits of technology and automation across China’s vast economic landscape.

Belt and Road Bolsters Cyber Mandate

In addition to realizing its Made in China 2025 vision at home, the importance of China’s persistent drive for tech and cybersecurity leadership extends well beyond its own borders. As part of ongoing efforts to export domestic spare capacity, China has inked many deals stretching across the globe to fulfill its Belt (overland routes) and Road (sea trading routes) Initiative. The main thrust of these ambitious projects is increase China’s role in facilitating global trade, helping open new opportunities for the Yuan while helping redirect domestic excesses abroad.

Concurrently, these massive investment undertakings open new avenues for Chinese firms to build a more multinational presence, specifically in Asia and North Africa, where its cyber security solutions and accumulated knowledge can be eventually deployed to defend critical infrastructure.  However, some are wary of the influence of Chinese technology companies, especially after very public international rows involving providers like Huawei and ZTE. Moreover, Chinese tech companies are no strangers to controversy and have a penchant for litigation, both at home and abroad.

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Collecting Controversy

Chinese cyber and tech companies are undeniably vying to become global leaders, helped in part by government initiatives, but they still do carry around baggage and negative publicity that may loom large over deals with conceivable partners.

For instance, Chinese cyber security leader Qihoo 360 has faced no shortage of criticism for its behavior including backdoors in its web browser and antivirus suite along with a slew of privacy-related breaches. Further, its NYSE delisting and take-private transaction is still being challenged in court by Maso Capital.  Alleging that the company hid material information including optimistic valuations and projections from shareholders before the transaction was approved, dissenting shareholders are still pressing the company in Cayman Courts to secure “fair value” for their shares.

Maso Capital’s lawsuit was opened in the Cayman Islands in a time when Qihoo is already under some controversy over complications and reputation damage after its own delisting process. Many observers have suggested that mediation offers the tidiest possible solution to a messy legal battle.

The cavalier attitude of the company toward its shareholders could warn off potential clients outside of China that are unnerved by Qihoo’s behavior. For those that do attempt to challenge Chinese companies, pursuing organizations in mainland courts or attempting discovery, especially those companies which handle state and military interests, promises to be an arduous, if not impossible, task.

However, allegations of malfeasance extend well beyond Qihoo 360. Huawei, another Chinese tech darling, has also found itself in the crosshairs of multiple governments. Between accusations of data transfers from U.S. companies highlighted in a 2012 U.S. House Intelligence Committee report to cases of corporate espionage and IP theft, Huawei’s predicament underscores the reasonable doubts of transacting with Chinese companies. 

Moreover, Chinese law demands that organizations, especially in the technology sphere, assist with intelligence collection efforts undertaken by the government. For partners in the BRI projects this itself should raise flags about working alongside Chinese companies, notably in the cybersecurity arena. Additionally, it casts doubt on the virtue of partnering with companies that are closely tied to the government and military, knowing full well that integrity may only mean so much in the larger context of national security.

Chinese Companies Heed the Government’s Siren Song

While the Chinese government may have taken a more cautious approach to industry in its early days, technology is now firmly viewed as a strategic imperative at the highest levels as connected online ecosystems experience rapid expansion. The result is a slew of measures and undertakings designed to support innovation within its own borders while incentivizing some of its largest homegrown companies to take more of an inward perspective towards growth and development.

External projects like the BRI represent immense opportunities for domestic companies that are close to the government, but shaking off the industry’s current reputation in world markets is undeniably prudent, especially given the nation’s intention to position its technology sector for global tech leadership. Absent real changes in terms of attitude and culture in this arena could stymie the leaderships ambitions and goals.  Still, the encouraging backdrop for some of China’s largest tech and cybersecurity enterprises is promising not just because of their prowess, but simply out of national interest which often drives a high degree of decision-making.

Mohammed Shihab runs a consultancy practice for Middle Eastern funds and business people seeking to invest in Indonesia and the broader Southeast Asian region. He was formerly at the Indonesian Ministry of Foreign Affairs.