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China's Wi-Fi Wrangle

By Bruce Einhorn The controversy over China trying to control Wi-Fi within its own borders is heating up. Last week, Intel (INTC) announced that it would stop selling its Centrino laptop chip, which has wireless networking built-in, in China on June 1. That's when a new policy comes into effect requiring all wireless network equipment to comply with a new, Chinese-made encryption standard. Beijing, citing national-security concerns, won't give any foreign companies access to the standard. So companies like Intel that want to sell Wi-Fi products in China have to become partners with two dozen or so Chinese concerns designated by the government.

The debate over this policy has been raging for weeks (see BW Asian Cover Story, 3/15/04, "China.Net"). The argument illustrates how differently Americans and Chinese look at the world: The Americans, distrustful of Beijing, see a malicious measure of industrial policy, while the Chinese, proud of locals having made an impact in a cutting-edge industry, see simply a commonsense measure to popularize a technology.

FAILING THE "LAUGH TEST." No amount of reassurance from Chinese officialdom is going to sway the minds of many U.S. businesspeople and industry officials. To the Americans, China has created a trade barrier to favor local businesses and help them win market share at home -- and thereby put them in a good position to do better overseas, too. In a U.S. election year, when China already has a trade surplus with America and stateside anguish is rising over a jobless recovery, it's no wonder that Beijing's bravado is infuriating some Americans.

"This is the most ludicrous trade barrier I have ever come across," raged Frank Vargo, vice-president for international economic affairs at the National Association of Manufacturers, in a recent conference call with reporters. "It doesn't even pass the laugh test." According to Vargo, forcing foreigners to team up with local outfits is a clear violation of World Trade Organization rules, and Beijing's policy invites Washington's retaliation.

"If this goes through, we will be there insisting the U.S. government react immediately," Vargo thundered. "There will be more than one industry lined up on Capitol Hill saying: 'Let's designate [American] companies that Chinese companies will have to partner with if they want to export to the U.S.'"

"IT'S NOT KOSHER." The big worry is that if Beijing can push through this policy, then more protectionist measures will follow. "To choose an independent, proprietary standard without a clear or open process means that [similar policies] could also be applied to other technology that uses encryption" such as PCs and cell phones, says Anne Stevenson-Yang, managing director of the U.S. Information Technology Office in Beijing.

She finds it particularly galling that the Chinese government justifies its policy based on national security. Instead, she says it's clearly an attempt to control the market and give Chinese businesses a boost. "It's a terrible precedent," says Stevenson-Yang. "It's not kosher."

Chinese officials' response: Humbug! They insist the reason for the encryption standard is just what the government says -- a matter of making China's wireless networks safe for users. "It's a security question. That's the biggest issue," says Ling Dongsheng, a general manager at ZTE Corp., a communications-equipment producer in the southern city of Shenzhen. ZTE is one of the Chinese companies designated to have the rights to the new standard. "If foreign companies want to cooperate with us, then we will have a positive attitude," he says.

LATE REPRIEVE? Liu Jiren, chairman and CEO of software developer Neusoft, says the encryption policy is an isolated case. Neusoft, based in northeast China, is one of the outfits that has the rights to come up with products using the new Wi-Fi standard. "The Chinese have adapted a lot of American standards for network and communication equipment," he says. "China is really an open country. The purpose of this is really to make [Wi-Fi] safer and create confidence so people will use the mobile network."

So what's likely to happen next? Both sides are talking tough, but it's still possible that the dispute will be resolved. Duncan Clark, managing director for consulting firm BDA China in Beijing, points out that a similar hullabaloo about encryption erupted back in the late 1990s. Then, the Chinese government suddenly announced that PC software had to be encrypted according to a local standard. An an outcry from foreign businesses followed, and eventually other Chinese officials intervened.

"That was 'committeed' away," says Clark. American companies can only hope the same thing happens this time. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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