SinoTech

As Facebook Joins the Race to the Metaverse, Chinese Tech Companies Face Hurdles

By Brian Liu, Raquel Leslie
Friday, November 12, 2021, 10:57 AM

In the wake of Mark Zuckerberg’s announcement on Oct. 28 that Facebook will be changing its name to Meta Platforms Inc., Chinese tech giants scrambled to stake their positions in the spacedespite stern warnings about the metaverse from Chinese regulators. 

The metaverse refers to a hypothesized next iteration of the internet consisting of online 3-D virtual environments that people can access through virtual reality (VR) headsets, smartphones, PCs, game consoles and other devices. U.S. video game companies such as Epic Games are already building their own metaverse platforms replete with shared immersive experiences like virtual concerts. 

But China’s dominance in the artificial intelligence (AI) sphere may have given the country a sizable head start over competitors in the race to build the next frontier of virtual human interaction. China’s New Generation Artificial Intelligence Development Plan has spurred billions of dollars in research and development investments from ministries, provincial governments and private companies since its issuance in 2017. China also has unrivaled capacity and experience in another driving force of the metaverse: consumer device manufacturing. From smartphones to VR headsets, Chinese companies are building the vast majority of devices that consumers need to access shared virtual platforms. 

Furthermore, Chinese interactive mobile platforms have a head start in innovation. As the world’s largest video gaming firm by revenue, Tencent already dominates the online gaming space and may be better positioned than Meta to pivot to the metaverse concept. Apart from its social networking arm, Tencent presides over a sprawling business empire encompassing everything from gaming to mobile payments and virtual offices. The company is also set to sharpen its focus on developments in the metaverse space by assembling an international team for a new gaming studio under subsidiary TiMi Studios and registering metaverse-related trademarks for its social and music apps.

Other Chinese tech giants have followed in Tencent’s footsteps as competition in the space heats up. Just one day after Facebook announced its corporate name change to Meta, Chinese search engine Baidu applied to trademark the name “metaapp,” while Chinese gaming giant NetEase filed dozens of trademark applications related to the buzzword. E-commerce giant Alibaba also registered several trademarks, including “Ali Metaverse”. 

Though Chinese firms are poised to capitalize on the opportunity this concept presents, they may face a significant hurdle in the race to the metaversetheir government. Beijing once championed virtual and augmented reality, acknowledging developments in the space in China’s previous five-year plan and including it in the country’s 2025 blueprint for matching the U.S. as a technology power. However, the government’s recent scrutiny over online content and data security complicates any advances the country’s tech giants may make in building online 3-D virtual environments. 

On Nov. 30, the China Institutes of Contemporary International Relations (CICIR), a state-backed think tank affiliated with China’s Ministry of State Security, published a research note expressing national security concerns over the metaverse. The state-owned Securities Times also warned in September that those who “blindly invest in such a grand and illusory concept as metaverse will be burnt in the end.”

The Chinese government’s tightened gaming regulations may pose another threat to the country’s competitive edge in this space. China introduced new rules in August that restrict minors’ gaming playtime to three hours a week and put new game approvals on hold. Such prohibitions could erode the country’s early advantage over U.S. companies in building the metaverse. 

Either way, it will undoubtedly take years until the metaverse is fully realized. As major players around the world compete to lay claim to the metaverse, no single country alone controls enough of the critical building blocks to the metaversecritical technologies like AI, 5G, end-user devices and the apps that bring consumers together online. The concept will likely require significant cooperation among tech giants around the globe. 

One thing is clear: Facebook’s name change reflects Silicon Valley’s ambitions in what will surely be a lucrative industry, one that Bloomberg Intelligence estimates could be worth $800 billion by 2024. It remains to be seen what role China will play in this race, particularly as it reconciles its data privacy priorities with its competitive interests vis-a-vis the United States. Just as Beijing has recently bolstered domestic anti-money laundering and intellectual property protections, in addition to emerging guidelines on AI ethics, we may soon see new legal and ethical standards governing the metaverse from China as well. 

U.S. Closes “Huawei Loophole,” Highlighting Challenges to Decoupling Telecom Networks

On Oct. 28, the Senate unanimously passed the Secure Equipment Act of 2021, forwarding the bill to President Biden for signature. The bill aims to prevent further integration of Chinese equipment into U.S. telecommunications networks. If enacted, the law would prohibit the Federal Communications Commission (FCC) from approving any equipment licenses from companies on the FCC’s “Covered List,” which currently includes Huawei, ZTE and three other Chinese companies. This would close what FCC Commissioner Brendan Carr calls the “Huawei loophole,” which prohibits U.S. telecommunications carriers from using Chinese telecommunications equipment purchased with federal but not private funds. 

The bill comes a week after the FCC voted unanimously to revoke China Telecom’s authorization to operate in the United States. China Telecom America is the U.S. subsidiary of China Telecom, China’s largest telecommunications company. The move did not come as a complete surprise to China watchers, as the FCC had warned in 2020 that it may shut down three major Chinese telecommunications subsidiaries in the United States. Still, it is expected to have a significant impact, primarily on Chinese nationals living in the U.S. The company is the carrier of choice for Chinese tourists, exchange students and businesses in America. 

While U.S. legislators celebrate the move as a victory for national security, some observers warn that these telecom crackdowns may inadvertently exacerbate America’s digital divide. In rural America, where nearly 40 percent of the population lacks access to “fast” broadband internet service, consumers rely heavily on Chinese telecommunications equipment as a reliable low-cost option. In 2018 the Rural Wireless Association (RWA), a trade association for small wireless carriers serving fewer than 100,000 subscribers, estimated that 25 percent of their networks used some equipment from either Huawei or ZTE. Some carriers in Alabama and eastern Colorado have built the majority of their networks on Huawei and ZTE equipment. 

Recognizing the economic burden to smaller carriers, the FCC opened a special process on Oct. 29 to reimburse rural carriers transitioning away from Chinese equipment. Last year, Congress established a $1.9 billion fund to help small carriers “rip and replace” Chinese network equipment with non-Chinese alternatives. Some critics have pointed out that the fund is insufficient, and the replacement process could cause rolling service outages. Decoupling may also delay the adoption of 5G in rural areas, as the FCC rule governing the use of the funds prevents rural telecoms from using the funding for network upgrades. Still, the fund’s enactment was celebrated by the RWA, as it exceeded original funding expectations by nearly 200 percent. 

While the United States can entice domestic carriers away from Chinese telecoms with financial carrots and regulatory sticks, its ability to influence international carriers is far more limited. Increasingly shut out of American and European markets, Huawei has doubled down on its investments in countries like Brazil, Indonesia and Nigeria. Many of these countries have allowed Huawei to build their government’s servers and data centers, despite Washington’s best efforts to convince them otherwise. Though the United States has offered loans to developing countries in an attempt to lure them away from Chinese telecoms, it has struggled to keep pace with China’s below-market rates and repayment schedules. 

For its part, China’s reaction to the telecom ban has been relatively muted. The main response has been from China’s Ministry of Industry and Information Technology, which urged the U.S. government to treat Chinese companies in a “fair, non-discriminatory” manner. The Chinese Embassy in Washington so far has not responded to the China Telecom ban, and a Foreign Ministry spokesperson appeared to bat away a question on the matter at a press conference. Part of the reason for the mild response may be the relatively small market share China Telecom has in the United States. The unit is estimated to earn less than $200 million a year, roughly 0.3 percent of China Telecom’s global revenues. 

China also probably recognizes that a full decoupling from Chinese technology is virtually impossible, at least without major ripple effects on global markets. In addition to expanding their reach to developing countries, Huawei and China Telecom are members of international technical standards organizations like O-RAN, ETSI and 3GPP, which facilitate interoperability in global telecommunications. While the United States is attempting to physically remove all traces of Chinese hardware from American systems, China’s place in these global organizations will allow it to continue shaping American telecommunications practices from afar. 

Justice Department’s China Focus Continues Under Biden With Latest Conviction

On Nov. 5, a federal jury convicted Yanjun Xu, a Chinese national and deputy division director of the Sixth Bureau of the Jiangsu province Ministry of State Security, of conspiring to and attempting to commit economic espionage and theft of trade secrets. Xu is the first Chinese intelligence officer to be extradited to the U.S. to stand trial. 

According to court documents and evidence presented at trial, Xu used multiple aliases to target specific companies in the U.S. and abroad that are recognized as leaders in the field of aviation. Xu allegedly attempted to steal technology related to GE Aviation’s exclusive composite aircraft engine fan by inducing a GE Aviation employee to share confidential documents containing “system specification” and “design process” for the technology as well as a file directory for the employee’s company-issued computer. Xu was arrested in Belgium, where he had traveled to meet with the employee in April 2018. A spokesperson for China’s foreign ministry called the charges against Xu “pure fabrication.” 

The conviction appears to indicate that the Department of Justice will continue prosecutions of Chinese nationals for economic espionage under the Biden administration. The Trump administration launched the “China Initiative” within the department’s National Security Division in November 2018 as a prosecutorial response to a perceived campaign of economic espionage, covert influence operations and illicit knowledge transfer by China. However, the program has come under fire since its inception. 

The stated goals of the China Initiative include “[i]dentify[ing] priority trade secret theft cases” and “[d]evelop[ing] an enforcement strategy concerning non-traditional collectors (e.g., researchers in labs, universities and the defense industrial base) that are being coopted into transferring technology.” In practice, however, many of the cases prosecuted under the China Initiative do not involve allegations of actual technology transfers. Rather, many suspects are indicted on charges like wire fraud or making false statements, oftentimes to prosecute researchers who receive grant money on supposedly false pretenses. 

Critics assert that the initiative has led to racial profiling and has fueled a climate of fear among Asian Americans in the U.S., particularly those of Chinese descent, who fear being targeted for investigation because of their ethnicity. An open letter to U.S. Attorney General Merrick Garland signed by 177 members of Stanford University’s faculty in September 2021 argued that “the China Initiative has deviated significantly from its claimed mission” and “is harming the United States’ research and technology competitiveness.” A recent survey of scientists at leading U.S. research universities reported fears from Chinese Americans and Chinese nationals that any connection with Chinasuch as collaborating on a research project, applying for a grant or collecting datamay leave them vulnerable to potential investigation by the FBI. Several Asian American advocacy groups also submitted a brief in 2020 in the prosecution of University of Kansas professor Feng Tao expressing concerns about government overreach.  

Furthermore, the China Initiative has been criticized as an imprecise and frequently unsuccessful prosecutorial response to the threat of economic espionage. The FBI’s thousands of investigations under the initiative have not unearthed widespread intellectual property theft among researchers, and prosecutors have met with prominent failures at trialmost notably with a grant fraud case brought against a University of Tennessee professor, Anming Hu, who was ultimately acquitted on all counts. 

Scholars, policymakers and advocacy groups alike have called for the Biden administration to undertake a careful review of the China Initiative or eliminate it altogether. Attorney General Garland was recently questioned about the China Initiative at a congressional hearing on Oct. 27. He stated that Congress and the public must bear in mind that “the People’s Republic of China is a serious threat to our intellectual property” but emphasized that the department “never investigate[s] or prosecute[s] based on ethnic identity, on what country a person is from or came from or their family.” Despite such assurances from Garland, it is likely that the China Initiative under Biden will meet renewed pushback if it continues to operate without reforms. 

Other News 

Yahoo Joins LinkedIn in Pulling Out of Chinese Market

Yahoo Inc. has announced that it is pulling out of China, becoming the latest foreign company to withdraw from the country amid Beijing’s toughening business environment. A Yahoo spokesman stated that “[i]n recognition of the increasingly challenging business and legal environment in China, Yahoo’s suite of services will no longer be accessible from mainland China as of November 1.” Yahoo is the second well-known U.S. tech firm to downsize its China operations in less than a month following the closure of LinkedIn’s networking site on Oct. 14.

Yahoo’s departure was largely symbolic, as the company had already begun shutting down its main services in China beginning in 2013 as regulations toward foreign tech companies hardened and domestic competition grew. The announcement marks the end of a tumultuous, two-decade relationship between the former search giant and China. Yahoo entered the Chinese market in 1999, launching email and search directory services and offering translations of U.S. news articles. Since 2005, most of the company’s Chinese operations had been run by Alibaba, which has gradually phased out Yahoo’s platforms. Yahoo came under fire in 2007 in a congressional hearing after data shared by the company with Chinese authorities led to the imprisonment of several Chinese dissidents. In 2013, Alibaba shut down Yahoo’s email, Chinese music, news and community services. Two years later, Yahoo shuttered its Beijing office.

Still, Yahoo’s official exit serves as a reminder of the challenging environment that foreign companies must navigate in China in the wake of tighter data security and privacy regulations and higher compliance costs. Yahoo’s departure coincided with the implementation of China’s Personal Information Protection Law (PIPL), a law designed to limit data collection by technology companies that went into effect on Nov. 1. Modeled partly on the European Union’s General Data Protection Regulation, the PIPL requires organizations and individuals that handle the personal information of Chinese citizens to minimize their collection and obtain user consent. Chinese laws also stipulate that companies operating in the country must hand over data if requested by authorities, posing difficulties for foreign companies that face pressure at home to avoid giving in to Beijing’s demands.

State Department Establishes Bureau of Cyberspace and Digital Policy 

On Oct. 27, Secretary of State Antony Blinken announced the creation of a new Bureau of Cyberspace and Digital Policy in a speech at the Foreign Service Institute. The new bureau will focus on international cybersecurity, international digital policy and digital freedom, according to State Department spokesperson Ned Price. The bureau is part of a broader effort by the Biden administration to compete in the global technology race, and will add a diplomatic component to the growing cyber community within the federal government. 

The bureau is expected to play a leading role in upcoming U.N. talks to enact a global comprehensive cybercrime treaty. The treaty would set the global rules of the road on everything from definitions of cybercrime to limitations on law enforcement access to data. China and Russia have already staked out positions on the treaty, with Russia offering a vision of cybersecurity that includes network backdoors, wiretapping capabilities and technical censorship. Negotiations over the treaty are set to begin next year, and the drafting committee is required to present the proposed treaty to the U.N. General Assembly by September 2024.  

Separately, Congress is considering a law that would create a permanent cyber diplomacy office at the State Department through congressional mandate. The Cyber Diplomacy Act of 2021, which passed the House and is pending before the Senate, would establish a Bureau of International Cyberspace Policy headed by an official with the rank of ambassador. If the law passes, it is unclear how it would affect the new cyberspace bureau, but a congressional mandate would provide the cyberspace office with guaranteed funding and protection against reorganization by a future administration. 

Some commentators have also read the establishment of the new bureau specifically as an attempt to check Chinese President Xi Jinping’s ambitions in technology. For their part, Chinese state media entities agree. The Global Times, a Chinese state-owned newspaper, criticized Blinken’s move as a bureaucratic power grab and an effort to form a “united front to suppress China.” 

Commentary

Jason Tashea of the Brookings Institution presents the case on how the U.S. can compete with China on digital justice technology. 

Gen. John Allen (ret.), Ryan Hass and Bruce Jones of Brookings propose a new framework for managing U.S. relations with China, focusing on protecting critical global systems, increasing investments in diplomacy and recognizing “persistent competition” as the baseline of the relationship. 

Ryan Fedasiuk of Georgetown’s Center for Security and Emerging Technology presents research on hundreds of Chinese Army contracts, showing how Chinese progress in military AI is being driven in part by shortcomings in the U.S. export control system 

Johannes Petry argues that with the center of the global economy shifting from West to East, the clash in state-market philosophies is set to intensify. 

Stewart Baker discusses Yahoo’s exit from China and the Pentagon’s new cybersecurity regulations for defense contractors on the Cyberlaw Podcast.  

The Guardian’s Vincent Ni makes the case that China’s “crackdown” on domestic tech companies can serve as model reform for the rest of the world. 

Jeffrey Wilson shows how Australia’s success in decoupling its economy from Beijing’s can provide a model for other countries to follow. 

Jonathan Hillman argues that to adequately compete with China, the United States must intensity its digital outreach to the developing world. 

David Ignatius posits that Xi’s purge of internet entrepreneurs may result in a brain drain in America’s favor. 

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