Tuesday, 26 May 2015

China Seeks Blue Water Navy

China's first military white paper in two years has caused headlines as it announces Beijing's intention to field its navy in the open ocean. This oceanic, or blue water capability is seen as vital if a nation wishes to have long range power projection capabilities. Currently, China has a green water navy, or one that can operate well in regional bodies of waters such as the South China Sea and Sea of Japan. China's declaration of blue water aspirations, is a response to the United States' "Pivot to Asia" under President Obama, which has seen America's military focus shift away from Europe (the legacy of the Cold War face-off on the continent with the USSR) to the Asia-Pacific.

China has the second largest economy in the world, and second highest military budget. Beijing's defence strategy is one that is focused on mainland defence via control of green water areas in East / Southeast Asia. To this end, China's navy - the Peoples' Liberation Army Navy (PLAN) has seen massive investments in recent years. China recently launched its first aircraft carrier, a heavily refurbished ex-Ukrainain vessel. China is also seeking to construct two to four additional, domestically produced, carriers. These carriers are essential for power projection and a blue water navy.

China's Liaoning Aircraft Carrier
Image Credit: news.usni.org

Carrier task forces form the mainstay of American global power projection, with Washington using its ten carrier strike groups as impressive manifestations of Pax Americana - the global maritime peace underwritten by the U.S. Navy. China seeks to create its own carrier groups in order to extend its defence buffer zone deep into the Pacific. Moreover, China is not only concerned about the American presence in the Asia-Pacific, but also that of America's various regional allies.

Specifically, China has long been concerned that Washington is establishing a system of alliances and defence agreements that effectively encircle China. The U.S. has alliances with Japan - itself the owner of a powerful navy -  and South Korea. Washington also has defence and military agreements with the Philippines, Australia, New Zealand, Thailand, Singapore and Taiwan. These nations either border China itself, or are adjacent to key areas of interest for China, notably the South China Sea. China in turn feels that it must hedge against not only the United States but also many of these other states - notably Japan, which China considers its second largest regional rival.

Originally written for Youth Independent

American Spy Planes in South China Sea Anger Beijing

The ongoing series of territorial disputes in the South China Sea continues to make headlines, as today the Chinese government spoke out against American spy plane flights in the area. Specifically, the Chinese Foreign Ministry spokesperson, Hua Chunying stated that “[The Chinese government] urge[s] the U.S. to correct its error, remain rational and stop all irresponsible words and deeds.”

China and the United States have been engaged in a battle for influence in the South China Sea; which Beijing claims almost in its entirety. Conversely, many nations bordering the South China Sea, such as the Philippines, Vietnam, and Malaysia dispute Chinese claims (the so called Nine Dash Line), arguing that Beijing is infringing on their sovereignty. This has led to a series of bilateral territorial disputes with China, as well as smaller nations courting the United States in efforts to balance against China.

One of the hot-spots in the region are the Spratly Islands. This is the same area American spy planes flew over today, and where China is engaged in island building activities. These activities consist of Chinese ships dredging the area around atolls and small outcroppings, to create larger islands, upon which Beijing seeks to construct airfields and ports. While China does not dispute freedom of navigation in the region, it is engaged in a skirmish with the United States over so called Air Defence Identification Zones.

Chinese Island Building in the South China Sea

These zones are the airspace over and near sovereign territory, and are administered by each country. Aircraft flying through these zones must identify themselves to the relevant authorities on the grounds, in order to screen for hostile intent and manage air traffic. China is attempting to set up an Air Defence Identification Zone over the South China Sea, a move that the United States does not recognize. Consequently, American planes have not been acquiescing to Chinese identification requests upon entering the zone.

This in turn has resulted in China scrambling aircraft to escort American planes in the area: a common tactic, used by America as well in its dealings with long-range Russian ‘Bear’ bombers. The dispute over air defense identification zones is merely another facet in the complex regional power game for control of the various islands in the South China Sea.

Originally written for Youth Independent

Wednesday, 13 May 2015

Despite Uber raid, Chinese e-commerce remains friendly

The raid on Uber offices in China does not herald a clampdown on e-commerce in China, rather demonstrates the importance of knowledge of China's internal stability concerns. Meanwhile foreign firms continue to profit, and Chinese firms seek new opportunities.

On May 1st the offices of ride sharing app Uber in Guangzhou were raided by Chinese authorities. Officials seized equipment, with Uber's office in Shenzhen also being visited for “routine inspections.” While this is not Uber's first international set-back, as the company has faced serious opposition and bans from various nations, some worry that this event signals a digital clampdown by Beijing.

Initially, these fears seem justified, following the government's decision to accuse Uber of operating without a license. Specifically, the Guangzhou Transport Commission described Uber as an“illegal [business] that disrupt[s] the market and we will not be soft on these activities in the future [sic]” The furor in China surrounds the use of privately-owned vehicles as taxi service providers. In China utilizing private vehicles to such ends is (since January 2015) illegal, with taxi operators having to first acquire a license permitting them to rent vehicles from vetted rental agencies.

Uber Upsets the Balance, Pays the Price

It is important to note that this rule is not merely a vestige of a planned economy, but rather one of China's many sector specific regulations which primarily seek to maintain societal stability. As demand for taxi services has rapidly increased in China, demand has far outstretched supply. This is because in most cases, the government has not issued any new taxi licenses since the early 1990s.

A Popular Convenience: Taxi Stand in China

While initially adequate, this relatively low number of licenses has caused prices to skyrocket, with a license in Shanghai fetching as much as ¥500,000 ($80,745). Moreover, car rental prices have also jumped as taxi firms drive up demand by seeking to maximize their fleet numbers to offset the lisence price. This has led to rental fee prices in places such as Nanjing rises to as much as ¥9000 ($1450) per month. (8)

Recently taxi drivers have gone on strike in various Chinese cities to protest for a reduction in rental fees. It is precisely here where Uber undercuts the established system by utilizing privately-owned vehicles. Consequently, in order to prevent unrest and economic losses, the Chinese government has gone after Uber, arguing it does more harm than good. Moreover, since Uber is a foreign firm, this lessens any fallout for the government, as it does not have to anger Chinese service providers.

China in Localization Push

Uber paradigm shifting businesses practices makes in an ideal (and not wholly unjustifiable) candidate to blame. This scapegoatism becomes more evident when one discovers that despite Uber's $40 billion valuation, it remains a marginal player in the taxi market in China. Currently Kuaidi Dache (Speedy Taxi) and Didi Dache (Honk Honk Taxi) control over 90% of the market. Prior to their $6 billion merger in February, these two firms were backed by top-tier Chinese internet giants. The former was partnered with Alibaba, benefitting from access to hundreds of millions of customers via Alibaba's social platforms; Honk Honk Taxi was backed by Tencent, another internet giant.

Following suit, Uber which debuted in China in February 2014, decided to partner with Baidu in December of the same year, thus gaining access to the leading Chinese search engine's mapping and mobile technology. Partnering with Baidu was an effort to integrate Chinese know-how into Uber's operations; however, following recent events, Uber will have to go further to accommodate Chinese regulations by ensuring vehicles are sourced from rental agencies.

Interestingly, the Guangzhou government agreed that traditional taxis we no longer sufficient to meet demand; with the regional government even announcing that it is considering launching a government run e-booking taxi service. This can be seen as part of wider Chinese efforts in recent months to promote or require domestic product / service use in important projects.

Huawei CEO Eric Xu

In particular, the Central government has pushed for localization over fears of foreign cyberspying, highlighting concerns about national information security. In a rare instance of a top CEO breaking rank with government policy; Eric Xu, CEO of Huawei, recently advocated in favour of maintaining open access in the market. Xu candidly admitted that even though Huawei could gain more contracts if constraints were placed on foreign firms, he would still oppose such constraints. Xu maintains that China's information security can only be guaranteed by attracting the best tech, whether foreign or domestic, to the country.

Xu went on to state that Chinese products could fill the gaps if foreign firms were restricted from various contracts, but that the overall quality would suffer.

China's E-Commerce Biosphere Remains Friendly

While China may seek to increase domestic content in important projects, Beijing is hardly alone in doing so. All nations seek to promote their local industries, with even adamant free-trade advocates such as the U.S. often preferring to utilize domestic firms over comparable foreign ones. In any case, the Chinese government is not going to undertake measures which drastically shake investor confidence, nor risk capital flight on rumors of punitive localization campaigns.

Fears over an impending clampdown on the e-commerce and mobile markets in China are unfounded. Indeed, Uber's plight appears an outlier, the result of having brushed up against the stability apparatus that underpins much of China's economic policies. Foreign firms continue to report stellar growth in China, with TripAdvisor announcing that China is set to become its largest market: Chinese tourists spent $500 billion in 2014. TripAdvisor launched Daodao.com, its Chinese site in 2009, and had capitalized on high mobile usage among Chinese travelers. Surveys by the company indicated stronger than expected willingness by Chinese customers to plan trips via mobile.

Similarly, China surpassed Europe in Q12015 to become Apple's second largest market, with the company posting $16.8 billion in profits. According to David Garrity of GVA Research, “we are seeing a move away from large, form factor phones [running on] Android operating systems to Apple.”

While there is not yet a Chinese equivalent of Apple, mainland firms are taking heed of Xu's words. Instead of pushing for government legislation to promote high-end Chinese alternatives to Apple et al, Chinese companies are seeking new opportunities.

China's key to continued growth is the creation of new markets. This is the mentality of Alibaba, China's e-commerce giant. Alibaba has recently partnered with state-backed China Telecom to sell budget smart-phones in China's smaller cities and rural areas. The partnership gives Alibaba access to China Telecom's 186 million customers. Alibaba is also promoting its own OS with these devices, in a bid to steal share from current market leader, Android.

Ranging in price from ¥299 to ¥699 ($85-113), the devices come with four months of free 2G service. Alibaba has also pre-installed it's Taobao consumer marketplace app; a program which has coined the term “Taobao villages” - highlighting the vital role the service plays in many local economies. The phones will be available via T-mall, another e-commerce site run by Alibaba as it seeks to increase its share of China's e-commerce market, set to expand to $76 billion by 2016.

Originally written for Global Risk Insights