China Cuts Off McKinsey, Other U.S. Consultants To Retaliate Against Cyber Indictments

May 25 2014, 7:50pm CDT | by

Today, the Financial Times, citing “people close to senior Chinese leaders,” reported that Beijing has ordered state enterprises to cut dealings with U.S. consulting firms, accusing them of spying for Washington.  The “instruction,” as the paper called it, was handed down after U.S. Attorney General Eric Holder announced indictments against five Chinese military officers for “serious cybersecurity breaches.”

“The top leadership has proposed setting up a team of Chinese domestic consultants who are particularly focused on information systems in order to seize back this power from the foreign companies,” the paper quoted a “senior policy adviser to the Chinese leadership.”  “Right now the foreigners use their consulting companies to find out everything they want about our state companies.” 

Beijing has not signed the World Trade Organization Agreement on Government Procurement, so the Chinese government is free to discriminate against foreign companies when it obtains goods or services.  Nonetheless, if the FT’s reporting is accurate, the instruction looks like a violation of the WTO General Agreement on Trade in Services, especially when state enterprises act in a commercial as opposed to a government capacity.  In Part A of Annex 5 of that agreement, China undertook not to limit market access to “Management Consulting services” and agreed that foreign parties are entitled to “national treatment” with regard to such services. 

Moreover, China, when it joined the WTO, confirmed that state enterprises would make purchases based “solely on commercial considerations, without any governmental influence or application of discriminatory measures.”  Furthermore, Beijing, in negotiating its entry into the government procurement agreement, is now arguing that purchases by state enterprises should not be covered by the pact.  In short, China’s ordering such enterprises to not do business with foreign consulting companies, as reported by the FT, is a clear violation of its WTO commitments.

Beijing does not seem to care.  The central government’s order to state enterprises is part of a concerted attack on foreign IT.  On Friday, the National Development and Reform Commission, China’s chief economic planning body, said it would strengthen national security review checks on foreign investments coming into China.

On Thursday, the State Internet Information Office announced it would establish a new screening process to vet most foreign IT products and services in China, including those in the communications, finance, energy, and other sectors the government deems related to either national security or the “public interest.” 

And shortly before the Holder announcement, Beijing banned the further purchase of Windows 8, Microsoft’s latest operating system, for central government networks.

Many say that none of these initiatives is a real threat.  The anti-consulting services measure, which Beijing will implement despite its trade obligations, means that state enterprises will be cut off from McKinsey, Boston Consulting Group, Bain, and other first-rank consulting firms.  It could take decades for the Chinese government to build a domestic consulting industry, and in the interim state enterprises will probably fall even further behind.  In the meantime, American consulting firms can concentrate on other clients, private Chinese firms and multinationals. 

The State Internet Information Office’s vetting procedure does not exist yet and could take years to put in place.  Cisco Systems and SAP, in statements to the South China Morning Post, said the new procedures are not expected to affect their Chinese businesses.  The NDRC did not detail how it would strengthen its national security checks, a clear indication that the decision to announce enhanced review was made on the spot.

And Windows is already thoroughly imbedded into central government computers, so Beijing is making sure it does not get upgrades.  As the FT notes, Beijing’s efforts to create domestic software to challenge Microsoft have floundered.  The failure of Red Flag Software, a project of the prestigious Chinese Academy of Sciences, is symptomatic of the inability of Chinese leaders to adapt their Maoist model to the 21st century.

These initiatives—and others—make the Chinese political system look not only backward-looking but increasingly anti-foreign.  As the South China Morning Post reported, observers suspect the IT vetting process announced on Thursday will probably result in Beijing favoring Chinese suppliers over foreign ones.

China’s accession to the WTO in late 2001 was supposed to prevent Beijing discriminating against foreign business.  More broadly, the entry of China into the global organization was intended to “enmesh” the country into a rules-based system. 

Unfortunately, in the last several years Beijing’s trade behavior—the country’s predatory practices are directed from the top—has markedly deteriorated.  The string of China’s losses in the WTO dispute panels—General Motors and Chrysler are the big beneficiaries of a preliminary decision handed down in Geneva on Friday—should be no surprise. 

Looking forward, it appears that China’s state enterprises will take advantage of the prevailing anti-foreign wave to entrench their position in the economy.  The thinking is that every yuan a foreign company makes is one less for Beijing.  Chinese leaders now believe they are living in a zero-sum economy, and foreign business will be the first casualty in this new environment.  China will the second.

Follow me on Twitter @GordonGChang and on Forbes

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

IPad Air Giveaway 2014 is Online
IPad Air Giveaway 2014 is Online
Our sister site I4U News is giving away a brand new iPad Air or if you can wait an iPad Air 2. This is an $499 value.
 
 
Your Parent Or Kid Moved In: Are You Covered?
A record 57 million Americans now live in multigenerational family households — double the number in 1980, according to a new Pew Research Center study. And I bet many of them have the wrong homeowner’s or renters...
 
 
Pandora Looks to Challenge Terrestrial Radio's Dominance in Cars
Pandora Media is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow...
 
 
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
It’s January 2026. New York Yankees owner Hal Steinbrenner gets out of his driverless car and triumphantly marches before the gathered press to introduce his prized new free agent. It’s a record-breaking contract—over...
 
 
 

Latest from the Network

US to bolster Ebola fight with more funds, troops
Washington, Sep 16 (IANS/EFE) US President Barrack Obama will announce Tuesday an extension of his government's plan against the Ebola virus disease outbreak in West Africa by deploying 3,000 troops and allocating...
Read more on Business Balla
 
Kiwi jihadi wants to leave war-torn Syria
Wellington, Sep 16 (IANS) A jihadi from New Zealand, who has links with the Al Qaeda and has taken up arms in Syria, wants to leave the war-torn country - but first needs a fresh New Zealand passport after burning his...
Read more on Politics Balla
 
A glass of milk daily good for your heart
New York, Sep 16 (IANS) Do you find drinking milk disgusting? Listen to your heart and change the habit. New research has found that drinking milk and consuming other dairy products may reduce the risk of a heart...
Read more on Apple Balla
 
Avatar sequels could feature cutting-edge 3D technology
The 'Avatar' sequels could use Douglas Trumbull's new system for 4K 3D at 120 frames per second. Trumbull has confirmed the news in an interview with The Hollywood Reporter, in which he revealed that James Cameron - who...
Read more on Movie Balla
 
Marvel releases synopsis of Avengers: Age of Ultron
Marvel Studios has released a full synopsis of 'Avengers: Age of Ultron'. The much-hyped film is set to feature the likes of Robert Downey Jr., Chris Evans, Mark Ruffalo and Chris Hemsworth. The synopsis of the film...
Read more on Movie Balla
 
Keira Knightley was neurotic
Keira Knightley was ''pretty neurotic'' until she was 25. The 29-year-old actress used to take herself ''far too seriously'' and obsessed over the criticism she received, particularly over her looks. She said: ''Have I...
Read more on Celebrity Balla
 
Lawyer: Robin Thicke is being 'exploited'
Robin Thicke's lawyer believes the singer is being ''exploited''. The 37-year-old star is currently embroiled in a legal dispute with Marvin Gaye's children, who have accused him, Pharrell Williams and Clifford 'T.I.'...
Read more on Celebrity Balla
 
Rain takes toll on Pakistan's historical sites
Islamabad, Sep 16 (IANS) Pakistan's monsoon rain, which started Sep 3 and has ravaged human populations since then, has taken a toll on ancient ruins as well, media reported Tuesday. Archaeologists say the ancient...
Read more on Politics Balla
 
Number crunching may make people selfish
Toronto, Sep 16 (IANS) People with a "calculative mindset" as a result of number crunching are more likely to engage in selfish and unethical behaviour, suggests a study. Repeated engagement with number-focused...
Read more on Celebrity Balla