With Chinese Internet giant Lenovo’s recent multibillion dollar purchase of Motorola, yet another of China’s state-owned companies has sought to buy the prestige of an international brand. Motorola’s consumers, though, may look at Lenovo’s past record and have concerns that the familiar brand will not deliver a trustworthy product.
Google announced on Jan. 29 it would sell Motorola Mobility to China’s Lenovo for $2.91 billion. The sale puts the Chinese company in the No. 3 spot of the global cellphone market, behind Apple and Samsung Electronics.
The United States, Canada, Australia, New Zealand, and the United Kingdom have banned Lenovo’s computers from government offices as a security threat. The reasons for the ban may carry over to Motorola products produced by Lenovo.
“The ban was introduced in the mid-2000s after intensive laboratory testing of its equipment allegedly documented ‘backdoor’ hardware and ‘firmware’ vulnerabilities in Lenovo chips,” states a report from Australia’s Financial Review in July 2013, which uncovered the internal ban.
It cited unnamed sources in the British and Australian defense and intelligence community, stating classified research found “malicious modifications to Lenovo’s circuitry,” which goes beyond security flaws typical in electronics, and “could allow people to remotely access devices without the users’ knowledge.”
More recently, however, all U.S. government offices were banned from using Chinese Information Technology systems, due to threats of espionage and cyberattack. The ban was included in the 2014 federal budget.
“I know for a fact that there is no single government organization in the U.S. that uses Lenovo,” said Farinaz Koushanfar, associate professor of electrical computer engineering at Rice University in Houston, Texas.
Koushanfar noted this was a major switch for the U.S. government. IBM laptops used to be used heavily in government offices, yet after Lenovo purchased IBM’s personal computer business for $1.25 billion in 2005, they moved to other brands due to security concerns.
Koushanfar’s work focuses heavily on the protection of intellectual property and security threats in supply chains.
She said the recent purchase may bring additional threats. While parts for Motorola phones may have been manufactured in China anyway, “they still went through integration and control software in the United States, and the chips were designed in the U.S.”
Now, however, China is not just manufacturing the chips, but also designing them. Koushanfar said, “Now they don’t even have control over the design flow.”
Lenovo is one of China’s “guoyou minying,” or “state-owned, people-managed,” companies. Its tie to the Chinese regime is through its largest shareholder, the state-owned Chinese Academy of Sciences (CAS).
As of March 2012, 57.81 percent of Lenovo’s shares were public, 8.36 percent were under Lenovo CEO Yang Yuanqing, 0.25 percent was owned by its directors, and 33.58 percent were under Legend Holdings Limited.
Legend Holdings Limited is “Lenovo’s parent company and the asset management unit of the Chinese Academy of Sciences,” states a January 2013 report from the Center for Strategic & International Studies. “CAS held a 65 percent stake in Legend Holdings in 2009, making CAS the largest shareholder of Lenovo with a 27 percent stake.”
The Chinese regime has particular interest in using its state-owned enterprises (SOE) to purchase and invest in foreign companies.
In the first half of 2013, China’s nonfinancial outbound foreign direct investment (FDI) was $45.6 billion, which was a 29 percent increase from 2012, according to the 2013 annual report from the U.S.-China Economic and Security Review Commission.
China’s motive, it states, “is to acquire resources and enter new markets overseas,” and by doing this, “China is increasing its direct ownership of foreign companies.” The other motive, it states, is related to currency manipulation, and is meant to “counteract the depreciation of the dollar against the [renminbao] and to earn a higher yield than is provided by U.S. Treasurys.”
China’s blurred lines between public and private enterprises bring along more complex concerns, however.
The trade-related aspects of China’s foreign investments “often intersect with national security concerns,” the report states. This includes “foreign intelligence collection efforts and espionage that target U.S. technology, intellectual property, trade secrets, and other proprietary information can be concealed under the pretext of foreign investment in cleared government contractors.”
A Party Plan
Lenovo’s recent acquisition of Motorola is in line with a recently announced long-term plan by China’s leadership, which includes buying up foreign technology companies to boost the brands of China’s state-run companies.
The purchase follows an emerging trend where Chinese state-owned companies are buying or heavily investing in U.S. companies. Along with this, some of the Chinese companies are starting “Made in America” campaigns.
For example, in June 2013, Lenovo opened a computer manufacturing line in North Carolina, giving its products a “made in America” cachet. An attempt by Chinese telecom company ZTE to partner with a company in Baltimore to sell a “Made in America” videoconferencing system was stopped by the U.S. government.
“It’s a concern,” said Daniel Katz, an expert on outsourcing manufacturing. Not only is the United States losing business to China through outsourced manufacturing, he said, “but they’re also losing the companies.”
While the new deals may seem like good business on the surface, they are also in line with a new directive of the Chinese Communist Party (CCP) through its 12th Five-Year Plan.
The CCP’s directive calls for a three-pronged approach to increase China’s investment abroad, states a 2013 congressional report. The first part is for Chinese manufacturing companies to invest overseas to build recognized brands, the second to invest in research and development outside China, and the third is to set goals to acquire foreign companies to advance China’s desired high-tech economy.
”The Chinese government wields many tools to drive these goals, including requiring permission for overseas investments by Chinese firms,” states the report.
It notes that China poses a unique challenge when it comes to spotting security issues when a foreign company wants a U.S. company, since China’s state-owned enterprises “can blur the line between national security and economic security.”
“The possibility of government intent or coordinated strategy behind Chinese investments raises national security concerns,” it states, “For example, Chinese companies’ attempts to acquire technology track closely the government’s plan to move up the value-added chain.”