Is China’s AI industry much ado about nothing?

Investment in China’s AI companies has plummeted after hitting a high in 2017, amid inflated valuation and unfulfilled promises.

In July the research firm ABI Research released a report tracking investment in AI. China’s AI industry attracted $4.9 billion private sector investment in 2017, overtaking the US for the first time as the world’s biggest AI investment destination. Barely four months have passed when the firm published an update to show that the investment in China’s AI sector has plummeted in the first half of 2018, attracting only $1,6 billion, less than one third of the level of its biggest rival.

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A couple of factors may have contributed to the decline in the investment level. Valuation of start-ups has soared. According to Kai-Fu Lee, a former Google senior executive who nowadays runs a venture capital investing in China’s technology sector, the reasonable valuation of a typical AI start-up in China is less than half of the price level it was a year ago. This may well have put off some investors.

Another factor could be the speed of progress. “[We’re] at a juncture where the generic use cases have been addressed,” Lian Jye Su, the firm’s principle analyst spoke to the Financial Times. “And building generic general purpose chatbots is much easier than specific algorithms for industries like banking, construction, or mining because you need industry knowledge and buy-in from the industry.”

But specialised AI products are hard to come by and take a long time to develop. So, some companies chose to take a short-cut to show their progress. Natural language processing is one such competitive sector. Not too long ago a controversy arose when a simultaneous translator claimed that the company that hired him at a conference in China used a voice-to-text engine to display his translate to the conference audience, pretending the live speech was AI machine-translated. The company explained that it was using a hybrid solution.

The much hyped, and feared, “social credit” system is also moving at a slow pace. Recently a university in southern China, instead of using AI to troll internet traffic, decided to resort to the analogue way of detecting dissent: it required all students and staff to hand in their computers, mobile phones, and USB sticks to be inspected by the school authorities. It backfired badly, and the university told the media that it would “rethink” the scope of its approach.

At the end of the day it falls to the technology heavyweights rather than the start-ups to take charge. Huawei and Alibaba have both started developing their own AI chips to shore up its vertical integration capability. This will take much longer than developing a gimmicky application, hybrid or not, but will be much more specialised and more powerful, especially supported by the large amount of data the companies possess.

DCMS and NCSC warn UK telco review might impact 5G supply chain

Reports of a letter circulating through the offices of UK telcos have emerged, though DCMS has played down the anti-China rhetoric which has been pinned to the communication.

“The Future Telecoms Infrastructure Review set out our long term plans to provide world class digital connectivity through full fibre connectivity and 5G mobile coverage,” DCSC stated. “As part of this, we are conducting a review of the supply chain underpinning those ambitions to ensure a healthy, diverse and secure supply base, now and into the future.”

The letter itself, which will not be officially released to the industry, has been signed by Matthew Gould, Head of Digital Policy at the Department of Digital, Culture, Media and Sport, and Ciaran Martin, Chief Executive of the National Cyber Security Centre, and reportedly suggests telcos should evaluate the resilience and security of their supply chains ahead of the much hyped 5G euphoria.

Although reports have emerged in the FT this morning, with the anti-China rhetoric featuring heavily throughout, DCMS has distanced itself from a targeted and calculated review. The review, and letter, is not targeted at a specific country, or firms which call that country home, but ensuring the UK has the right overall framework in place to ensure secure and resilience telecoms networks. The review will consider the economics of 5G, as well as aiming to create the desired resilience and security standards.

What is worth noting is that this letter is not new. The review and communications with telcos has been discussed in the House of Commons, while the letter itself was sent to executives weeks ago and originally unearthed by Politico. The anti-China rhetoric, which is outwardly present in other nations, seems to be more interpretation from the industry in this case.

That said, it is not completely misguided to assume the review does have a couple of nations in mind. NCSC has previously warned operators against using ZTE equipment in their networks as this might impact the long-term security of the UK, and with the rest of the world pointing a suspecting finger at Huawei, it would not be out of the question for the UK to jump on the band wagon.

While President Trump has been aggressively leading the anti-China sentiment across the US, Australia followed suit by banning the firm from participating in the Aussie 5G bonanza and South Korean telcos coincidentally left Huawei out from their preferred suppliers.

The conundrum the UK faces is focused around future trade and relationships with the rest of the world. With Brexit on the horizon, and looking increasingly unfavourable for the UK, bonds will need to be strengthened with other nations. Unfortunately this leaves the UK in a difficult position, with historic partner US on one side of the argument and the Chinese, a country various UK governments have attempted to get closer to, on the other.

While DCMS and the UK on the whole seemingly wants to justifiably maintain a neutral position in such reviews, we don’t doubt there will be a few cogs in the machine who are harbouring suspicions of the Chinese, which are starting to become commonplace.

This might not be a Chinese witch hunt, though it is certainly reasonable to assume that a level of biased suspicion will be present in some minds. What impact this has on the UK’s relationship with China and its kit vendors remains to be seen.

T-Mobile/Sprint merger finds a new enemy in mysterious lobby group

A new non-profit organization called ‘Protect America’s Wireless’ has emerged, seemingly with the sole objective of hurling spanners at the T-Mobile US and Sprint merger.

Details on the group are relatively thin at the moment, it was only founded last month, though a press call introducing the group and its mission statement on the website both seem to give the same message; the T-Mobile US and Sprint merger will be bad for the national security of the US.

“We must protect our networks from foreign spying,” the team announces on the websites homepage. “Our greatest concern is the pending Sprint T-Mobile merger, which could give countries like Saudi Arabia, China, Germany, and Japan direct access to our networks through the use of foreign-made networking equipment and billions of foreign money. We call on President Trump, Congress, and the FCC to protect American national security by denying these foreign interests access to America’s wireless communications.”

On the press call, David Wade, Founder of Greenlight Strategies, suggested a merger of the two telcos would open up the US to a Chinese ecosystem, while also suggesting any business working closely with Chinese vendors would effectively handover data to the Chinese government. While it is true Sprint owner Softbank has collaborated closely with Huawei and ZTE in the 5G R&D journey, this seems to be taking the conspiracy theory up another level. Deutsche Telekom, parent company of T-Mobile US, also has ties to Chinese vendors, but there aren’t many telcos who don’t.

The theory here is a merger between the two telcos would be bad for national security, effectively handing China a key to the backdoor. There have certainly been objections from a competition perspective, but this is the first we’ve seen with this angle. It’s difficult not to be suspicious about who the puppet master actually is.

Interestingly enough, the group has declined to discuss where funding is emerging from. As a 501c4 non-profit, the team do not have to disclose funding or ownership details, though they are permitted to attempt to influence politics as long as it isn’t their main area of focus. While the groups attempt to tackle US security is a thinly veiled attempt to demonstrate ‘social welfare’, as long as the group isn’t spending more than half of its funds on political-related activities, it can continue to operate half-hidden by shadows.

Finding out who is funding this organization is key to figure out what the angle is and whether this is yet another example of propaganda, though it is not necessarily a simple task. 501c4 non-profits have to complete a Form 990 for the IRS, on which any donations above $5,000 have to be disclosed. Unfortunately, due to the efficiency of the IRS, there is usually a 12-18 month lag on this information being made publicly available.

Until the influencers and donors of this group have been identified, this could be a very dangerous source of misinformation. Statements being made might very well be true, but without transparency it would be safe to be suspicious.

US ups the ante on Chinese industrial espionage claims

State-owned Chinese company Fujian Jinhua Integrated Circuit Company (FJICC) and Taiwan’s United Microelectronics have been formally charged with intellectual property theft, targeting a US firm.

FJICC, which is owned by the People’s Republic of China (PRC) and part of the ‘Made in China 2025’ technology development programme, has already had it US supply chain components severed after intervention from the US Department of Commerce earlier this week, though the formality of a lawsuit escalates the conflict between the US and China further. United Microelectronics has already stated it has cut ties with FJICC, seemingly in an effort to avoid similar sanction from the US.

The lawsuit takes FJICC, United Microelectronics and three individuals into the courtroom, accused of using stolen trade secrets in the production of FJICC and United Microelectronics products. According to the lawsuit, the PRC did not possess DRAM technology prior to the events described in the indictment, though it was a segment which was identified as an economic priority. The three accused individuals previously worked at a subsidiary of US firm Micron, before transferring to United Microelectronics and subsequently setting up the relationship between the company and FJICC. At this point, the trade secrets were allegedly transferred to Chinese control.

If convicted, each company faces forfeiture, though how this will be imposed we are not sure, and a maximum fine of more than $20 billion.

“I am announcing that a grand jury in San Francisco has returned a multi-defendant indictment alleging economic espionage on the part of a state-owned Chinese company, a Taiwanese company, and three Taiwan individuals for an alleged scheme to steal trade secrets from Micron, an Idaho-based semi-conductor company,” said Attorney General Jeff Sessions.

“Micron is worth an estimated $100 billion and has a 20 to 25 percent share of the dynamic random access memory industry—a technology not possessed by the Chinese until very recently.  As this and other recent cases have shown, Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly.  I am here to say that enough is enough. With integrity and professionalism, the Department of Justice will aggressively prosecute such illegal activity.”

Intellectual property theft is one of the cornerstones of President Trump’s assault on China, though taking the company to court is escalating the conflict further. After allegations of corporate espionage early this week, cutting out US components from the company’s supply chain was a logical step, though the lawsuit further compounds the battle.

The ban from the Department of Commerce is similar to the economic dirty-bomb the US dropped on ZTE earlier this year, though that only lasted a couple of weeks. The consequences of that action were clear, ZTE was also sent to keep the dodo company, though there was certainly collateral damage for US firms. Acacia Communications was one company who dependence on ZTE as a customer saw share price decline by more than 30% as a result of the ZTE export ban, though whether there are firms who are similarly dependent on FJICC remains to be seen.

The lawsuit itself represents the greater conflict between the US and China, both of which has ambitions to control the 5G ecosystem and subsequently lead the technology industry of tomorrow. Intellectual property theft is rhetoric which we have consistently heard from President Trump, though should the US prove successful in this case, it would not be surprising to see more investigations. Considering the leading positions Huawei and, less so, ZTE have crafted in the telco industry, these firms might find themselves in the crosshairs before too long.

One thing is certain, this will not be the last aggressive move towards China from this administration. If anything, this is justification for every intervention made by President Trump, think back to the Executive Order blocking Broadcom’s acquisition of Qualcomm and also the dreaded tariffs, as well as validation to accelerate towards further conflict.

“No country presents a broader, more severe threat to our ideas, our innovation, and our economic security than China,” said FBI Director Christopher Wray. “The Chinese government is determined to acquire American technology, and they’re willing use a variety of means to do that – from foreign investments, corporate acquisitions, and cyber intrusions to obtaining the services of current or former company employees to get inside information.

“We are committed to continuing to work closely with our federal, state, local, and private sector partners to counter this threat from China.”

DHS and GCHQ join the China spy BS brigade

The Department of Homeland Security (DHS) has stated it, and the UK’s National Cyber Security Centre, are supporting industry denials regarding malicious microchips installed on hardware by China.

Last week Bloomberg unveiled a weighty report which pointed the finger at the Chinese government for an in-depth and delicate espionage campaign which would have shaken the telco industry’s global supply chain. By allegedly compromising motherboards produced by Super Micro, the security protocols and trade secrets of more than 900 companies have been directly compromised. Who knows how wide the web could spread when you look at the indirect implications, partners who use the infected networks or collateral damage.

While the claims have been refuted by all the parties involved, including Apple and AWS, and despite confidence from the DHS and the National Cyber Security Centre, a division of GCHQ, without a denial from the body likely to be conducting the supposed investigation, the CIA, or a flat-out rejection from the White House, there is still an air of possibility.

“Like our partners in the UK, the National Cyber Security Centre, at this time we have no reason to doubt the statements from the companies named in the story,” a statement from the Department of Homeland Security reads. “Information and communications technology supply chain security is core to DHS’s cybersecurity mission and we are committed to the security and integrity of the technology on which Americans and others around the world increasingly rely.”

The initial report is a damning one. According to Bloomberg, Chinese agents infiltrated subcontractors of Super Micro operations in Shanghai, or coerced the managers of these facilities, to gain access to the motherboards. A microchip, smaller than a grain of rice, was placed on the hardware, before it was shipped onto customers to be incorporated into servers. Elemental, now an AWS company, was supposedly one of the customers who used the motherboards, as was Apple, a major US bank, the US Navy and the CIA, who used Elemental servers for drone missions. The information which would be available is staggering.

All parties involved have denied finding any malicious microchips on hardware, and also being aware of or aiding in any investigation led by US intelligence services. With the DHS and GCHQ also stating they have no reason to doubt the statements of denials, the chorus of disapproval is getting louder. That said, there is still an element of doubt.

Bloomberg is one of the most trusted and professional news sources on the planet, with a pedigree for unveiling worrying truths which have been deemed unsuitable for the general public. The report, which was researched and written over months, points to a total of seventeen sources. One source might have been suspect, two or three might have been dubious, but seventeen individuals confirming the same story suggests there is at least an element of truth to the claims.

Ultimately we doubt there will be anything the companies or government can do to completely remove the element of distrust. The claim of nefarious actors and activity has been raised, and now there will always be a heightened suspicion. A concrete rejection of the claims from the White House and the US intelligence services would set the ball rolling, but don’t expect that any time soon. This saga conveniently supports the anti-China rhetoric being fuelled by the US government; why would it want to do anything to discredit the help Bloomberg is giving it?

Amazon, Supermicro and Apple call BS on Chinese spying sting – someone is lying

Amazon, Supermicro and Apple have released statements denying they have ever found any malicious microchips on their hardware calling into questions the validity of Chinese espionage claims.

Yesterday Bloomberg pulled back the curtain on an apparent three year-old US government into one of the most intrusive and intricate espionage campaigns, fuelled by the Chinese government. Should the claims be proven true, it would certainly add weight to the political paranoia which has been whipping the anti-China rhetoric into a frenzy, though the major players have denied all knowledge of the malicious microchips and the resulting investigation.

“As we shared with Bloomberg BusinessWeek multiple times over the last couple months, this is untrue,” said Steve Schmidt, Chief Information Security Officer at Amazon. “At no time, past or present, have we ever found any issues relating to modified hardware or malicious chips in SuperMicro motherboards in any Elemental or Amazon systems. Nor have we engaged in an investigation with the government.”

“Supermicro has never found any malicious chips, nor been informed by any customer that such chips have been found,” Supermicro said in a statement. “The manufacture of motherboards in China is not unique to Supermicro and is a standard industry practice. Nearly all systems providers use the same contract manufacturers.”

“Over the course of the past year, Bloomberg has contacted us multiple times with claims, sometimes vague and sometimes elaborate, of an alleged security incident at Apple,” an Apple statement reads. “Each time, we have conducted rigorous internal investigations based on their inquiries and each time we have found absolutely no evidence to support any of them. We have repeatedly and consistently offered factual responses, on the record, refuting virtually every aspect of Bloomberg’s story relating to Apple.”

While the entire saga is now a bit hazy, one thing is clear, someone is lying and misleading the general public.

Would China compromise ‘Workshop of the World’ position?

It is not difficult to believe the Chinese government would conduct such campaigns. It is generally accepted the Chinese government monitors the activities and communications of its own citizens, therefore it is not a huge stretch of the imagination to believe it would do so for foreign countries. But, would the Chinese government put its valuable position as the ‘Workshop of the World’?

With roughly 75% of smartphones and 90% of PCs manufactured in the country, any accusations of espionage would certainly force companies to reassess their supply chain. What company would buy hardware if they knew the potential for data breaches? It would be commercial suicide. China surely knows this, but it depends on what it places more importance on; securing intelligence from foreign governments and multinational corporations, or maintaining stability for a very lucrative industry for the country.

This is not to say they wouldn’t, but it would have to accept it would be sacrificing an important and profitable role in the global supply chain, one which it has worked hard to dominate.

Amazon, Supermicro and Apple clearly have a lot to lose

Another denial here is nothing which should come as a surprise. Should there have been a confirmation, the trio would haemorrhage customers.

Amazon AWS’ government business is a big earner, but how many would trust the services if there was a threat of espionage. The same could be said of corporate clients who are incredibly protective of trade secrets. Supermicro manufactures motherboards for more than 900 customers around the world, clearly this would be incredibly damaging to its reputation. For Apple, and Amazon as well, the PR damage for the consumer business could be a disaster. Consumers would be very wary, which combined with the high-prices Apple tends to charge, could possibly turn the public to other brands.

Each company has a lot to lose by admitting it has been compromised. There was of course going to be a denial, especially considering this investigation has not been confirmed by the government. If it does turn out to be true, the trio can simply state they were under non-disclosure agreements and a denial was necessary for national security, even if it was a lie.

A convenient revelation for the US government

Just as President Trump is going on the offensive against the Chinese government with tariffs and company bans, the story emerges. To say it is convenient timing is somewhat of an understatement.

Just last month, Trump upped the ante on the Chinese trade war by introducing tariffs on another $200 billion of imports. This adds to the initial $50 billion which was announced earlier in the year. With the price of imports increasing, and the option of domestic manufacture more expensive, the price of certain consumer goods will soon begin to rise. Trump will soon need to justify to US citizens why it is important to swallow these price increases, and an espionage scandal would certainly fit the bill.

Another interesting aspect is on the 5G side of things. With Huawei banned from any meaningful deployment or contracts, the risk is reduced competition which could potential lead to increased prices and slower deployment. Ghost stories about the naughty Chinese will only get the government so far, Trump will soon need a concrete reason for banning Huawei and ZTE from the fray. The malicious microchips provide justification here as well.

Not everyone can be right

Right now the validity of the claims is hazy. There are of course strong arguments for all, some suggesting they are telling the truth and some as evidence of lies, but right now, who knows.

With the intelligence community and the White House remaining quiet, rumours will continue to swirl. Until this confirmation or denial for the investigation is unveiled, the conspiracy theorists will be typing away. Of course, a confirmation or denial will not stop the conspiracy theorists, but it will at least provide some clarity for the rest of us.

Maybe the Chinese espionage rhetoric is more than political hot air

Evidence has reportedly been found of China spying on more than 30 US companies, suggesting the anti-China rhetoric might be more than political posturing.

To date, little hard evidence has been displayed in the public domain regarding Chinese espionage, but that might be about to change. According to Bloomberg, a three-year old investigation has uncovered tiny microchips nestling on the motherboards of servers used not only in private corporations, but Department of Defense data centres, the CIA’s drone operations, and the onboard networks of Navy warships. These chips can be traced down the supply chain to a Chinese subcontractor used by SuperMicro.

While espionage has focused on locating and exploiting vulnerabilities in software in recent years, compromising hardware can be more effective. It is more difficult to do, but due to the life-cycle of these products, it can be longer until the issue is uncovered. Compromising hardware can be done in two ways; firstly, devices can be manipulated when on-transit between the supplier and the customer, or the nefarious activities can be conducted at the beginning of the manufacturing process. This is an example of the latter.

The microchips were first discovered after Amazon sought to acquire a company called Elemental. Elemental makes software for compressing massive video files and formatting them for different devices, but also provides expensive servers for customers installed on their sites to handle the video compression. These servers were assembled by SuperMicro, which in turn outsourced some processes to the Chinese subcontractor. These microchips allowed the controller to create stealth doorway into any network that had servers hooked up to it.

To conduct this sort of espionage is incredibly difficult. Not only does the microchip need to be small enough to avoid detection, and powerful enough to perform the desired actions, implanting the device would require an intimate knowledge of the products design. Considering how much of the worlds telecommunications manufacturing is done in China, the country is in an incredibly unique position to master the complex and intricate task. Sources states the microchips were inserted by operatives from a unit of the People’s Liberation Army, the armed forces of the People’s Republic of China and Communist Party of China.

Amazon has stated it had no knowledge of such a saga, though Bloomberg notes this is contradicted by its own sources. While the scale of such espionage activities are unknown for the moment, it is believed more than 30 companies could have been victims, including Apple which had planned to purchase servers from SuperMicro as part of the companies data centre expansion plans.

For the US government, this might just prove to be the justification it needs to chase Chinese companies off the shores. It has been battling to rid the country of Huawei and ZTE, though as little evidence has been released to the general public, a sceptic might suggest this was little more than anti-communist propaganda.

Unfortunately, this might simply compound the pressure which is being applied to China, instead of creating a resilient security framework. A whitepaper from the Rural Broadband Alliance entitled Domain5 suggests a supply chain can be compromised at any point and concentrating on one country might not be the best solution. Operatives are capable of infiltrating a manufacturing plant, in theory, irrelevant as to where it is, therefore concentrating too intently on one country might weaken the security protocols elsewhere.

This should not undermine what is perhaps the most damning evidence of Chinese espionage in recent years however. Various intelligence committees and sub-committees have pointed the finger of dodginess at China for years, though this is the most compelling evidence which we have seen.

Twitch is blocked by China’s Great Firewall

The Amazon-owned game streaming platform Twitch confirmed on Friday that it became inaccessible from China, the latest of a string of popular services banned from the world’s largest internet market.

That China has banned another internet site can hardly hit the headlines nowadays. On the contrary, often it is the clandestine or not so clandestine efforts from those blocked to re-enter China that are making the news. As a matter of fact, among the top 10 most visited websites based on the traffic data from the analytics company Alexa Internet (not the personal assistant from Amazon, but an Amazon subsidiary nonetheless), four are entirely blocked (Google, YouTube, Facebook, Twitter), one is partially blocked (Wikipedia), one is accessible (Yahoo), the rest are China-based.

The reason that the twist on Twitch has caught media attention is that it has suddenly gained popularity in the last month, not the least because e-sports were included in the recent Asian Games in Jakarta, a regional multi-sport event with the number of competing athletes next only to the Olympics. Following the Games, Twitch’s iOS app climbed to the 3rd position in Apple’s App Store in China, before it was quietly taken down, presumably another measure to comply with local regulations.

E-sports have been attracting stronger following in recent years, and special events have taken place in different parts of the world, where spectators would travel to follow the stars they have followed on platforms like Twitch. However the Asian Games was the first time e-sports were sharing the stage with other “real” sports.

China’s attitude towards e-sports, and the games industry in general is mixed. It is the world’s largest video game market, host to the world’s largest publisher (Tencent), and has a total number of video game players larger than the total population of the United States. But it also banned game consoles sales for a number of years, and its official media has also repeatedly underscored the “harm” video games can do to young people’s mental development. Despite the extensive coverage of the Asian Games, where China dominated the medal table, the state-owned China Central Television (innocuously abbreviated as “CCTV”) did not cover the e-sports section at all, leading to the sports channel’s chief producer alluding to this gap in his latest column (in Chinese).

“I can’t say I am surprised by the crack down on Twitch,” said Nitesh Patel, director of Wireless Media Strategies of the research firm Strategy Analytics. Live video streaming, including game steaming, has taken China by storm in recent years. Large amounts of money and time have been spent on following streaming stars. “The authorities are concerned about gaming addiction and, as a consequence, players like Tencent have implemented features to limit the time children spend playing addictive titles like Honor of Kings. The recent reported spike in use in Twitch may have caused some concern among authorities and they have moved to pull the plug before momentum continued,” added Patel.

Likely to benefit from the ban will be local game streaming platforms, for instance Douyu, Huya, Panda TV, similar to WeChat benefiting from the ban on WhatsApp, Badu on the ban of Google in the past.

Amazon China staff were reportedly selling-on user data

Amazon is conducting an internal investigation into allegations that its staff in China received bribes from merchants for user data.

According to a report by the Wall Street Journal, staff of the online retailing giant’s China operation received between $80 and more than $2,000 to part internal user and sales data to brokers, who would then re-sell them to merchants who do business on Amazon platform. According to the WSJ report, it was not only Amazon’s internal sales metrics and users’ email addresses that were sold, also on offer was additional services. The staff would help the buyers to delete negative reviews and to re-open banned Amazon accounts.

It is said the malpractice was particularly rampant in Amazon’s office in Shenzhen, the city bordering Hong Kong. It is not the first time China’s online retailers suffered from data security comprise. Back in 2016 over 20 million of Alibaba’s users had their data hacked. Nor is this the first time that Amazon has found itself in the centre of data leaking controversies, but earlier cases were related to its cloud service AWS. So it is astonishing that in the present case, data was not breached by hacking but through blatant criminal transactions. It is not clear how many users have had their data sold.

Amazon released a statement saying “We have zero tolerance for abuse of our systems and if we find bad actors who have engaged in this behaviour, we will take swift action against them, including terminating their selling accounts, deleting reviews, withholding funds, and taking legal action.”

Amazon set up its business in China in 2004 after acquiring a competing online bookshop Joyo with $75 million. It was rebranded Amazon China in 2011.