Why geopolitics is the biggest threat to the IT industry
Image: REUTERS/Dado Ruvic Courtesy: World Economic Forum

By Ian Bremmer / Eurasia Group

Once considered a globalizing force, information technology today faces some of the world’s most punitive geopolitical barriers to entry. Estimates indicate the Snowden leaks could cost the US IT industry up to $180 billion in lost revenue. Even as the fallout from this incident dissipates, the rise of the internet of people and things will keep governments concerned with protecting their national data, with a number of intents in mind, ranging from protecting privacy, to combatting foreign or domestic threats, to supporting domestic economic players.

Separating out these different intents helps makes sense of an increasingly complex regulatory picture. And yet, a few important subtleties must be kept in mind when trying to put case studies into neatly defined boxes. First, local actors sometimes have an interest in blurring the picture by, for example, claiming to act in the name of one cause while furthering another. For instance, Russian lawmakers have presented their country’s data localization rules as necessary to defend users’ privacy from foreign intelligence services, but the measures will also - and primarily - enhance Kremlin surveillance. Doublespeak is the name of the game.

Conversely, it is important for external observers to remain cautious and objective before attributing ill intents to local decision-makers. For instance, many international observers have expressed concern that Nigeria’s stance in fining telecommunications providers for failing to comply with SIM-card registration rules may be a case of economic extortion. Yet a close look at the country’s challenge in battling technologically-savvy Boko Haram reveals that Nigeria’s claim that its rules are justified by national security requisites actually has some merit.

It is also worth remembering one of the key rules of political analysis: never underestimate the amateurishness of bureaucracies. The US government, for example, is vastly underprepared to coherently deal with the challenges emerging from the rise of the internet of things; hence, consider the possibility that messy policy in that area may simply be the result of internal confusion.

Finally, like any threat environment, the nature of what drives economic coercion policies is ever-evolving, and one must stay aware of its vagaries. For instance, after years of focusing on ensuring domestic surveillance, there are now early signals that Iran may be toying with controls on foreign market players as a means of preserving its promising but fragile technology industry in a soon-to-be post-sanctions environment.

The geopolitics of IT

Regardless of what drives IT nationalism, its result is unequivocal harm to the sector’s global business environment. Lost business is the biggest threat: when a local regulation either prevents or complicates the purchase of foreign IT goods and services, it makes it that much less likely outside companies will have a fighting chance at winning new contracts or maintaining old ones. Second come compliance costs: more stringent regulation means having to hire more lawyers to pore over arcane legislation, particularly as governments often provide little guidance to accompany their diktats. Then there are the costs of actually implementing these new rules: one study put the preliminary costs of Russia’s data localization law near a whopping $6 billion.

Of course there is also the fact that a deteriorating geopolitical environment harms upstream research and development (R&D). In a tense international climate, IT companies may be less inclined to hire foreign scientists and engineers. One American ICT company, for example, just a year ago decided to shut its engineering presence in Russia.

Capricious domestic regulation also means fewer opportunities for economies of scale. The Kremlin wanting all smartphones sold in Russia to be able to run on its alternative to the US GPS - a system called GLONASS - is an example of the ways in which companies’ profit margins can be cut by having to adapt to national specifics.

A breakdown in international flows can also affect consumers’ experiences by, for example, impeding the interoperability of the products they use. The internet of things will soon raise the profile of this issue if major IT players continue to compete, rather than collaborate, in building their communication protocols for the ever-longer list of goods connected to the internet.

Indeed, as the IT industry becomes inseparable from the rest of the economy (think of the fact that some of AT&T’s greatest growth comes not from new cell phone plans but from connected cars), the economic coercion affecting IT companies will increasingly spill over to all industrial sectors. In an age in which cars are nothing more than “computers we ride in” (Doctorow), no company will be exempt from the coercion aimed at the IT industry.

Post-Snowden America

Is this all a US story, affecting only American IT companies while their European and other foreign competitors get off scot-free? Yes and no. It is primarily a US story insofar as the Snowden revelations hit the US in ways that haven’t affected other major IT producers. It is interesting, for example, that Europeans seeking to escape the perceived vulnerability of relying on American cloud services have opted to replace their US providers with none other than the Chinese company Huawei - long-shunned in the United States for its alleged ties to China’s security services.

In IT, as in everything, money talks: foreign consumers may recognize that a Chinese company’s security could be just as compromised as an American company’s, but at least it is cheaper, goes their thinking. And so Chinese IT companies have been wildly successful in developing countries, not least across sub-Saharan Africa.

But this will change. Having the US as a common enemy is convenient, but sooner or later foreign countries will realize that they can’t trust each other either. Snooping is not just a US versus the rest-of-the-world phenomenon. Take, for example, the revelation that a Chinese computer maker had been delivering its products with pre-installed spyware running on them until it was caught in early 2015.

China and Russia may have sealed a neat-sounding “cyber non-aggression pact” last spring, but the reality is that they know they can’t trust each other any more than they can the West. When the Chinese government began cracking down on foreign IT providers in the summer of 2014, it was no more lenient with Russian cyber-security providers than with their US competitors.

Likewise, Narendra Modi may have allowed Chinese IT companies to operate in his country as part of his “Make in India” manufacturing strategy, but only under the condition that the Chinese goods produced in this partnership will go through a rigorous vetting process to make sure they’re devoid of Beijing’s malware.

Does all of this mean IT companies - American or not - are stuck with a global business landscape so rugged that they might as well fall back on their domestic markets? Far from it. What we are witnessing today may be another Darwinian turn in the road that will separate the weak from the rest, but resilient IT companies have a bright future ahead of them, provided they follow a few rules of thumb:

Do not exaggerate the threat, observe the opportunities: In a heated geopolitical environment, knee-jerk reactions against new regulations are normal, but not always advised. Before engaging in an all-out denunciation of new policies, companies should read the fine print and consider potential upsides. Europe’s Digital Single Market strategy provides an interesting case study - while most US tech giants took the announcement of this regulatory overhaul as an attack against their presence in the Old World, a few chose to focus on its bright spots. Contrary to most of his peers, for example, Facebook CEO Mark Zuckerberg argued that the unification of 28 regulatory environments into one would help his company operate more seamlessly across European markets. Microsoft, for its part, has welcomed the EU’s invitation to rebuild trust in US IT systems by announcing the opening of a “Transparency Center” in which outsiders will be able to review technical details of the company’s products.

Play to your strengths: In many instances, the same countries that aim to protect themselves against the dominance of established IT companies are also those that need said-foreign expertise most. Know-how is not something that can be picked off the shelf. For instance, when the Kremlin attempted to create a domestic payment card system of its own, it ended up turning to multiple foreign card companies, to compensate for its repeated technical failures. Similarly, Russia’s attempt at a domestic mobile operating system was quickly revealed to be reliant on a Finnish developer.

Take your future into your own hands: The 21st century presents a government-relations paradox for players in the IT industry: more than ever, they are influenced by the foreign policy decisions made by their home governments; yet any attempt at working with policy-makers to minimize the excesses of these decisions risks exposing them to accusations of collusion - hence Silicon Valley’s profound reluctance to engage with the American government despite the latter’s push for greater private sector engagement.

But no one can force IT companies to buy into a narrative pitching IT actors against one another solely on the basis of their national affiliations. In fact, companies willing to look at the IT landscape with an apolitical eye will quickly discover the existence of local allies in their scepticism toward excessive regulation. For example, one of the greatest opponents to Russia’s version of the “right to be forgotten” has been a Russian search engine.

Know when to leave: The decision to pull the plug on a market is never a fun one for executives, but sometimes - just sometimes - it is better to leave on time than to overstay one’s welcome. And guess what: coming back is always an option, which is what one American IT company did, returning to China after a five-year strategic retreat.

The global business landscape for IT companies will never be as smooth as it once was. But the good news lies at the source of today’s tensions: the very reason governments are fighting over who can access their IT turf is that they realize the digitization of the global economy will mean ever-greater market opportunities, which they naturally want to protect. This is, paradoxically, a fantastic opening for foreign IT companies: if they can prove their ability to grow their partners’ pie, no doubt they will receive a fair slice of it.

( Author: Ian Bremmer, President, Eurasia Group. Ian Bremmer is an American political scientist specializing in US foreign policy, states in transition, and global political risk. He is the president and founder of Eurasia Group, a political risk research and consulting firm. As of December 2014, he is foreign affairs columnist and editor-at-large at TIME. In 2013, he was named Global Research Professor at New York University. Eurasia Group provides analysis and expertise about how political developments and national security dynamics move markets and shape investment environments across the globe.)

Courtesy: World Economic Forum

 
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