Written by Kari Firestone
We all know, deep down, that there is no “free lunch.” The most obvious case of this are the lunches that all buy side investors are invited to featuring the management of companies that are going public or already public. If you are not a client of the hosting firm, you know that your host will likely expect some business after they serve you a three-course meal, even if the chicken is bouncy.
“Free” comes in many forms. Two decades ago, when I first met the management of Google (we both bought the stock and paid all the investment bankers at my former firm), I remember hearing about their revenue-generating approach that more closely resembled traditional networks rather than subscriber cable TV. The content would be free, but advertisers could target audiences with greater precision than TV through the use of traceable “clicks.”
The sophistication of those tracking tools has grown tremendously, as we all know, so that I guarantee the next time I search on Google, I will be offered the best deal on golf shoes (I really need a lobotomy not new shoes). Also, the information that we can obtain from Google free – directions, translations, the 3,000 types of tulips, etc, etc, – has expanded exponentially.
Facebook, including its subsidiaries Instagram and WhatsApp, followed the same model: connect with anyone in the world in words or video, for free, and all we had to do, so they said, was give up some minor personal information, such as purchase history, for all that. Fair trade, right?
That’s, of course, what we thought until we realized that much more of our personal data was being sold, often in violation of stated privacy policies, to influence elections and spread misinformation. Even skeptics among us underestimated the inherent risks embedded in the deal to which we had so easily agreed, as well as, the cost of that “free lunch.”
So, what does this have to do with China? A lot. There were two benefits that the US wanted from China: its enormous source of cheap labor and its huge population of potential customers for everything we had to sell.
In 1972, when Richard Nixon went to China, he initiated an “open trade” policy, the ultimate result of which was cheaper consumer and industrial goods as production moved to Chinese factories. We got cheap goods and they got higher paying jobs. Fair enough.
Then, once there were enough Chinese who could afford Guess! jeans, Marriott Hotel rooms, and Dell laptops, we wanted to sell to the newly expanded urban middle class. The Chinese, of course, wanted their own corporations to benefit from this upside, requiring joint ventures for foreign business operations that were marketing in the mainland. The Chinese government demanded Intellectual Property transfer within these JV’s, which range from washing machines and tee shirts to aircraft.
To get a foothold into a country with three to four times the population of the US, everyone on this side of the Pacific (or Atlantic) said YES. There was limited danger from simply copying, which the Chinese would likely do with their access to our “trade secrets,” because the big profits to US firms have always come from innovation, which the US would still dominate.
What happened, in hindsight, was inevitable. We under-appreciated the risks that China would “cheat” on the deal, just as we underestimated the risk that our personal data would find its way into the hands of Russian hackers or worse. The Chinese partners in the JV, after learning how everything was made, the engineering process, and software algorithms, didn’t need the US anymore. They went off on their own, competing with US firms everywhere in the world. In addition, highly (mostly US) educated and well-trained Chinese began to use their knowledge to develop new applications themselves.
Now, we don’t like the way China plays trade, and it’s totally understandable. Did we really think they wouldn’t steal our IP? The outcome of our trade isn’t one sided, of course, as US consumers and US companies have gotten a lot out of the deal. Clothes cost less now than 40 years ago, for example, and China, has generated hundreds of billions in profit for US corporations. However, unless the rules change again, we will give up much more than we ever expected.
The problem is that, as with the social media firms, we didn’t expect China to step outside our concept of the deal and turn the process into something outside our control, potentially very harmful and costly. No free lunch. Remember next time.