Networking in China ... boundless opportunity: constrained by a tough regulatory environment and limited carrier choice.

Amajor international economy with a GDP (as measured by Purchasing Power Parity) of $8.1 trillion (2005 estimate; Source: The World Factbook), The People's Republic of China is the world's second largest economy after the U.S. China is a communist country that has embraced capitalism with "Socialistic Characteristics" and, with an officially reported economic growth rate of 9.2 percent in 2005, China's economy is growing very strongly. There are a number of factors contributing to this growth: China becoming an internationally renowned high quality, low cost manufacturer; membership in the WTO; and the growth in domestic consumption. However, growth may be constrained by the fact that the 1.3 billion Chinese had an average GDP per capita of $6,200 in 2005, barely 2/3rds of the worldwide average. Additionally, China's financial sector still needs to develop in the area of corporate governance and risk management to fully leverage the potential of the economy. Politically, China remains governed by the Chinese Communist Party in a one-party system. This arrangement gives capitalism in China a decisively different look since the government takes an active role in managing economic growth. The one example of this in the IT industry is the firewall that stands between the Chinese Internet and the Worldwide Web.

Strong Economic Growth with Steady

Key Indicators

The country made a formal decision to open up its economy in 1978, and has been gradually allowing more and more capitalism ever since. Today, China is a magnet for foreign investment. Foreign Direct Investment was at $60.6 billion in 2004, putting China third behind the U.S. ($96 billion) and the UK. ($78 billion), according to the United Nations Conference on Trade and Development's 2005 World Investment Report. Key businesses attracting funds are mainly in heavy industry. However IT infrastructure supporting these businesses is of increasing interest to foreign companies. The economy is expected to continue to grow at an annual GDP growth rate above 7% through the remainder of the decade. However, due to a number of fundamental economic issues, the view on the Chinese economy isn't all upside. With a healthy share of the economy now being driven by domestic consumption, the disparity between rich and poor may effectively limit the potential of economic growth. An example of this conflict is demonstrated by the fact that China's middle class is expected to grow to 100 million people by the end of the decade, however currently 17 percent of the citizens of China live on less than $1 a day. Also, overcapacity in key industries such as steel, aluminum and auto industries will drive down prices and affect corporate financials. Lastly, China has a significant portion of their GDP (40% in 2004) generated by exports. The recent change to greater exchange rate flexibility has created more versatility for the central band and may portend more transparent management of the economy. From another perspective, consider China's inclusion as a component of the BRICs (Brazil, Russia, India and China) economies. Grouped together the BRICs economies could be larger than the G6 economies in less than 40 years, with China not surprisingly being the largest economy in the world.

The Economies Influence on the IT Industry

As an IT economy, China's domestic market shows great potential and dynacism Certain types of businesses, like technology manufacturing, have been a staple of Chinese IT economy for decades. Lately the growth of IT business has been especially robust, aided by the general international trend of Multi-National Corporations (MNCs) opening offices in China to tap into the country's inexpensive resources and high manufacturing quality. Outsourcing is becoming a big industry in China because of the sheer number and quality of resources available. Few realize that China is the number two outsourcing destination in the world. Over the last decade China has grown into an attractive IT market. China's digital economy is big enough to put up significant competition with Western heavyweights like Yahoo, EBay and Google. The recent agreement by Google to sensor its search services rather than pull out of the Chinese market is a clear message about the importance of this market. Long the land of low cost equipment manufacturers, China is now a technology exporter, with Lenovo buying IBM's personal PC business, and Huawei challenging Cisco System's router business on American soil. However concerns still exist, the transportation and communications infrastructure require investment. Also as recently as 2004, 27% of Chinese manufacturing firms needed to own back-up generators. Chinese telecom industry is an enabler of the high tech manufacturing and outsourcing trends. To illustrate the relative magnitude of the Chinese digital economy, consider a comparison between China and India (another of the BRICs countries); the entire Chinese telecom industry generated $65.3 billion in revenue in 2004, whereas Indian telecom brought in $17.8 billion in the year ending March 31, 2005. Another example of the growth in the IT market, in 2003 mobile penetration exceeded fixed line penetration according to the Ministry of Information Industry (MII) of China.

In the outsourcing market China is quickly growing to surpass India as the worlds leading low cost outsourcing destination. Amounts spent on telecommunications and numbers of IT graduates (IT workforce is at 200,000 and grows by 50,000 every year) are indicative of the growth and investment in China's infrastructure. It is also a demonstration that China has an adequate number of trained professionals to compete for international software outsourcing business. Still India enjoys a better image as an outsourcing destination for now, chiefly because of MNCs concerns about China's controls over (and ability to control) Intellectual Property, something analysts and country specialists see gradually changing over the next decade. Going forward, experts predict China emerging as the number one offshore destination and a dominant IT economy.

Robust IT Resources in Major Metro Areas, but Higher than Average Employee Costs

CIOs planning their entry into China are in for an interesting experience. On one hand, they are entering a country that is hardly an emerging market in the sense of a lack of physical and logistical infrastructure. To a CIO, the major business and industrial areas of China offer advanced levels of telecom services, access to IT hardware, access to advanced services like managed security, A-grade office space and robust business park infrastructure for manufacturing and satellite facilities, ample English-speaking and IT trained personnel and an abundance of consumer telecom services that can be used for business telecommuting.

On the other hand, CIOs would have to adapt their IT policies significantly to the ways of a country where business regulation is complex and harsh, telecom is not deregulated, and laws on intellectual property may not be as aggressively pursued as in most western countries. As an IT economy, China is home to 200,000 technology workers, concentrated in major cities and in technology parks.

English skills here are not ubiquitous but definitely growing. China's infrastructure is uneven--the most advanced part of the country consists of 12 major cities and some 270 industrial parks. These locations enjoy high teledensity, availability of major telecom services, reasonable competition in IT workforce compensation and availability of resources. An average IT worker makes almost $9,000 a year, or $750 a month, which is a lot compared to some of China's neighbors like Vietnam. A CIO in China makes $34,000 a year which is almost double of the rate in Vietnam.

Issues that China faces on the infrastructure side are somewhat unique to China. For instance, due to the unreliability of China's power grid infrastructure many companies are not 100 percent sure they trust the power supply to be there at all times--emergency backup solutions are very popular. Data centers built in China often are constructed with premium access to power generation facilities being a major factor, or with a power generation facility being a part of the new build.

Most of the world's IT equipment is currently manufactured in China including some of the hottest consumer products. Motorola's RAZR Made in China. Dell Computers Made in China. Even China's regional rival Japan understands the opportunity--Sony's preferred manufacturing site for Playstation[R] 3 is China. These facilities are also supplying the Chinese market with products, thus passing some of the savings extracted from outsource manufacturing to CIOs and IT managers looking to buy equipment locally. CIOs operating in China are also bound to find that even though network and organization security are largely in-sourced in most Chinese companies, the market for outsourced managed security services is beginning to stir. Some of the local competitors include companies like Venustech and NSFocus, whose services range from designing security infrastructure to monitoring.

The biggest challenge CIOs setting up operations in China face are the significant regulatory hurdles in the IT market. First and foremost, it is almost certain that a large scale IT operation will have to get government licensing clearance. This is important because most CIOs are not well equipped to distinguish between the different types of communication services that the Chinese government chooses to regulate. Regulatory clearance could take the form of obtaining a telecom license, or making sure the equipment is certified to be operated in China, or ensuring that the entire information exchange happening within the IT network is behind the country firewall.

Second, CIOs are likely to have to conform their information policy to the Chinese information policies. Chinese requirements towards the government's ability to listen in on conversations are similar to requirements other national legislatures developed to the same end, public-private partnerships like the CALEA (Communications Assistance for Law Enforcement Act) in the US. The difference here is that the Chinese government has a much wider mandate to police telecommunications, which means it has wider latitude to define what it needs to monitor, thus making everything from firewalls and VPNs to VoIP transmission a subject of potential monitoring. To that end, CIOs can't use IT equipment that has not been cleared for import by Chinese authorities, namely the Ministry of Information Industry of China. Authorities must have the key to all codes that run in China.

As was previously mentioned, recent issues that search engine companies had to address--developing alternative search content that would pass the censor muster--are a sign of the potential regulatory issues in China.

Further Deregulation on the Service Provider Side, but Continued Potential Hurdles for Enterprises

CIOs operating in China get access to a solid telecom infrastructure and a robust market for consumer telecom services. As is the case in many countries, telecom infrastructure is being updated by an incumbent PTT(s), and last mile connectivity is vastly better in majorcities and business parks than in rural China. Also, DSL is solidly the most popular and affordable broadband available.

That said, telecom options are limited because of lack of competition. For market insiders like Joshua Gordon, COO of Red Pocket Mobile, China's requirements for participating in the Chinese market stretch all the way from setting up operations in the country to billing for services. First and foremost, because the telecom market is not fully deregulated, allowing only for limited inter-modular competition, companies like Red Pocket Mobile need to have a strong partner going in.

Without a strong relationship with a Chinese carrier that operates under class I--a full telecom license--a non-Chinese company would be very limited in what it can do. From the regulatory standpoint a typical CIO would be hard pressed to provide even simple services like VoIP and IP VPNs without some kind of a regulated long distance service bought via a regulated and adequately interfaced with regulated partners. For a CIO developing a multi-site network, a Chinese partner is an absolute must because certain types of networks--like long distance telephone networks--can't be built without a class I carrier participating, and to get such a license a company has to commit to building and maintaining a network that would match that of the PTT. In practical terms, this leaves only an option of accessing partner's network via a lease and essentially there are only a couple of companies with networks that cover all of China to pick from when it comes to potential partners.

With intranet, extranet and telecom needs of the company attended to, CIOs typically turn to study telecommuting options for remote sites and individual workers. In spite of good broadband penetration in major cities, setting up a telecommuting service for all of a company's far flung offices can be difficult. A lack of competition in the telecom sector means that there is no real alternative to DSL.

Locations that can't be reached with DSL would require an expensive--and slow--network build. The only real alternative here is the inter-modal option of mobile telephony. With mobile telephony taking over fixed line in total penetration, telecommuting and remote access setups explored by CIOs should include both fixed line and mobile platform-based strategy. Also, China is experiencing a meaningful uptake of Wi-Fi technology, meaning that its DSL footprint is being incrementally--300 feet at a time--grown thanks to public and private Wi-Fi hubs.

Chinese telecom is going through a deregulation process though, however slowly. As a World Trade Organization member since 2001, China must continue deregulating certain aspects of its telecom industry. It already lifted quantitative restrictions for joint ventures in domestic and international data services that include voice-, packet- and circuit-switched transmission. The two main elements of the agreement were to allow foreign telcos to own 25 percent of fixed line joint ventures--regulations have been issued, but full implementation is problematic because of the large capitol requirements, and 49 percent of mobile joint ventures--there is one 49% foreign wireless joint venture under review for approval. These quotas are expected to evolve over time.

Conclusion

For most CIOs, the question is not ... Can I operate in China. Being able to run IT operations in China, the second largest economy in the world, has become a requirement similar to that of being able to run IT operations in the U.S. Most of the issues that CIOs are going to face in China are tariff and regulation-related and can be predicted and managed. Hard core IT issues such as telecom infrastructure, enterprise security, IT staff and hardware procurement--have real market issues attached to them that are no different than in most other developed countries.

Networking in China: Quick Facts

Telecom Deregulation Status The Ministry of Information and Industry, the telecom regulatory authority in China, split China Telecom into six operators. Additionally, China's acceptance into the WTO required that they allow 25% foreign investment in basic services joint ventures in Beijing, Guangzhou, and Shanghai (regulations have been issued but few foreign telecom companies have successfully established operations); and 2.) allow up to 49% foreign investment in wireless JVs in most major cities as a condition to membership in 2002 (This has been fulfilled). National PTT China Telecom (south) and China Netcom (north) were formed from the former China Telecom and are the largest fixed-line telephone operators in the country. Other Carriers China Mobile, China Unicorn, China Satcom, and China Railcom Average Pay (per annum us) Mid-level manager (2-5 years experience): $8,799; Manager (5-8 years experience/software developer): $13,400; CIO: $34,000 Internet Users 720 per 10,000 inhabitants (2004) InternetHosts 46.6million (2005) PCs 13.18 per 100 inhabitants Top Telecom Portals www.cnnic.cn; http://en.chinabroadcast.cn; www.ceocio.com.cn; www.cio-asia.com www.at&t.com/business.

TopNetworking Facts

* Mobile phone penetration is half the USA rate: 29%, however, China has the largest mobile subscription base in the world with 400 million (twice as many subscribers as the USA)

* VoIP is legal in China (but not PC-to-PC or PC-to-Phone VoIP, e.g.Skype) and provided by class I services providers (eg., China Netcom, China Telecom, etc.): VoIP comprises over 50% of total domestic and international voice minutes for carriers such as China Telecom

* Broadband is widespread: Over 64 million broadband lines(2005)--50% growth from 2004

* Wi-Fi is primarily concentrated in hotels and airports: Guangzhou, Beijing, Shanghai, Shenzhen, and Dalian

* Top IT schools: Tsinghua University, Peking University, Zhejiang University, Fudan University and Najing University

* Domestic and international telephone services are increasingly available for private use in main cities, low teledensity in rural areas: 24% China overall

* Telecom is covered by one regulatory agency: The Ministry of Information Industry (MII or Xinxi Chanyie Bu)

* Technology management is an executive level job: CIOs are growing in numbers; many &them are not native Chinese

* T1 is used, but not as often as ISDN: ADSL is widespread

Carriers in China

* China Telecom: formed from the former China Telecom and its affiliated telecom companies in the 21 southern provinces

* China Netcom: formed from the former China Telecom and its affiliated telecom companies in the 10 northern provinces.

* China Mobile: state-owned enterprise focused on the mobile business

* China Unicorn: engaged in the cellular business in 30 provinces, municipalities and autonomous regions in China

* China Satcom: primary services include satellite special services in communications, broadcastand other fields, satellite mobile communications services, Internet services and VSAT services

* China Railcom: shifted from the Ministry &Railways and is a major state-owned basic telecommunications operator

Chinese Words Of Love Exploit PowerPoint Day Zero Flaw

PowerPoint file secretly installs keylogging Trojan horse 

Experts at Sophos's global network of virus, spyware and spare analysis centers, are analyzing a malicious Microsoft PowerPoint file that exploits an unpatched vulnerability in the software in order to spy upon computer users.

The suspect PowerPoint PPT file, which contains "humorous" philosophy about love between men and women and is believed to have been distributed via email, contains exploit code that drops the keylogging Trojan horse onto users' computers.

The Trojan horse also attempts to disable anti-virus products running on the infected computer.

The PowerPoint presentation discusses relationships between men and women but secretly drops a Trojan horse onto computers.

The first slide in the presentation can be translated as follows:

What is romantic? You know the girl doesn't like him, but still sends her 999 roses; What is wasteful? You know the girl does like him, but still sends her 999 roses.

The next slide translates as: There are two types of women: one is posh, and another is normal. The posh is for somebody else, the normal one is for family and husband.

During marriage a husband only sees his normal wife and during affair the husband will see the posh woman.

This is analysis of the reason why men have affairs. This is wonderful. hi total there are 18 slides in the presentation.

"The hackers exploiting this unpatched hole in PowerPoint appear to have timed the release of their malicious code to deliberately follow," said, senior technology consultant for Sophos. "The bad news for Microsoft and its customers is that there was no fix for this problem in that bundle of patches. All computer users need to be exercise great caution over unsolicited email attachments. The only people who are going to have a warm glow inside from the words of love in this presentation are likely to be the hackers behind the attack."

Sophos experts are continuing to examine the Powerpoint file which contains the exploit.

In May, in a similar incident, Sophos how hackers exploited a day zero vulnerability, in Microsoft Word with the Troj/Oscor-B Troj an horse.