xfdfw BLOOMBERG-TV-79
<Show: BLOOMBERG TV>
<Date: March 23, 2010>
<Time: 00:00:00>
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<Tran: 032479cb.550>
<Type: SHOW>
<Head: Lipman Fellow Adam Segal on Bloomberg Radio.>
<Sect: News; Domestic>
<Byline: Tom Keene>
<Guest: Adam Segal>
<High: Adam Segal, Lipman Senior Fellow for Counterterrorism &
National Security Studies at The Council on Foreign Relations, talks to Bloomberg's
Tom Keene on Bloomberg on the Economy.>
<Spec: Economy; China>
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)ADAM SEGAL, LIPMAN SENIOR FELLOW FOR COUNTERTERRORISM NATIONAL SECURITY STUDIES AT THE COUNCIL ON FOREIGN RELATIONS, TALKS TO BLOOMBERG'S TOM KEENE ON BLOOMBERG ON THE ECONOMY.
MARCH 23, 2010
SPEAKERS: TOM KEENE, BLOOMBERG NEWS
ADAM SEGAL, LIPMAN SENIOR FELLOW FOR COUNTERTERRORISM NATIONAL SECURITY STUDIES, COUNCIL ON FOREIGN RELATIONS.
TOM KEENE, BLOOMBERG NEWS: It's Bloomberg On the Economy from our world headquarters in New York. Hello, everybody. I'm Tom Keene.
In this hour, Clayton Moran, analyst at the Benchmark Company. Google takes more share. Should you buy shares in 2010?
But first, the two internets of our cyber future, our internet and the internet of China as Google walks away from billions of users, we speak with Adam Segal of the Council on Foreign Relations. Mr. Seagal, welcome to the program.
ADAM SEGAL, LIPMAN SENIOR FELLOW FOR COUNTERTERRORISM NATIONAL SECURITY STUDIES, COUNCIL ON FOREIGN RELATIONS: Thanks for having me.
KEENE: I've been reading your work for years. We were looking for something big and momentous. I said Google's going to walk away.
Is Google going to walk away or is the Chinese going to push them into the Pacific Ocean?
SEGAL: Well, it's a little of both. I think what Google is going to try to do at the end if finesse it, which is that they've made this massive statement about how they're going to withdraw from the Chinese market.
But I think China - Google is going to try to figure out how it can still serve some Chinese users and particularly how it can protect the mobile market. Google wants to be involved with Android and so it's going to try to figure out it can do both of those. That's what they're going to try to do.
KEENE: Just looking at the recent literature, this from the San Francisco Chronicle SFGate.com, After trying sweet reason and negotiation for years with China, Google is fed up. From where you sit as more of an expert on China and cyber, oh, terrorism and cyber this, cyber that, what was the catalyst at Google?
Was it the two founders? Was it Eric Schmidt?
From where you sit, how did Google get to being fed up?
SEGAL: I think the final hacking really set something off with Sergey Brin. I think, you know, from the little that we know of what the kind of thinking inside of Google, given Brin's background, that his father was a dissident in the Soviet Union, that he probably was subject to some of the types of things that the Chinese were doing to Google.
You know, reading their mail and harassing them, stopping the free flow of information, that really kind of set them off. There also seemed to be a kind of fear that Google was getting closer and closer - excuse me, the Chinese were getting closer and closer to the core technologies from Google, that some of the hacking really seemed to be directed at how Google collects information on users and how it then uses it to exploit its market advantage. So that really seems to have been the kind of what really ticked them off.
KEENE: Adam Segal with us, folks.
Just an example in Foreign Policy magazine, The Chinese Internet Century.
You've got a great idea in here - I'm going to call it a sense of copyright where the Chinese just essentially want to own technology and - I love this word you use: cyber espionage. And when you say they hack Google, what are they actually doing to Google?
Are they going in and looking at patents or copyrights? What are they doing to get into our computers?
SEGAL: Well, with Google it seems to have been two things. One, it was a cyber espionage, right, so they seem to be kind of reverse engineering source code, which is kind of not only the code behind Google's search which is partly what they might have after.
But more importantly they seemed to be going after some of the code that Google was using internally, which is the kind of code that when you're using your Gmail account and you see a - you know, if you get an email from a friend about dinner and then the ad that pops up is dinner places that are somewhere around you. So the code that was helping them collect information on their own users, which was the cyber espionage side.
But the other side of it really seemed to be directed at human rights dissidents, that individual accounts were opened and read, specific either Chinese dissidents or people involved in religious issues in China. So it was a kind of a two-pronged attack.
KEENE: There seems to be a new effort here by the Chinese and again, in one of the articles, talking about new defense aid by the United States to Taiwan.
Is it sort of the same path it's been on for four years, or is there a new urgency to this tripod if you will? It's not a tripod, but the U.S., China and then Google over on the side.
SEGAL: There does seem to be a new urgency .
KEENE: Yes.
SEGAL: . because the relations - just all of these things seem to be going bad at the same time.
And partly I think, you know, we had these pretty high expectations when President Obama came in that he and Secretary Clinton and others in the administration were talking about a pretty comprehensive and broad engagement with China and that there were these really serious global issues and that the two of us could sit down and really address them. And then over the last year, you know, we saw the Chinese intransigents at Copenhagen, we've seen them be not particularly helpful with Iran, we see the kind of anger of the currency and renminbi revaluation is clearly going up in the United States.
And then add all of this Google, then I think you really get this perfect storm of the technology issues overlapped with the growing disillusionment in the United States with engagement with China.
KEENE: When you dive into this and looking at the new China, part of this going the other way would be why does Google need China? I mean its 300 million people. Baidu has been stiff competition.
Can't they do well and just ignore China? Do they really need China?
SEGAL: I think they do. I think, you know, as you said, they've only had - Google had about 30 percent of the market, 40 percent of the market and Baidu has had dominated in the other.
KEENE: Has Google been gaining market share?
SEGAL: It's been slowly gaining, but the total revenues for Google in China has been small in the realm of $2 billion given their global revenues.
But I think the issue is that China really seems to be the future of internet users, right. As you said 300 million now. That number could easily grow in the next - they will continue to grow over the next decade. Much of the innovation and new technology will be driven by Chinese users is what they're doing.
And so Google I think thought long and hard about what can it really afford to pull out of the market. I think Google is different from other U.S. companies in that it thinks that it can continue to - it can still serve Chinese users outside of the market.
KEENE: How does it do that?
SEGAL: Well, because the most technologically savvy of Chinese users can figure out how to get around the surveillance and the censorship. They'll either use virtual private networks or they'll use proxies or other technological kind of solutions to get around the firewall.
KEENE: Well, let's go with 300 million as a working number, and again, folks, from Adam Segal its The Chinese Internet Century. The majority of Chinese simply don't care.
Okay, they're going to go Baidu and they're going to look up soccer. Once, folks, I was in Hong Kong and there were four soccer games on TV. I mean that's what they're looking at to a great extent, and other stuff as well, Adam, that you know better than we do.
What number of out 300 million are those virtual internet people that Google can still serve?
SEGAL: Well, I think you're right. I think it's, you know, just like everybody else they'll use the internet to find out gossip about movie stars and everything else. I don't think we have a number, right.
I think we can be pretty much assured that the most kind of sophisticated and a large part of the middle class will use Google once or twice for what they think is really important research.
I mean this is truly anecdotal, but I was in Beijing last week. I spoke to a number of kind of think tank analysts and .
KEENE: Right.
SEGAL: . government officials and scholars. And they basically all said, yes, we use Google. There's no way we could do our work without Google. And then the science magazine Nature last week or the week before had a survey that basically said all Chinese scientists rely on Google and they're going to be severely hurt by it.
So it's clearly a more research oriented group that's going to be hurt by it. The average Chinese their instant messaging is not going to be affected.
KEENE: Yes, but this elite of China are they - are we assured that they can do an end around the Chinese system?
SEGAL: They can probably still figure it out. I think the issue is right now their sympathy is primarily with Google. Those people are kind of aware that the Chinese government censors result and they find it offensive and their sympathies are with Google.
But, you know, that could always change. And kind of figuring out nationalist sentiment on the web in China is very difficult to do and it could turn against Google. They could see it as they've been abandoned and their anger could turn against Google.
KEENE: We're going to continue our discussion on The Digital Dragon. That is Dr. Segal's book on China and we'll continue our discussion and turn our attention from Google to China's broader theme of the moment - that is China's new defense capability.
We'll talk about the burgeoning defense. I think of Steven Tsang and his work on the tension between China and Taiwan.
We'll talk to Adam Segal of the Council on Foreign Relations about the cyber espionage of the Chinese military, also their ability to capture ours and others technology secrets. Most importantly, what can be our defense against cyber espionage whatever nation and whatever region that can come from.
Also don't forget later in the hour Clayton Moran will join us from the Benchmark Companies as we look at the value that is Google. You know how far it's come since the IPO, but it's really leveled out over the last couple years, everything considered. What is the future growth? Clayton Moran with an outperform on Google.
We're all Google in this hour. It's Bloomberg On the Economy.
(BREAK)
KEENE: It's Bloomberg On the Economy. I'm Tom Keene in New York.
Don't forget Tom Keene On Demand - all of our interviews, including this interview with Dr. Segal from the Council on Foreign Relations.
Also, for example, from Bloomberg Surveillance, the recent interview with Douglas Holtz-Eakin, the former director of the Congressional Budget Office. Douglas Holtz-Eakin on the cost of healthcare. Look for that at Tom Keene On Demand.
Adam Segal with us. He's Lipman Senior Fellow for Counterterrorism and National Security Studies, China.
What do we need to know, Adam, about the projection of China within cyberspace? What's the thing Americans really need to focus on?
SEGAL: Well, there's I think a great deal of concern about an attack on the U.S. infrastructure, the electricity grid. But I think the primary concern right now is espionage, that the Chinese government, Chinese hackers are going after U.S. technology secrets and that really is one of our few remaining competitive advantages against China right now.
KEENE: So let's take IBM. We just spoke with the head of software for IBM. Great. They want to do business in China. They send over lets say routers, servers, other stuff.
You've got to be kidding me. Aren't they into that stuff in a heartbeat and essentially just taking the visible proprietary technology and the less visible proprietary technology?
SEGAL: I think it is and I think every U.S. company is really serious considering about how it does business in China and how it does business with China. In fact, the American Chamber of Commerce in China just did a survey last week which it shows that probably for the first time in 15, 20 years the business community is extremely pessimistic about the future.
And in it they also said they're beginning to think about, well, how do you protect your R D and should you even be shifting your R D to China in the first place.
But even if you're not in China, you're still being subject to attacks, right. People are still trying to hack into your servers and get in through emails.
KEENE: Well, .
SEGAL: So .
KEENE: Well, go ahead, please. Please.
SEGAL: No, I'd just say I think we're going to begin to see a real shifting of kind of the assumption that you're going to want to be moving lots of research and development to China.
KEENE: Okay. And you're the expert in the world on this. How do we defend?
Can you defend against cyber espionage?
SEGAL: It's very hard, right. We have this situation where the offense has all the advantages over the defense. And a lot of this stuff is - some of its technology, but a lot of it also is just people. And the attacks are becoming increasingly sophisticated.
You know, you get an email that looks for everything - for all purposes looks like it's from your boss and it then it says here's a memo attached and you open it and then you let the attackers in.
So it's hard to think that we're necessarily going to be able to stop it. I think what companies are beginning to do is thinking how you - how do you break the research up into different parts, so if one part gets exploited or can you keep the other parts away. And you should locate them in different countries and how do you think about protecting things.
But the thing about this field is that the technology moves so quickly people - it's so cheap and easy to do, right. You can - if you're a hacker, you can download new exploits on the web. Your friends share them with you. So it's very hard to think about how you defend against it.
KEENE: Okay, and within this pessimism, if we say there's an international - not outrage, let's call it a polite uproar over this, is there a coordinated response?
I mean we think of the failed Doha round and other trade issues. What are the incentives we can build in to bring the Chinese and for that matter other nations around them not doing cyber espionage?
SEGAL: Well, I think the one thing that we have going for us is the negative, which is that everyone is threatened by this. The Chinese themselves are hacked pretty frequently and they say that they are the biggest victim of hacking.
And so the other issue is that there are cyber terrorists or cyber criminals, all of these people are victimizing legitimate business and legitimate interests. So I think there is a common interest that states have in trying to defend against this.
And that's why you have right now in Europe you have a convention on cyber crime. Unfortunately only about 26 countries have signed it and Russia is not one of them and that's where many of the cyber hackers and cyber criminals are.
But I think as China begins to realize that its own businesses are under a threat, that its own infrastructure is vulnerable, we will begin to see some more traction with the Chinese in moving and kind of regulating and restricting this.
KEENE: Well, I mean we think of copyright infringement and legendary and big piles of CDs and token media bond fires, but this is a little different, isn't it, than just copyright theft of artwork or royalty streams and such.
If you take a given company and I'm going to take Johnson Johnson, folks. It just happens to be the company that pops into my brain. How do they - you know, when they go to an advisor like you, what do you tell them?
What do you tell a Johnson Johnson?
SEGAL: Basically that nothing is really safe and you have to assume that the days of where you could kind of sit on your intellectual property and expect to reap the benefits for three, five, seven, ten years are over. That somehow or another your competitors are going to get at it, which increases the kind of metabolism of everybody, which makes everybody have to really innovate and develop much, much faster.
And then also, you know, money has to be spent on cyber security. You have to figure out how to protect these things and keep them safe.
But it's true. It's different, you know, the copyright violations, the fake DVDs, that's clearly a threat to Hollywood and has a significant cost.
I think the attacks on these technology companies on their kind of core innovative competitiveness is a real broad-based economic challenge to the United States and one that we're going to have to really respond to.
KEENE: Adam Segal, I've had the privilege of interviewing Steve Tsang of Oxford University from his Hong Kong with his great work, one of his books, If China Attacks Taiwan, - folks, Steven Tsang, a professor at Oxford University.
And you look at this and let me ask you a question. I say this with great respect because we seem to have gotten the Russian defense capability or offense capability so wrong somewhere in the vicinity of 1990. How good is China's military capability?
SEGAL: I think most people think that there's no way they're going to challenge U.S. forces - you know, force on force. They're not going to take the U.S. directly on. They're still at least two decades behind.
But I think when people talk about it - an attack on Taiwan, there's lot of things to be worried there. That the Chinese - these new capabilities, some of them bought from the Russians, some of them developed themselves - submarines, anti-ship cruise missiles, mines, -things like that that could really cause problems for the U.S. Navy and, more importantly, just slow the U.S. Navy down.
That when you think about a war in Taiwan, the Chinese probably don't want to and don't think they could invade Taiwan. What they want to do is create a kind of political outcome, force the Taiwanese back to the negotiation table. And that would happen very quickly. And that the Chinese are getting the capabilities to do pretty easily.
KEENE: Where did they get the technology for a given missile that you just mentioned? I mean did they take that from us?
Did they take say a North American Rockwell project in China, steal the technology and turn it into missile capabilities?
SEGAL: Some of it they bought from the Russians. Some of it they probably stole, not from any project in China, but from the U.S., that Chinese spies or Americans were convinced to sell things to Chinese agents. Some of it is dual use, right, the controls for cruise missiles use GPS and other technologies that can be used for airplanes and other things like that so they probably bought it on the open market.
KEENE: We've got to continue this discussion. Not enough time. Adam Segal with us, folks, from the Council on Foreign Relations.
Coming up, we're going to continue this discussion and look actually at Google. One of our more popular guests on Bloomberg Surveillance, Clayton Moran will join us from the Benchmark Companies. If you missed Google at the IPO, should buy now?
Again, our thanks to Adam Segal.
From New York, it's Bloomberg On the Economy.
END OF TRANSCRIPT
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