Storm Clouds in the East
Most human knowledge, including corporate and government data and information, resides on servers that are remotely accessible via the Internet or even in “the cloud,” a nebulous connection of big data centers located around the world. In today’s environment, keeping data secure is becoming increasingly challenging.
Facing few constraints, hackers have become increasingly sophisticated and ever more brazen. In emerging market nations, they appear to be acting as a state-sanctioned if not exactly state-supported intelligence gathering arm.
That’s particularly true of Chinese hackers.
While there’s little publicly available evidence showing a direct link to Chinese hackers and the Chinese state, the US government clearly believes there’s a connection.
Two weeks ago, US General Keith Alexander, who heads both the US Cyber Command and the National Security Agency, told the US Senate Armed Forces Committee that his command should have 40 “online support teams” ready for action by 2015 and at least 15 of those units will function solely to attack other countries.
Gen. Alexander’s announcement follows a Presidential Policy Directive signed by President Obama a few months ago that, although still classified, has been described as outlining one of the most aggressive cyber security policies in history.
No single country has been named by the American government as a preeminent cyber threat, but it’s more or less common knowledge that Chinese hackers have been systematically attacking the computer systems of Western multinational corporations as well as infrastructure and government computer systems.
So far, though, the aim hasn’t been to inflict malicious damage on the systems. Rather, they appear to be fishing for trade secrets with an eye towards finding information that will allow companies to operate more efficiently and upgrade their technologies.
With the exception of Google (NSDQ: GOOG), most companies tend to stay quiet about cyber attacks for fear of reprisals or drawing the attention of other hackers to weakness in the systems.
That said, computer security firm McAfee says that it identified more than 70 victims of Chinese hacking attacks just in 2010 and 2011 alone. More recently, The New York Times and Dow Jones & Co., the publisher of The Wall Street Journal, have reported that they have been victims of cyber attacks appearing to originate in China.
While media outlets haven’t been common targets of attacks—at least that we know of—Mandiant, another Internet security firm, has said that information technology firms are the leading group of victims, followed by aerospace, satellites and telecoms. Financial and industrial companies also rank within the top ten most-targeted types of companies.
Given Gen. Alexander’s announcement, the US government is clearly concerned about these attacks and estimates that they have caused tens of billions of dollars worth of economic damage.
Let us all thank China for helping to militarize the Internet. But it doesn’t stop there, because China has prompted an offline arms race as well.
The continuing dispute between China and Japan over the Diaoyu/Senkaku Islands is heating up, most recently after the Chinese government labeled the island chain a “core interest.” The Chinese intend to push their claim on the islands as stridently as their claim on Taiwan.
Not only will that continue to complicate relations between China and Japan, it has prompted the Japanese to increase their national defense budget for the first time in 11 years.
In January, the Japanese government announced that it would boost defense spending by 0.8 percent this year, bumping it up to JPY4.68 trillion yen. Most of that increase in being allocated to Japan’s coast guard, the agency primarily responsible for monitoring and, if need be, defending the Diaoyu Islands.
It’s also telling that Japanese/Russian relations seem to be warming, as both view China as a common threat.
While the spending increase doesn’t breach the more or less informal spending cap of 1 percent of gross domestic product on defense that has been in place since the end of World War II, it clearly demonstrates that Japan is concerned about China’s growing regional influence.
Tensions and greater military spending are spreading throughout the region. Last year, South Korea increased its defense budget by 5.6 percent to KRW33.1 trillion. While one impetus for that increase was the leadership change in the north and the growing unpredictability of that regime, increasingly strained relations with China certainly played a role. The Korean government also said that it was earmarking about KRW26 billion to help develop resources to counter cyber attacks.
The arms race is pervasive throughout the region.
China and Vietnam have long been historical enemies. Relations between the two countries have more or less stabilized since 1991, following their naval conflict in 1988.
But Vietnam is getting nervous. China recently launched its first aircraft carrier—it sails but isn’t combat ready yet—and upgraded its submarine fleet, while simultaneously pursuing territorial and resource claims more aggressively.
Like China, Vietnam depends on the rich resources of the South China Sea and the Pacific Ocean to help drive economic growth. If its access to those waters were to be curtailed by a growing Chinese naval influence, Vietnam would find itself in a sticky situation.
As a result, the Vietnamese naval budget has grown by 150 percent since 2008 and is expected to reach USD400 million by 2015. Much of that increase has gone towards procuring new ships from the Russians, who have few scruples when it comes to selling advanced military technology. Those sales include six Russian Kilo-class submarines, which are slated for delivery to Vietnam by 2018.
It’s not my intention to strike an alarmist note here; I’m merely pointing out that a more assertive China is raising regional tensions in a bid for influence that isn’t likely to wane any time soon.
The Chinese can be rather enigmatic about their true intentions, but they’re clearly believers in realpolitik and recognize that true influence comes from being able to project both economic and military might into regions of interest. Frankly, they need only look to the example set by the US to see the value of that strategy.
The regional military buildup isn’t likely to reach the levels seen in the US and the Soviet Union during the Cold War. Despite the region’s strong growth, there still isn’t enough economic firepower there yet. However, escalating tensions do create the risk of unintended consequences. More and more ships operating in a theatre as small as the South China Sea raises the chances of an incident.
A contained regional conflict may also one day prove advantageous to the Chinese. The country’s leaders genuinely believe they have a legitimate claim on the Senkaku Islands, but the tensions created by the issue also have helped deflect ethnic and regional tensions occurring internally in China. These geopolitical disputes are a way for the government to project public anger onto an external foe.
If domestic tensions remain a problem or grow worse, a contained, small-scale regional conflict may be just what the doctor ordered for China’s top brass.
The remilitarization of Asia poses an interesting investment thesis for the region. That’s particularly true for Western defense companies that are finding new customers in Asia, to offset defense cuts from budget sequestration in the US and the deepening pan-European recession.
Portfolio Updates
Chunghwa Telecom (NYSE: CHT) reported this morning that its first quarter net revenue grew by 2.1 percent to TWD56.63 billion, thanks to a 9.1 percent increase in mobile communications revenue, partially offset by decreases in Internet and domestic fixed communications revenues. Earnings per share came in at TWD1.18, in line with expectations.
Mobile services are increasingly important to Chunghwa, as the fixed-line market becomes saturated. The company added 388,000 new mobile Internet subscribers in the quarter, while mobile data revenue shot up by 42.2 percent year-over-year.
Internet revenue fell by 2.7 percent, largely due to a 15.7 percent increase in capital expenditures, but the company’s broadband Internet business actually grew by 81.9 percent versus the same period last year.
With strong growth prospects in both its mobile and Internet service operations, Chunghwa Telecom remains a buy up to 35.
Stock Talk
Add New Comments
You must be logged in to post to Stock Talk OR create an account