The next target for China’s cybersecurity crackdown will be the pools of data collected by the latest generation of cars. This approach risks Beijing shooting itself in the foot, and jeopardizing its ambitious plans to lead the global race for electric and autonomous vehicles.
China wants to have control over the information cars have about their drivers, the roads they traverse, and the faces and voices they pass, according to a draft law on data-security management for the automotive industry first issued in May. It seeks to ensure manufacturers across the auto supply chain keep data in the country and pass a government security evaluation if it’s sent overseas. Operators that process personal information of more than 100,000 individuals, or what preliminary rules have broadly defined as “important data,” are required to report it to regulators, provincial governments and a host of other official bodies. The rules apply to almost every situation in which people find themselves in or near a car, creating a host of ambiguities.
China’s move to protect privacy and put boundaries around data makes sense. However, in the current form, the rules do more to restrict innovation, creating an enormous burden on companies for the sake of regulation, and undermining the progress Beijing — and global firms operating in the world’s largest auto market — have made within the industry.
State planners have been aggressive in pushing electric cars and other future-forward technology. After eliminating restrictions on foreign ownership in its EV market a few years ago, China made significant headway on road rules for autonomous driving and put in place policies that were bolder than almost anywhere else in the world. Subsidies have been strategically allocated, pruned and targeted toward charging infrastructure and better batteries — both key to getting ahead.
For global automakers and their suppliers, the cost of compliance will be large. These companies collect data to improve the driver experience and manufacture intelligent cars. Information on roads, how vehicles perform on different terrain, driving habits and a host of other sensitive areas is also typically used to enhance performance and continuously upgrade features. Cameras and sensors collect the information for what are considered necessary and desired features these days. Many cars have mobile applications that respond to drivers’ needs and preferences, and built-in connectivity for software updates. Autonomous driving, too, is dependent on piles of information needed to feed machine-learning programs.
Given the latest guidance, however, the more data that's collected, the more regulatory hassle and hurdles companies stand to face. If firms can’t get their data out or use it effectively, development won’t happen or will be restricted. Carmakers, in turn, could be forced into markets where policies incentivize innovation, such as parts of Europe or the US.
While the rules remain in draft form for now, Beijing’s paranoia is already in full flight. In March, it restricted use of Tesla Inc.’s vehicles by military staff and employees of key state-owned enterprises, citing concerns that the information they gather could be a source of national-security leaks, the Wall Street Journal reported. Anecdotally, government offices aren’t allowing Tesla cars on their premises. Meanwhile, the company is now increasing local data centers and moving its Chinese client data and verification services from the US to China. The firm also said it was developing a local platform to let users access their data, a reversal from a previous decision not to share information. Even if Tesla’s relationship with Beijing has several strings attached, it didn’t sign up for this.
If that's a preview of what’s to come, investors should be paying attention. They’ve pushed up valuations for companies projected to have a high portion of green cars in their sales over the next few years, according to Nomura Holdings Inc. The promise of production of EVs and autonomous vehicles has bolstered conviction for several US-listed Chinese electric car companies like NIO Inc., XPeng Inc. and Li Auto Inc. that have huge potential in a promising market.
But so did the likes of Didi Global Inc. and the handful of companies recently hit by a regulatory probe into data usage. Always eager to make an example of the private sector, officials have shown little sympathy for homegrown champions and will take action against them — even if it’s at odds with what were commonly understood to be China’s own policies. Companies are learning that regulators will go as far as they deem necessary, and have started to warn investors about evolving rules.
Recently floated Full Truck Alliance Inc., for example, one of the companies caught up in the latest regulatory sweep, cautioned in its offering document in June that “the PRC regulatory and enforcement regime with regard to data security and data protection is still evolving,” noting that officials are increasingly focused on this area. The firm also said that draft laws could change and that it can’t assure investors “that relevant regulators will not interpret or implement the laws or regulations in ways that negatively affect us.” Those precautions became a reality.
The draft law is wide-ranging and will affect almost all automotive industry players, according to law firm King & Wood Mallesons. Companies up and down the supply chain, car-related startups and tech firms could suddenly find themselves on the wrong side of regulation, shut out of much-needed capital-raising to grow their businesses — at the cost of crippling China’s electric and self-driving future. The alternative is that firms don’t bring their best to the country, as we’ve seen in the past with fears of technology transfer. That should worry Beijing, too.
Data and technology are at the heart of competition for automakers right now. The likes of Toyota Motor Corp. have made multibillion dollar investments in ride-hailers to tap that information, among other things. Last week, the Japanese carmaker bought a company that gives it access to high-definition maps from crowd-sourced inputs. Meanwhile, Volkswagen AG wants to transform itself into a tech company, it said at earnings last week. If market players start walking away, China won’t get anything close to the dominance it seeks.
Bloomberg
