CHINA INFORMATION TECHNOLOGY LAW NEWSLETTER

SPECIAL ISSUE:

The Chinese government has recently
implemented the WLAN standard

The Chinese government has recently implemented the WLAN standard, called GB15629.11-2003, is very similar to the popular IEEE's 802.11 standard, commonly known as Wireless Fidelity or Wi-FI. The Chinese standard uses a different security protocol, called WLAN Authentication and Privacy Infrastructure (WAPI). The Chinese standard went into effect on December 1, but the compliance deadline for foreign companies has been extended to June 1, 2004.

The Chinese standard for WLANs was approved by the Standardization Administration of China (SAC) in May, 2003 and came into effect on Dec. 1, 2004, although a transition period has been granted that extends the compliance deadline for some WLAN products until June 1, 2004. Equipment vendors that want to sell WLAN gear in China are required to offer products based on the Chinese standard. Sales of Wi-Fi equipment worldwide reached over $2 billion last year, and China is seen as one of the fastest-growing markets for the technology.

To conform to this standard, foreign equipment vendors must license WAPI through a manufacturing agreement with one of 24 Chinese companies designated by the Chinese government. Many of these companies currently compete against foreign equipment vendors, and they are not under any obligation to license WAPI to foreign companies. Thus, these foreign companies could find themselves locked out of China's WLAN market if they cannot reach an agreement with a local partner. Foreign companies have two options: accept the Chinese standard and work with the Chinese licensees or reject the standard and miss out on the market.

Thus far, China has kept most of the technological details of its security technology under wraps. The technology describes how data transmitted over wireless networks should be encrypted to prevent unauthorized monitoring. Some industry analysts have speculated that China rejected the already well established Wi-Fi security technology in favor of a proprietary system in order to keep control over wireless communications in the country, or to promote local business by requiring foreign suppliers to work with Chinese partners. Thus, the new standard is really just a technical barrier to trade enforcing a protectionist attitude in order to further move China up the IT food chain (see below).

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The implementation of this standard will greatly undermine the fundamental reasoning behind having Wi-Fi as a global standard. The goal of the 802.11 standard is to create a world where anyone with a computer can go online wherever you go in the world. Thus, anyone who travels from a foreign country using the 802.11 standard will not be able to use their laptop to access the internet in China. Instead of checking their e-mail at the local cafe, they will be confined to their hotel rooms attached to the wall by an old fashioned Cat-5 cable.

The China standard also raises concern with licensing issues because the only way to get into this market is going to be through one of the firms that have a license. In order to have these firms adapt the foreign products to the China market, the foreign firms will be forced to share proprietary and sensitive materials. This would essentially bypass their intellectual property rights and give these competitor companies the information they need to copy the foreign firms in the global market.

In a recent interview with Reuters, Broadcom Corp. (nasdaq: BRCM) CEO Alan Ross said,

"that the new Chinese regulations on wireless data communications imperil the intellectual property of foreign suppliers by requiring them to share design information with local Chinese firms. We're not playing their game. We're not going to lose our technological edge through the risky disclosure of our IP (intellectual property)."

This standard has already caused a backlash as companies like Intel have refused to conform to the new standard and have halted all shipments of the Centrino processor to China and threatened to pull out of the China market completely in the hopes that this will isolate China in the global market and pressure the Chinese government to accept the global 802.11 standard. On the other hand, many small manufactures are counting on Intel's resistance because the market will open up for smaller companies looking to grow in a new market that it not dominated by the giants of the IT industry. Already, AMD, BenQ, and Texas Instruments have agreed to conform their products to this new standard.

Alternatively, there are those that believe that once the Chinese government opens the standard, the cryptography community world over will try to break its security. If it is broken, the Chinese companies will get isolated, since no one else in the world will follow the WAPI standard. If it is not broken, it would automatically turn out to be better and more robust than 802.11. Essentially, the market and Time will decide on the fate of this new standard. Also, if a company has to engineer their products to work with both standards, this will drive up the cost of these products for consumers. Thus, they will pay the ultimate price for China's standard. However, a free market is very tricky. Consumers may just decide to purchase less expensive equipment and then smuggle in the 802.11 technology in defiance of the law.

However, there are many other issues that will plague this China standard. According to Stan Abrams, a China IT and Intellectual Property attorney, we are perhaps using the term standard in a slightly confusing manner here. To clear this up, here is some language from the WTO on the difference between a standard and a technical regulation:

"The difference between a standard and a technical regulation lies in compliance. While conformity with standards is voluntary, technical regulations are by nature mandatory. They have different implications for international trade. If an imported product does not fulfill the requirements of a technical regulation, it will not be allowed to be put on sale."

This means that the requirements of following this particular standard can be referred to as a technical regulation.

One can appreciate the turnabout here. For many years, Chinese companies have been stuck under the thumb of companies like Qualcomm and Philips that own solid patents. Either voluntarily or after litigation, the Chinese manufacturers of mobile phones, DVD players, and other products have had to pay license fees to these foreign companies. In establishing a home-grown standard, the Chinese government is doing a lot of things, one of which is to stem the tide of out-flowing license fees and help Chinese companies, and another is to get into the licensing business themselves.

Another wrinkle involves the trade implications of this wireless standard and international law. Technical barriers to trade have been used in the past to protect domestic industries and make it more difficult for foreign enterprises to sell products. There is an entire index item on the WTO web site devoted to technical barriers to trade. Note the introductory language, which serves to explain the issue fairly well:

"Technical regulations and product standards may vary from country to country. Having many different regulations and standards makes life difficult for producers and exporters. If regulations are set arbitrarily, they could be used as an excuse for protectionism. The Agreement on Technical Barriers to Trade tries to ensure that regulations, standards, testing and certification procedures do not create unnecessary obstacles."

Along with a rather odd graphic of an egg spinning on its vertical axis, the WTO site page on this subject is worth a look if you are at all interested in this debate. To summarize the WTO position on technical barriers to trade (TBT), it is that you need a good reason to impose a technical regulation. The usual excuses are safety, quality, internal harmonization, or facilitation of trade. It is hard to see in this case what the good reason is for this technical regulation. Basically, "Unnecessary obstacles to trade can result when (i) a regulation is more restrictive than necessary to achieve a given policy objective, or (ii) when it does not fulfill a legitimate objective." One would think the argument here goes directly to what the legitimate objective is here.

Officially, the legitimate objective has to do with security, specifically the encryption standard. Lots of political implications of this of course, but this probably has less to do with control of information and more to do with economics. It is hard to see a legitimate reason why the security regimes of existing standards are not good enough.

There are other standards in existence, of course, such as the 802.11 series that have been hanging around for quite a while. For example, the Wi-Fi Alliance, which was founded to certify products to the 802.11 standard, was set up all the way back in 1999. Intel uses this standard in its wireless Centrino chip.

The ramifications of WAPI are not limited to computers either. Nokia's new handset, the 9500 Communicator, is another major product that in all likelihood will not enter the Chinese market due to WAPI. There are likely to be many such casualties, and it remains to be seen just how far the Chinese government will go to establish their own homegrown standard.

Lehman Lee & Xu

http://www.lehmanlaw.com

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The China Information Technology Law Newsletter is intended to be used for news purposes only. It should not be taken as comprehensive legal advice, and Lehman, Lee & Xu will not be held responsible for any such reliance on its contents.