Tuesday, October 9, 2018

Chinese Spying Chips In Manufactured Electronics

Smart hack: How China used embedable electronic chips to spy the world.
Yesterday’s bombshell Bloomberg Businessweek reported that, Chinese military has sneak spy chips onto server components used across the U.S. which strike an immediate major impact on Asian tech stocks. Apple (AAPL, +0.97%) suppliers Taiwan Semiconductor (TSM, +0.51%) and Largan Precision—the latter makes camera lenses for iPhones—fell by 1.6% and 7.3% respectively. LG Display, which was recently reported to be a new supplier of iPhone screens, fell by more than 1.8%. And component suppliers TDK (TTDKY, -0.13%) and Murata (MRAAY, -1.92%) dropped by 4.8% and 3.9% respectively. Also hit hard was Lenovo (LNVGY, -2.45%), the Chinese PC manufacturer that makes ThinkPad and Yoga laptops. The Beijing-based company’s shares fell by almost 23% at one point on Friday, before recovering to a mere 15% drop by the end of the day’s trading. The question is, do these falls make sense, given what the Bloomberg report said? Here are a few points to remember.

The Bloomberg piece talked quite specifically about malicious chips on server motherboards that were made in China for the U.S. firm Supermicro (SMCI, -22.17%) (whose share price halved on the news, unsurprisingly). It did not talk about smartphone components. And Lenovo told CNBC that it’s not a Supermicro customer. This suggests that the sudden lack of confidence in Lenovo and Apple’s suppliers is to do with Lenovo being Chinese and Apple making its devices in China, rather than them having any clear, direct link to the alleged espionage described in the Bloomberg piece.




Supermicro, Apple and Amazon (AMZN, +0.96%)—which is central to the Bloomberg report as a user of Supermicro equipment—have all strongly disputed the contents of that report. The force and breadth of those denials is notable, with observers (such as the author of this must-read analysis in The Register) seeing more here than traditional obfuscation or weasel-wording. At the same time, the Bloomberg team is highly reputable and the story appears to be well-sourced. So somebody here is either wrong or not entirely forthcoming, and it’s not quite clear who that is. That said. 

Motive

All intelligence agencies inherently want to be able to spy as much as they can. They can do that over the Internet, but the real prize is sneaking in a “hardware implant” that renders a device vulnerable to espionage or takeover. China, being the preeminent manufacturing hub for so many electronic devices, is in a uniquely advantageous position to follow this path. However, China also wants to maintain its manufacturing-hub status, which is central to the country’s economy. Getting caught could be a national disaster—and this is why most observers have assumed that it’s still safe to make so much of our stuff there; because they wouldn’t try that, would they?


The Supermicro made from China are used in most motherboards of iPhones and others.
The U.S. investigation into the spy chips is, according to the story, a few years old already, dating back to the Obama era. But its revelation comes under the presidency of Donald Trump, who is engaged in a trade war with China, frequently accuses the country of intellectual property theft (one of the likely use cases for the reported implants), and is desperately trying to get companies including Apple to bring their manufacturing to the U.S. With that in mind, there is a strong possibility that Bloomberg‘s story will provide further ammunition for the president on his anti-Chinese quest.

Even though Apple’s connection to the story is about servers that it no longer even uses—for apparently unrelated reasons—its Chinese manufacturing was already a Trumpian talking point, and this news really won’t help matters. In the light of this uncertainty, faltering confidence in Apple’s Far-Eastern suppliers is perhaps understandable.

Investors Concerns

As for Lenovo, the fear there is that, if the Chinese military managed to sneak its spy chips onto Supermicro motherboards (as used in U.S. warships, CIA drone systems and so forth), then maybe it’s managed to compromise other manufacturers too. Lenovo is a big enterprise player, and companies do not want the Chinese stealing their trade secrets. It remains to be seen whether Western business markets really do turn against Lenovo, and—what with all that controversy over the accuracy of Bloomberg‘s details—the next few weeks may be crucial on that front.


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