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USIS Review

Quarter 4 2017

UoS Investment Society

In this edition: • Elon Musk on markets • Secrets of Chinese hacking • Sportsware retail strategy • Catalonian independence • AI at the Box Office • The Dell-EMC Merger


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Contents

USIS Review Quarter 4 2017

Contents

Editor’s Letter 3

Banking & Finance Dell & EMC Merger 4 UK Sports Retail Strategy 5 Sentiment Towards Elon Musk 7 Technology

AI for Box-Office Predictions

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A Decentralised Energy Grid

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Environment

Economics & Global Affairs

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China's Hacking Capabilities

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Our Partners

Catalonian Independence Crisis


USIS Review Quarter 4 2017

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A Word from the Editor Welcome to the second quarterly edition of the USIS Review for this academic year. The review is one of the three pillars of the University of Sheffield Investment Society which links the trading division, the fund, and the wider society. Since the last edition, we have secured further funding from the Alumni Foundation and would like to thank them and all our sponsors for enabling this magazine to be published. This edition of the USIS Review is brought to you by a range of students from a wide variety of degree backgrounds. The financial world does not exist in isolation and geographical, political, and scientific developments frequently have a huge impact on the way that markets operate. We are proud of how the diversity of our writers allows us to fully engage with this complex interrelation of factors in order to create a review of the world of investment for students at the University of Sheffield. There are many exciting topics covered in this edition. A strategic analysis has been conducted for the two major UK Sports Retailers, JD Sports and Sports Direct. On technology, our writers explore the implications of the recent merger between Dell and EMC, a novel use of AI to predict box office performance, and the future of decentralised energy supply. On a global platform, we present analysis of the dark arts of China's international intellectual property theft and the conditions surrounding Catalan's independence crisis. Our special thanks go to the University of Sheffield Enterprise Zone and the Sheffield University Management School for their on-going support with this publication. I very much hope you enjoy this edition of the USIS Review.

David Scott Editor

Editors, Contributors & Sources Editor: David Scott Contributors: Advaith Srivathsa, Bryn Evans, Bruno Benitez De Lugo Risueno, David Scott, Jonathan Garvey, Marcus Pinard-Baden, Tom Simpson Sources: Cover Photo:

Bloomberg, Bloomberg Businessweek, Thomson Reuters, Financial Times, Economist, Investors Chronicle, Wall Street Journal, Investopedia, Mergermarket, Yahoo Finance, Company Press Releases & Company Annual Reports Annie Damon


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Banking & Finance

USIS Review Quarter 4 2017

Corporate Finance

What Happens Behind Closed Doors

The Dell-EMC merger amid growing reluctance of big tech to go public

"Go big or go home, baby"

Since the global financial crisis, the world has been flush with cash as a result of loose monetary policy, and much of that money has found its way into unlisted securities such as in the form of venture capital (VC) and private equity (PE). The term unicorn, used to refer to start-ups with a private valuation of over one billion USD, was first coined in 2013 by venture capitalist Aileen Lee. Uber, AirBnB and Xiaomi are all examples of unicorns that have yet to tap the public markets for capital, and it’s no surprise: Uber recently completed a Softbank led $9.3 billion equity sale. Private companies can avoid the scrutiny of sell-side analysts and the quarterly earnings call. They can focus on longterm strategies that may hurt earnings and revenues in the short-term. Taking such a bold strategy whilst public can impede a company’s ability to raise cheap capital in the debt markets. As a result of the financial crash, many investors turned to the secondaries PE market to access capital that was contractually tied up in PE funds. Due to the success of these auctions, and the introduction of sovereign wealth funds to the list of potential investors, liquidity in secondaries has soared, leading to increased confidence for investors considering committing capital to PE funds.

Michael Dell

In addition, researchers at the London Business School have found a significant positive correlation between the pricing of secondary funds and the liquidity in the secondaries market, forming a positive feedback loop. By increasing liquidity, the risk of holding private securities diminishes, and can lead to the financing of mega-deals such as described below. In 2013, Michael Dell, founder and CEO of Dell Technologies, partnered with private equity group Silver Lake partners to take Dell private, a deal valued at $24.4 billion, and which was the largest private-equity-sponsored leveraged buyout since the financial crisis, and the largest tech buyout in history. Michael Dell is known for his big risks. In the 1980’s, he began selling personal computers directly to consumers, a move that proved immensely successful. He utilised cheap marketing in computer magazines, and let customers order a custom built PC by mail or by phone. He then used the data accumulated from sales to innovate on the supply-side, reducing inventories, thereby using cash more efficiently. By 1999, Dell was the leading manufacturer of computers in the US by sales, but as sales of PCs plateaued, it was left to Dell to once again forge a new path for his company.

In 2015, Dell and Silver Lake announced their plans for their $67 billion industry-shaping acquisition of EMC, a company that sells cloud computing, data storage, information security, and big data analytics, along with other services, using a business to business model. Dell and Silver Lake clearly admired this model, and may continue to expand similarly. Dell now counts JP Morgan, Microsoft and Amazon, along with 98% of the list of Fortune 500 companies as clients, and has total revenues of $79 billion, making it the world’s largest privately held technology company. The deal can teach us about where innovators such as Dell and Silver Lake see growth in the technology industry, but the nature of the deal brings substantial risks. Dell-EMC’s largest markets are a fiercely competitive arena, with Microsoft and Amazon playing as both large customers and competitors. Due to the 2013 buyout, Dell was already shackled with debt and, in order for the deal to be orchestrated, required a substantial amount of financial engineering. A consortium of nine banks led by JP Morgan raised around $50 billion in debt which despite poor market conditions, was a record in international debt markets. More impressive was that over $40 billion of the debt was rated investment-grade, despite Dell’s junk rating. The resulting capital structure produces around $7 billion in EBITDA, and requires $2 billion for annual interest payments. Only history will tell whether the deal was a wise move, but should things pan out as well as Dell expects, we can expect to see a wave of mega-deals in the technology sector. Jonathan Garvey BSc Mathematics


USIS Review Quarter 4 2017

Banking & Finance

Strategy

Battle of the sportsware titans

A comparison of the strategies of UK retailers JD Sports and Sports Direct In July, the sportswear market was hit with a shock as despite having both the UEFA European Football Championship and the Olympic Games in Summer 2016, Sports Direct plc announced a fall in underlying profits of 58.7% in the year to the end of April. In contrasting fortunes competitor JD Sports recorded an 81% increase in pre-tax profits (year to end of Jan). Many investors are wondering whether Sports Direct is doing enough to bounce back, and whether JD Sports will be able to maintain its recent success.

planning on breaking into emerging markets in East Asia. The company is teaming up with marketing firm Rocketfuel Entertainment to create digital content in Malaysia, and also aims to open 25 outlets by the end of 2018 in countries such as Singapore and Thailand. The progression into emerging markets continues with the part acquisition of South Korean footwear brand Hot-T in September, having an initial stake of 15%, and an option to purchase another 35% on top in December.

JD Sports have cemented themselves as the largest UK competitor to Sports Direct with consistent increase in pre-tax profits over multiple years. The company revenue is nearly double in 2017 (£2,378.7m) than in 2013 (£1,258.9m), and interim reports for this year suggest that this isn’t going to slow down.

According to Executive Chairman Peter Cowgill, these actions have large potential to cement JD Sports as a global player, something its British competitor has been unable to do so effectively. Developing in emerging markets early also can inspire brand loyalty before other firms, giving a strong first mover advantage to the company, and creating barriers to entry for competitors. Hence, acquiring already successful retailers such as Hot-T will convey their confidence in these markets to investors.

The success of the group is also translating to its subsidiaries as Go Outdoors, acquired by JD in a deal finalised in May, also posted a 2% increase in EBITDA, inspiring confidence in the investment made. How will the company continue this into the future? Other than acquisitions of companies such as Go Outdoors, JD Sports has answered this question by

Signs of continued success are strong as the company reported a 33% increase in pre-tax profits in the 6 months to July 29th, with a 41% increase in revenue over the same period. Whilst there still can be doubt surrounding how long this hon-

eymoon period can be maintained for, the retailer is certainly making its global presence known. Similar success hasn’t been present for Sports Direct over the past year. The fall in pre-tax profits of such magnitude will have certainly knocked investor confidence in Mike Ashley’s firm. However, the response has been swift. A finance director was hired almost instantly (the first since 2013) and the company made a bold forecast of earnings rising between 5 and 15% for the following year, with the vision to turn Sports Direct into “The Selfridges of Sport”. Whilst these statements show bold ambition, its actions speak louder than words. The biggest move going into the future is its proposal to sell Newcastle United Football Club- the £300m deal with Amanda Staveley looks likely to go ahead. This will allow room for a large amount of investment to be made by the firm. Where this money will be invested is uncertain as current acquisition activity has been volatile. Over the Summer months several investments were made in struggling UK retailers, such as a 26% stake in Game Digital, increasing stake in French Connection from 11.2% to 27%, and an increased stake in Debenhams to over 10%. Other more audacious projects have also surfaced in the past few months, including plans to set up a Sports Direct gym in both Lincoln and Glasgow, utilising the range of sports gear that they also sell, and a £30m attempt to buy Brixton Market appearing to be on the cards. These acquisitions and projects seem healthy, and show that Sports Direct have the spending power to follow up their Selfridges claim. They have translated to immediate success for the company. French Connection has cut its

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Banking & Finance

USIS Review Quarter 4 2017

combination of these with likely returns to prosperity for Debenhams and French Connection could signal that Sports Direct are back on track with a bright future. This seems to have convinced investors as despite a lack of actual success share prices have risen from 291.20p on 30th June to 377p on 29th December, a rise of 29.5%. Over the same period JD share prices have dropped from 350p to 336.2p, a fall of 3.94%.

losses for the first six months to £5.7m, suggesting a shift in momentum back to profitability, and the backing of Mike Ashley will certainly have spurred confidence into other investors. Debenhams saw a pre-tax profit fall of 44% to £59m, however, the majority of that drop is down to a redesign strategy, which would suggest that a return to success won’t be too far away for the firm. These could be seen as minor improvements, however Sports Direct hasn’t seen the same impact for itself, as pre-tax profits dropped 67% to £46m for the 6 months to October 29th, partially due to the £132m invested into the other firms. This means that it is hard to gauge at this point whether Sports Direct is back to winning ways, and a clear picture won’t be painted until the full year statement

comes out in July. Both JD Sports and Sports Direct have made bold moves since the contrasting fortunes that appeared in July and September. JD Sports certainly has shown that it can continue success over multiple years, and the rise in pre-tax profits year upon year will squash the majority of doubts amongst investors, reducing issues within corporate governance. The push into developing markets also shows the prospects for sustainable growth for years to come. It’s hard to disagree that JD Sports have taken the win when it comes to progression over the past six months. That is not the whole battle though, as Sports Direct are still waiting on developments with projects such as creating gyms and the acquisition of Brixton market. A

JD Sports have the better success on paper, but it is Sports Direct and Mike Ashley’s business record that inspires a greater confidence with investors. One thing is certain, the next few months are crucial for both retailers. Marcus Pinard-Baden BSc Financial Mathematics


USIS Review Quarter 4 2017

Banking & Finance

Markets

Sentiment towards Elon Musk Do tweets help direct market movements? In a list of the greatest inventors and innovators alive, Elon Musk will forever find himself near its top. As hardworking as he is ambitious, he has revolutionized electric vehicles and privatized space travel amongst many other things. Tesla, his pioneering venture into mass produced electric vehicles, has the potential to be great. With grand ideas and a first mover advantage, Tesla has virtually no current competition, especially in the US. The company has become synonymous with its eccentric founder. He carries the company on his shoulders, investing his life savings in the company to save it from bankruptcy. It is his life's work, and they are inseparable. Despite Musk’s enthusiasm, Tesla as a business has struggled since its inception. A recent report in the Wall Street Journal stated that: “In the past five years, though, Tesla has fallen short of more than 20 projections made by Mr. Musk, ranging from car-production output to financial targets. The company missed 10 of his stated goals by an average of nearly a year. Tesla’s Model S sedan was rolled out on schedule in 2012, but its Model X sport-utility vehicle was delayed nearly two years before its debut last September. The Model 3 sedan, initially targeted for roll out by the end of 2014, was unveiled in March and will not be delivered to customers until next year.”

However, Tesla is still a name on every investors' lips as the world knows about Musk's uncanny knack of fighting any challenge thrown at him and coming out on top. "Investors love Tesla, even though Tesla is losing money" said an article by Forbes. It may seem certain that there would be a strong link between public sentiment on Musk and Tesla’s share price, however this is easily disproven. The graph (below) shows the % of positive Tesla and Musk tweets and TSLA prices over time for last 12 months. The sentiment has been measured using Reuters' "Social Media Monitor" which has an accuracy of 70%. The idea of a link between sentiment of Musk and Tesla’s share price lies in the idea that investors will demand more shares of a company if they feel good about it. However, the graph indicates an inverse relationship. There are a number of possible explanations for this. These data might be presenting an unfair representation of reality. The people who have indulged in tweeting about Elon Musk might not actually be the people who invest in the company, and are just the people who follow the news and voice their opinion of the news item. It is also possible that the tweets have been written by just a small, insignificant chunk of the investors who have Tesla in their sights.

A second interpretation might be that socially acceptable public thought is in contraposition to private action. Many people simply follow the herd of social media influencers when broadcasting their opinions but do not translate it into their trading strategies. For example, post Elon Musk's recent split with Amber Heard, it became a part of gossip to pick sides about the issue and speculate foul play. It's been noted that Elon Musk regularly lets his personal life affect his professional life, which has also drawn a bit of negative attention. Musk told Rolling Stone that his heartbreak over his break-up had even affected the launch of his Tesla Model 3. Keeping all this in mind, the negative tweets against Musk might just have been the socially acceptable thing to do at that point. Another way to look at it might be that people have started trading more technically than sentimentally. This is a good sign as it shows that people are becoming more and more financially literate and that they trust mathematics more than simply word of mouth. The role of "fake news" is widely being spoken about these days. Maybe the news actually doesn't convey the true story of the inner business circles. In any case, this is an irregularity from what we would anticipate. This might have happened due to a variety or a combination of reasons. Or this pattern was just a coincidence this year. Hopefully, we get more data in the years to come, so that we can cross-check if this pattern is a concrete regularity. Either way, there is no denying that Elon Musk makes up a huge chunk of the company's name, and that whatever the graphs might show, Tesla's future is dependent heavily on Elon Musk's future. Advaith Srivathsa BSc Economics & Finance

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Technology

USIS Review Quarter 4 2017

Artificial Intelligence

When sci-fi becomes a reality

Artificial Intelligence to predict box office returns With the omnipresence of home streaming services and articles decrying the death of the movie theatre, you could be forgiven for thinking that the traditional movie industry was in dire straits. However, global box office revenue has increased almost 50%, $15 billion, since 2007, the year Netflix launched. That is not to say that the traditional film industry is not under pressure. Revenues have grown in the booming Asian market but stagnated in the US. Online streaming is also moving to directly compete with the movie industry- with highly respected directors such as Bong Joon-ho and Noah Baumbach directing films which released simultaneously online and in cinemas. One clear advantage that streaming services have over the movie industry is data they collect for free from their users. This can be used to make recommendations to viewers and to predict what films and shows will be popular and hence increase their audience. In contrast, the movie industry relies on rougher metrics such as box office revenue and critical reception for previous films. As a result, several new start-ups are using artificial intelligence to help studios and investors make decisions which have previously been made purely on experience. One such company is Pilot Analytics. The Boston based software as a service start-up uses machine learning to provide predictions of box office revenue. Pilot analytics collects data from 4000 Amer-

ican films made since 1990, including details of the cast, crew, director, release date etc and the corresponding box office performance of the films. Then using machine learning algorithms, they build a mathematical model based on this data which allows them to predict the box office revenue of proposed films. From US opening weekend box office predictions made for this summer Pilot analytics had a mean absolute error of 19.7 % on sub $30 million budget movies but on above $30 million films, this error dropped to 9.8%. The percentage error is likely to be greater on smaller budget movies due to a smaller overall box office take, but it also reflects increased volatility of low budget movies. This was demonstrated by the movie "All Eyez on Me" which Pilot underpredicted by 30%, this prediction was more in line with the industry consensus showing that Pilot’s algorithms seem to pick up similar ques to experienced industry insiders but that it needs to improve if it is to provide superior predictions on lower budget films. The key challenge facing these companies however is access to the huge amounts of data required for accurate analysis. This is especially pertinent with the growing importance of the Chinese market and the difficulty of obtaining the 3rd party data which they need. The ramifications of this are illustrated by franchises such as Transformers. Pilot analytics made a prediction of the opening box office of

the latest instalment this summer and provided a fairly accurate estimate of $62.5 million compared to $68.5 million actual for the US box office. Traditionally this would be considered a failure, however the film ended up making 80% of its revenue outside of the US and eventually almost tripled its budget, a moderate success. This decrease in the importance of the US box office is an increasing trend in large blockbusters. the percentage of revenue from the US market having shifted from constituting around 50% of the total only a few years ago down to 30% or less for many films. This demonstrates that Pilot analytics must concentrate on the global market as well as the domestic market if they are to be truly successful. With streaming services utilising big data more and more, traditional film producers will likely become more and more interested in innovative technologies such as machine learning in order to level the playing field. The results of an increasingly data focused approach however must be considered. This could be a boon for mid-to-low budget directors who can use data driven box office predictions to build credible business cases for investors, outside of a major studio structure. Given that current models are less successful at accurately predicting the performance of low-budget films, this may not be the case. Furthermore, in the current cinematic climate of increased studio reliance on re-using properties and developing franchises, the result of an increased use in data analytics may only exacerbate this issue. It would be much harder to predict the success of a completely new film and rather easier to simply produce yet another comic book movie which an algorithm has calculated will be more profitable. Thomas Simpson MEng Mechanical Engineering


USIS Review Quarter 4 2017

Environment

Energy

The future of energy distribution The plausibility of a decentralised energy grid One of the large differentiators between developed and “developing” nations is the presence of a national grid. Supplying energy to industry and households uninterrupted has helped further advance nations relative to peers whose energy supply may be volatile. Changing energy production and needs may see the rise of effective decentralised energy supply, leaving the developed world hampered by legacy grids which are expensive and resistant to innovation. Developing nations may be able to bypass these, allowing cheaper, cleaner, high technology energy supply. Soon after Edison and Tesla first demonstrated the power of commercial supply of electricity, utilities companies fought to place private pylons across the USA. This meant separate power supply from each company, allowing greater competition but frequent power-outs and huge inefficiencies as companies had to oversupply in order to meet energy demand. Rising fuel prices led to the establishment of a national grid in which power suppliers would feed the grid with a continuous but dynamic source of electricity based upon need. In Britain, the story was similar though the grid was set up as a nationalised service seeking mainly to supply industry. The national grid was effective in its time, reflecting an industrial country. Power plants are co-located according to where they would get fuel giving efficiency savings compared to transmission losses, facilitated by huge wires stretching across miles of countryside. The easily variable energy source found in coal and gas (the more you burn the more energy you get) reduced energy waste significantly as with basic demand forecasts, overcapacity could be minimised. Recently this technology has started to show its age. Most above inflation growth

in energy costs has come from the high levels of investment necessary in transmission infrastructure. Supply is controlled by a few huge companies due to the huge financial risks and a large degree of vertical integration is needed to offset many risks associated with energy prices. Today, advances in renewable energy production look set to reduce reliance on fossil fuels. One of the largest problems with renewable energy is that the energy supply is variable, unpredictable, and often isn’t produced during times of greatest demand. With better energy storage technology, including pumped storage hydroelectricity and effective large batteries, more energy can be generated in times of plenty and stored for times of need allowing for time lags between production and supply. CHP plants are becoming more popular as they can supply both electricity and heat for industry on a smaller scale, close to where industry is located. There are a number of start-ups looking to disrupt the energy supply market. In Germany, around 1000 cooperatives are a case study in a shared ownership model which is financially viable as they can sell directly to third parties, rather than being forced to sell to the grid as in the UK, one of the largest barriers to smaller scale renewable energy, especially as subsidies for renewables have been broadly scrapped.

In the case that UK energy policy does not change, there is still a case for centralised grid technology. It facilitates trade between different areas and countries. Sensing disruption is near, current large producers are starting to invest in renewable technology. These companies tend to make large profits from their energy trading arms and are likely to enjoy the benefits of a centralised grid. Most recently BP have made a £200m investment in Lightsource, a large player in the solar energy market. The deal will give potential to integrate the company into its power trading business and gives it a second chance at entering the solar power market after an unsuccessful first foray. It remains to be seen whether end is nigh for the national grid - the distributed network may need more sophisticated transmission systems to trade energy. It is a certainty however that the energy future of the UK and world is about to go through a significant change - one which is reflected in the company’s sale of it’s gas distribution arm. It may also place the developing world at an advantage as they will not have to implement such drastic change. David Scott MEng Mechanical Engineering

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USIS Review Quarter 4 2017

Spain

The persistent headache in North-East Spain An analysis of the Catalonian independence crisis “Life is never easy for those who dream”, but the dream of some can be the nightmare of others. The last fifteen years have seen the steady rise of a secessionist sentiment in the Spanish Autonomous Community of Catalonia. Frequent general election winners were forced to sign governmental pacts with small, regional parties to conform a majority, ultimately providing concessions and a bully pulpit to a radical few. This, coupled with consistent regional election successes, spurred the infamous events of the past few months, which brings us to an important and relevant question: is investment in Catalonia a viable option? The straight answer to that question would be a strong no, at least in the short-term. A breath-taking total of 3,073 companies have left Catalonia since October 1st, the date of the illegal referendum which led to a unilateral declaration of independence. The Spanish GDP growth forecast for 2018 has been pushed back by 0.5%, a direct consequence of the decline of foreign investments. An approximate 519m€ (75% of total investments) flew from Catalonia to other parts of Spain or Europe due to a generalised feeling of uncertainty. Even tourism, which has always been a given for cities like Barcelona, has dropped considerably, forcing hotels to reduce their prices by 40% to try to attract customers. These numbers are not encouraging for existing investors or potential ones either, as it seems to be progressively worse for

MNCs and SMEs, negatively impacting the financial panorama. The result of the recent regional election gave a deeply divided parliament, with a constitutionalist party being the first force but with secessionist parties gaining an overall majority if they decide to enter a coalition (which seems likely). If the latter manage to stay united and continue to pursue their goal of an independent Catalonia, the situation can only deteriorate and reduce consumer confidence, elevating the inevitable risk of investment. Despite this, there are some who still argue that normality will be restored in a matter of years, at most. They believe unilateral calls for independence will be relegated to an ephemeral and otiose mantra, lost in the sombre pages of a history book. For instance, Banking Manager from A&G Gonzalo Lardiés argues that, at the current time, Catalonia ‘does not offer the best environment for potential buyers to arise’. Yet, whilst underlining the risk behind major investments, he suggests that putting money in companies like Almirall (pharmaceutical) or Miquel y Costas (tobacco paper) might not be a bad idea, given their low, attractive prices that could peak after the turmoil is over. Assuming a long position after a destabilising event, such as natural disasters, has provided economic triumphs for those who are daring enough to gamble. However, the circumstances seem to be particularly different here. Simone Foxman (Quartz) remarks that ‘betting on

natural disasters has been one of the best investments since the financial crisis’, but neither the duration, nor the impact of a Hurricane, for example, can be compared to social and political instabilities. The overall panorama looks grim for the Catalonians, who can quickly go from one of the most potent autonomous communities in Spain (thanks to much investment and concessions from the central government over the years - it must not be forgotten), to a financially drained region. The most likely governing coalition wants the next president and vice-president to be an exile in Belgium and a convict, and tensions revolving around the disreputable referendum are still there. Warren Buffett has been known to say ‘be greedy when others are fearful’, and those who follow this doctrine understand that there is a slim chance of great success in these daring situations. Nevertheless, at this moment, greed must be tempered with reason. Bruno Benitez De Lugo Risueno BA Politics & International Relations


USIS Review Quarter 4 2017

Economics & Global Affairs

China

China's dark arts of development The capabilities of China's keyboard warriors The economic rise of China over the previous 3 decades has been marvelled by investors the world over; a Communist state enabling free market capitalism without suffering the same fate of its rival the Soviet Union, who under Gorbachev’s Perestroika collapsed whilst China rapidly expanded its GDP. There is however, more than what meets the eye to China’s apparent economic success, it’s a tale of espionage, intellectual property theft and intimidation. To fully understand the Chinese political and economic situation, one must analyse China’s economic war with the USA, the Chinese Communist Party’s (CCP) “unrestricted warfare” strategy and understand its endgame. According to Epoch Times journalist and cyber espionage expert Joshua Philipp, in 1986 Deng Xiaoping, Mao Zedong’s successor, approved the launch of Project 863, a Military Intelligence hacking programme with the sole aim of catching up fast with the West and then surpassing it. China was far behind the USA and even the Soviet Union in terms of technology, and thus sought to expand its GDP through acquiring Western technology. Project 863 was charged with identifying key industries to obtain technology from for military and economic means. This included Bio-tech, space, energy, new materials, telecoms and marine technology. This was practice was common by the USSR during the Cold War, who after stealing information, would attempt to reverse engineer a product, thus duplicating it. Whilst this was possible for the USSR who may have only been 1 or 2 generations behind the USA in certain technologies, the knowledge gap between Chinese technology and American technology was too large and the process was very time consuming and costly. Instead, Chinese spies would obtain open source

information of the earliest form of a technology, then buy the next generation’s, complementing its hardware with the technical knowhow derived from a small army of students sent to study abroad in the West in relevant industries. They were then able work out the steps taken between one generation to another, mass produce it, and then sell it on to Western markets at a fraction of the cost, costing Western economies trillions of dollars. China’s military, the People’s Liberation Army (PLA), has played a central role in this operation. In order to fund its ever-increasing defence budget, the PLA has instigated intellectual property theft to appropriate funds. Many top brass have senior positions in state run companies, and have pocketed funds via providing these companies with the necessary information for property theft and then reaping the profits. In recent times, the lion’s share of China’s technology acquisition focuses on legitimate means, and only resorts to Military hacking if it really has to. According to an ethical hacker speaking under anonymity, the greatest threat to companies is not technological, but rather

social engineering. The weakest link in any cyber security system, he says, is human error. In the majority of cyberattacks, a network is penetrated by an employee unwittingly clicking on an infected email, which then gives a hacker access to the entire network. Methods have varied from leaving USB sticks in car parks, for an employee to find and then put in their computer (as happened in Iran when the US/Israeli Stuxnet cyberattack targeted the Iranian Nuclear programme in 2005), to setting up “Honey traps”, where an attractive woman takes a sudden interest in an employee in order to obtain information. Honey traps are actually so widespread, that in 2009 MI5 issued a 14-page document to British banks, businesses, and institutions, warning them of the tactic used by Chinese Spies to exploit employees to cooperate with them. It’s a practice that is very difficult to counter as companies cannot simply regulate who their employees date, or ascertain whether an employee’s partner is genuinely attached to them. Another method is to reach out to Chinese nationals in Western companies, either paying them for information or encouraging them to return to China.

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However, most effective is simply to ask. As a requirement of participation in the largest growing consumer market in the world, China subjects Western companies to oppressive regulations which are not reciprocated on Chinese companies operating abroad. Foreign companies must abide by strict regulations, which often involve allowing the Chinese authorities to closely examine technology under the justification of “anti-terror protection”. This examination of technology is used to then transfer intellectual property (IP) to their own industries. A survey conducted in 2016 by the American Chamber of Commerce found that 52% of US companies operating in China felt that the threat of IP theft was greater in China, and that one in four US companies had already left China or were in the process of doing so, citing the increasing hostility from the Chinese government and inconsistent enforcement of laws. Indiscriminate fines (Apple), office raids (Microsoft), and even arbitrarily declaring companies illegal (Uber). What’s behind this protectionist strategy? Simple- China’s money belongs to China. China attracts Western investment but then clamps down on that money being used outside of China, in a similar way it

USIS Review Quarter 4 2017

outlaws its citizens from investing in what it classes as “irrational outbound investment” such as property, hotels, gambling and sports teams abroad. As China moves towards developing a service economy based on internal investment from a new middle class, it will gradually become less dependent on exports to the West, which we can already see from the increasing difficulty for Western companies to do business in China. This goal is part of a long-term strategy for Chinese hegemony on the world stage. As far back as 1999, PLA officer Colonel Xiao Liang published a book titled Unrestricted Warfare, hypothesising how China would defeat a technologically superior enemy such as the United States through unrestricted warfare, more commonly known today as hybrid warfare. Xiao states that “the first rule of unrestricted warfare is that there are no rules, with nothing forbidden.” The book outlines various warfare strategies including economic, legal (through international bodies such as the UN), and network warfare combined with international terrorism. It evokes the question: what would one want to achieve through

going to war, and how could one achieve it without actually going to war? Not limited to economic warfare, critical infrastructure is cited as a valid target, such as power networks, banking institutions and even transport. It is believed that this power in the future could be used by China to intimidate the West. Intelligence experts claim China is using a system known as Advanced Persistent Threat attacks, which involve 24/7 cyber-attacks on companies and government networks, constantly prodding to exploit even the smallest weaknesses. Governments are starting to get tougher on this growing cyber threat, but it’s difficult to develop defences against social engineering hacking within a free society, a fact that is clearly being exploited by China. Bryn Evans BA Modern Languages


USIS Review Quarter 4 2017

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USIS Review Quarter 4 2017

Background The Review is a quarterly student run publication and is read by a range of students and staff from different disciplines. It covers developments in banking and finance, investments and strategy, technology, economics, and global affairs and has contributors from a range of backgrounds. For students, the Review allows them to fully research and develop a reasoned argument about a relevant topic in finance. An article can open up topics to debate, challenge paradigms formed by only getting information from similar sources, and help inform students about recent issues. We also hope that it is helpful for students to show their interest in different sectors at interview.

Join the team The Review now has a huge range of sections dealing with every aspect of the businesss and investment world. Our contributors study a diverse range of degrees from Engineering to Medicine, Economics to Politics and History to Management, so we have no specific requirements or prerequisites. A developed interest in business and finance is a pre-requisite for an enormous number of careers. Making the transition from reader to writer will allow you to develop your skills and knowledge, whilst gaining tangible evidence that can set you apart from the crowd in any interview. There is also a large opportuntiy to inverview guest lecturers at the University meaning that the review is an ideal opportunity to engage and network with established professionals in a variety of fields.

USIS

If you are able to keep to deadlines and can work effectively, both independently and as part of a team, then you are warmly invited to contribute your own unique articles to our publication. If you are interested in contributing, or would like further information, please don’t hesitate to contact us using the following email address: dscott4@sheffield.ac.uk

You can Like us on Facebook (USIS Review) and join our group for regular updates on the publication and the opportunities available.

David Scott MEng Mechanical Engineering


USIS Review Quarter 4 2017

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USIS Review

Editor David Scott

Copyright Š 2017 The University of Sheffield Investment Society Any unauthorised reprint or use of this material is prohibited. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system without express written permission from the publisher. All opinions expressed within are those of the respective contributor and do not represent the views of The University of Sheffield Investment Society, the USIS Review or our partners.


USIS Review

Quarter 4 2017  
Quarter 4 2017  
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