The Appliances Are Listening

An Excerpt from ‘Trafficking Data: How China Is Winning the Battle for Digital Sovereignty’

Americans’ addiction to low-cost consumer products, particularly connected (or “smart”) devices, has led to a world where data security takes a back seat to affordability. Consumer products have razor-thin profit margins, making everything from smart watches to baby monitors a potential source of data exploitation. Since firms with significant operations in China face intensive pressure to share consumer data with China’s government, affordability directly works against the safety and security of consumer data. Such pressure enables what I term “data trafficking,” or the extraction of consumer data without explicit consent to achieve an international political advantage. But this is the last thing anyone wants to think about when they are hungry.

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Most people are not in the habit of monitoring whether they are consenting to data gathering when they eat, but some connected home devices even know when you open your refrigerator door. Beyond posing a conundrum for avid snackers, this kind of monitoring can also provide such data points as how many people might be at home at a given time, when mealtimes are, and which foods people eat. This issue of consumer data gathering on devices has particularly interesting data trafficking implications when companies change hands.

In August 2018, I served as the scholar liaison for a group of congressional staffers traveling to China on a delegation through the National Committee on U.S.-China Relations. While we were in Qingdao, our hosts from the Qingdao Municipal Committee of the Chinese Communist Party (CCP) invited our group to visit the consumer products company Haier, a firm best known in the United States for making inexpensive mini refrigerators.

Haier emerged from the state-run Qingdao Refrigerator General Factory as part of the first wave of liberalization in the 1980s. Haier’s chairman and CEO, Zhang Ruimin, who took over Haier’s leadership in 1984, has articulated clear plans for building a data platform and leveraging the Internet of Things (IoT) as part of a turnaround strategy for the electronics firm. Haier had its initial public offering in 1993, listing Class A shares—shares for retail investors—on the Shanghai Stock Exchange. In 2018, the firm listed Class D shares on Germany’s China Europe International Exchange, or CEINEX, a joint venture of Chinese and German stock exchanges.

(Courtesy of Oxford University Press)

Zhang’s role underscores Haier’s position as a key player in the CCP’s long-term strategic planning. In addition to being the company chairman and CEO, he was a delegate to the 19th National Congress of the CCP and an alternate delegate as far back as the 16th National Congress in 2002. Zhang’s long-standing role in CCP leadership, paired with Haier’s origins in the state-run sector, highlights the difference between this firm and other global appliance firms, such as Samsung, Electrolux, and Whirlpool.

Jet-lagged and exhausted, our group visited the Haier headquarters to learn about refrigerator manufacturing. We quickly recognized that Haier had transcended its refrigerator company origins. Instead of mini refrigerators, we saw connected home appliances with sensors to surveil users’ daily lives. As we toured kitchen mock-ups studded with stainless steel devices, our hosts told us that Haier was now a tech company. The firm’s executives went on to note that not only was Haier’s brand growing in the United States, but the company had also acquired a U.S. legacy brand, GE Appliances, one of the oldest and most trusted consumer brands in the United States.

In June 2016, Haier purchased GE Appliances for U.S.$5.4 billion. Together, Haier and GE Appliances comprise the world’s largest consumer appliance company. The acquisition specifically targeted growth through the IoT. Since purchasing GE Appliances, Haier has made good on this goal by delivering an entire line of connected consumer electronics called GE Smart Appliances. Data is gathered via the appliances and stored on apps developed by Haier US Appliance Solutions, Inc. But what is perhaps more significant to investors is that Haier has foregrounded the development of its new proprietary platform for its IoT, the U+ Connect platform, which collects data through all connected GE Appliances and Haier products. This move makes Haier as much a data company as a consumer products company.

The Haier U+ Connect platform leverages another Chinese firm that is likewise subject to the data localization requirements of China’s 2017 Cybersecurity Law. Haier’s partner for its home platform is the Chinese national champion search engine Baidu (known colloquially in the Western press as “China’s Google”). Haier used Baidu’s TianGong smart IoT platform to connect equipment, manage devices, and store data for the U+ Connect app that GE Appliances uses, thereby integrating GE Appliances into China’s nationalized data storage system. Even the name of the product evokes central government oversight. TianGong means “heavenly palace” in Mandarin. These characters evoke Tiananmen Square, the geographic center of China’s past and current leadership, the site of both the Forbidden City and Great Hall of the People.

The transition to connected products has long been a concern among those who care about data security. Data security incurs new costs and expertise demands for low-margin consumer products companies. Time to market takes precedence over product security. Haier faces these challenges much as its competitors Whirlpool, Samsung, and Electrolux do. But Haier’s use of Baidu back ends for GE-branded appliances further complicates existing cybersecurity concerns. The GE brand conceals Baidu’s role in consumer data aggregation on smart appliances and its political and economic dependence on the cyber sovereignty regulations of the People’s Republic of China.

While data at scale enhances corporate revenue streams, corporations conceal this motivation from consumers. When I called the GE Appliances help desk on July 1, 2019, to get information about where the company stores data from the appliances’ apps, I received little assistance. The help desk assistant first replied, “All of your data is stored on your phone in the app.” When I asked where the company stored data from the app, the call center worker responded, “I have no idea, not the slightest clue how to answer that. I have never been asked that question.” After I requested more detail, the customer service agent forwarded me to the Consumer Relations department that handles faulty goods, but I obtained no additional information. Immediate consumer access to information about where consumer data is stored is limited, at best. The outsourcing of data further obscures the kind of data-labor bargain consumers make with firms by preventing access to individuals who have detailed knowledge about what users consent to.

Ultimately, Haier’s networked devices operate on a Chinese consumer platform that reports back to data centers in China. This arrangement underscores the larger strategic framework of Chinese data-governance practices. Data generated domestically must stay in-country. Data generated outside China must still conform to China’s regulatory framework.

China’s approach to data ownership takes on even more significance with respect to its connection to the military. Through military-civil fusion, Haier’s connected platform must acquiesce to Chinese military demands for access to corporate secrets. This requirement presents several challenges. First, the data gathered can enhance China’s artificial intelligence capabilities, as articulated in the Made in China 2025 plan. Second, the platform creates an opportunity for the extension of Chinese surveillance into homes outside China. From a strategic standpoint, the expanded reach of the platform also allows for Chinese military access to digital platforms operating in U.S. homes. This risk goes beyond the preexisting risks involved in the weaker security systems operating in most connected home appliances.

Market dominance offers several key advantages for Haier, but also for the Chinese government. Building popular household brands is a key element in developing soft power, enhancing China’s attractiveness to citizens around the world. And the Chinese government has identified soft power as a deficit in its comprehensive national power.

Haier influences U.S. domestic politics through the U.S. political system. The corporation Haier America Trading LLC (now known as Haier) started as a joint venture between U.S. investor Michael Jemal and the Haier Group. Haier entered the U.S. market through a partnership with a U.S. firm, and it manufactures products in the United States. It has the legislative support of the congresspeople in the districts in which it invests. Unlike connected device firm LeFun Smart, which operates in the United States under its Chinese brand name, Haier operates both under its Chinese name and under the GE Appliances brand, one that is emblematic of U.S. soft power.