JAMES KYNGE. The US cannot halt China’s march to global tech supremacy.

Aug 29, 2018

The moment may one day be glorified in propaganda art. As the mist rolled off the Yangtze River, Xi Jinping stood on top of the Three Gorges hydropower dam in Yichang, a proud symbol of engineering prowess, and proclaimed that China would blaze its own trail to become a technology superpower.

The Chinese president’s immediate audience in April was a group of smiling workers in blue overalls. But his remarks were directed at the White House, from which rumblings of a trade war on China were emanating.

“In the past, we tightened our belts, gritted our teeth and built the two bombs [atomic and hydrogen] and a satellite,” Mr Xi said. “In the next step of tackling technology, we must cast aside illusions and rely on ourselves.”

Such rhetoric from the most powerful Chinese leader since Mao Zedong carries crucial weight. But, as a visual metaphor, the Three Gorges dam is more revealing than Mr Xi was prepared to acknowledge. Although the dam walls were built by Chinese companies, the turbines that generate its electric power were supplied – at least initially – by foreign companies.

Global leadership by 2025

The contradiction encapsulates China’s dilemma as it ramps up a techno-nationalist agenda. Its official ” Made in China 2025″ programme calls for global leadership in various technological sectors by 2025, but its progress up the value added ladder has – to a significant degree – relied upon foreign technologies and intellectual property.

Thus, China’s response to the trade war is set to be carefully calibrated. Chinese companies are being told by Beijing to cut reliance on US technology and intellectual property in their supply chains, replacing them where possible with alternatives from Europe, Japan, Korea, Taiwan and elsewhere.

“The US is fundamentally an unreliable economic partner,” said one senior official at the State Assets Supervision and Administration Commission, the Chinese state-holding company with combined revenues last year of Rmb26.4 trillion ($US3.8 trillion). “It is just too risky to rely on them.”

Can China really live without America? The answer supplied by financial markets appears to be “no”, as reflected in the slide in the renminbi’s value against the dollar and a concurrent fall in Shanghai stock prices. But over the longer term, China looks likely to prevail in two important ways. It may be able to de-risk its supply chain by reducing reliance on US imports, notwithstanding difficulties in key areas such as semiconductors. It may also attain its goal of global excellence in tech sectors including artificial intelligence, 5G telecoms, the internet of things, self-driving cars and battery technology by 2025.

One point in China’s favour is that its de-risking activities may be applied only to imports from the US and not to components made by US companies in China. This is a significant factor: the value of products that US companies made and sold in China was about $250 billion last year, almost double the $130 billion in products imported from America.

The other consideration is the ready availability of alternatives to US tech products. Research by Haitong, a Chinese securities company, finds that in eight of 11 technology sectors the sales in Asia of products made in the EU, Japan, Korea and Taiwan outstrip those of products made in the US. The three sectors in which the US has clear dominance are semiconductors, semiconductor equipment and aerospace.

Semiconductors a lightning rod

The semiconductor industry, therefore, is the lightning rod for US-China tech rivalry. China’s vulnerability was laid bare in April when the US banned ZTE Corp, a Chinese telecoms company, from buying American semiconductors and other technology for seven years. The sanction brought ZTE to its knees, before Washington offered a reprieve.

Yet semiconductors are also the area in which China’s ambitions are clearest. Of some $300 billion committed to help deliver Made in China 2025, some $150 billion is earmarked to upgrade China’s capacity in semiconductors, according to Dan Wang of the research group Gavekal.

And even in semiconductors, the US chokehold is far from total. If the sanctions on ZTE had been applied to its Chinese competitor, Huawei, the damage would have been easily contained. Huawei designs its own chips through a wholly owned subsidiary called HiSilicon, which ranks as the world’s seventh largest chip design company.

China’s record also underlines the foolishness of betting against its modernising verve. A decade ago, few would have predicted global dominance in smartphones. But last year, companies such as Huawei, Oppo and Vivo accounted for 43 per cent of global smartphone sales, eclipsing Apple in the US and Korea ‘s Samsung.

It seems clear that, while US opposition will make its ascent up the technology ladder slower and more painful, China will continue its climb.

Perhaps the story of the Three Gorges dam does – after all – point the way. Although its first turbines were supplied by European and US power equipment groups, two Chinese manufacturers raised their game quickly enough to participate in the project’s later stages. Harbin Power Equipment and Dongfang Electrical Machinery are now taking business off their European and US rivals in other countries.

This article was published by The Financial Times on the 26th of August 2018. It was written by James Kynge. 

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