reflections

U.S. Tech Restrictions Will Strengthen Beijing's Resolve

6 MINS READMar 9, 2016 | 01:16 GMT
(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

The U.S. Commerce Department on March 8 officially put into place export restrictions on the sale of equipment by U.S. companies to Chinese telecom manufacturer ZTE Corp., the world's seventh-largest producer of smartphones. The restrictions, which will severely hamper ZTE's supply chain, come in response to the Chinese conglomerate's sale of U.S. technology to Iran in violation of sanctions. The incident represents the latest flare-up between the United States and China over technology manufacturing.

The restrictions on ZTE will hinder its ability to use chips made by Qualcomm, Intel or any other U.S. manufacturer in its smartphones and will limit its access to optical equipment for cameras. Since Beijing's rivals — South Korea, Taiwan, Japan and, of course, the United States — dominate these sectors, the sale of these parts is perhaps the most powerful trade lever that those countries can use against China. This will reinforce Beijing's overall strategic drive to move away from foreign reliance on components for its technology manufacturing industry.

The U.S. move comes at a crucial time for China's electronics industry. Four of the world's seven largest smartphone manufacturers — Huawei, Xiaomi, Lenovo and ZTE Corp — are Chinese. Though their focus has mainly been on supplying the domestic market, which has been the world's largest for the past four years, the companies are working to expand their global market share, making them a target for Washington.

China is the world's dominant producer and assembler of mobile phones, televisions, computers and other high-end electronics, but its ability to develop, design, engineer and manufacture all the component technologies that go into those products is limited. The Chinese tech industry is heavily reliant on imports from the United States, Japan, South Korea and Taiwan for those parts.

Only about 10 percent of the semiconductors that China uses in its tech industry come from Chinese producers. Its five biggest semiconductor suppliers are U.S.-based Intel and Qualcomm, South Korea's Samsung and SK Hynix, and Japan's Toshiba. Some of these companies, including Intel, have a limited number of chip fabrication plants in China, but no Chinese semiconductor manufacturers rank among the world's top 20 producers. The gap between Chinese firms and international competitors is large. In the areas of chip design and manufacturing, China's plants are often one or two generations behind their competitors.

The next step in China's tech-sector evolution will be to move beyond mere assembly and production of electronic products and into the design and fabrication of the components integral to their manufacture. Last year, Chinese President Xi Jinping announced a plan to invest $161 billion over the next decade to step up his country's production and design of semiconductors with a long-term goal of becoming the global leader in all aspects of the semiconductor industry (and related industries) by 2030.

While corporate espionage — a tactic the United States has long accused China of using — may be a component of China's technology development strategy, it is also pursuing the purchase of foreign tech companies to achieve its goals. Recent moves included a planned $23 billion offer by China's Tsinghua Unigroup for Micron, the world's fourth-largest semiconductor manufacturer, in July 2015. Later in the year, other Chinese companies announced a potential $2.5 billion offer for the U.S. company Fairchild Semiconductor, and in September, Tsinghua also announced plans to buy a $3.8 billion stake in Western Digital, one of the two global giants in hard drive disk storage technology. The deals all were scuttled over concerns that the Committee on Foreign Investment in the United States would block the sales on national security grounds.

Beyond the United States blocking Chinese takeovers of tech firms, several other hurdles stand in the way of China's bid to become a technology development leader. Maintaining the rapid pace of semiconductor improvements under Moore's Law (an observation that the number of transistors in an integrated circuit doubles about every two years) has become expensive, since the costs of semiconductor fabrication facilities are rising and their equipment needs massive overhauls every other year in order to build new generations of chips. In 2015, for instance, there were $100 billion in merger and acquisition announcements. China will be hard-pressed to catch up with foreign competitors both in terms of research and development spending and the investment in equipment used in manufacturing.

Beijing's resolve to develop its own semiconductor industry will help Chinese companies overcome those barriers through cheap access to capital, but the United States, Taiwan, South Korea and Japan will still seek to protect themselves from Chinese competition. China certainly has advantages — an abundant pool of engineering and science talent and an emerging tech sector — that mirror the conditions that elevated the Japanese industry in the 1960s and 1970s and South Koreans in the 1990s and 2000s to world-class status. Additionally, the drive to maintain the current pace of semiconductor development could decline over time, especially since some of the biggest growth markets for semiconductors, such as Internet-connected devices, can make use of older technologies and foundries, giving China a potential edge if the pace of development slows.

In other areas of research and development, China's innovation has already equaled that of its global competitors. For example, China is a leader in the development and application of quantum communications technology and has plans to launch the world's first quantum communications satellite later this year. It is important to remember that Japanese and Korean products in the same sector were once viewed as inferior to those of the United States, but both eventually caught up thanks to a high level of government interest and the science and engineering culture that their educational systems promoted. China's innovation in many of these areas remains in its infancy, but its position as the world's largest tech assembler and market will make those technology transfers inevitable.

The U.S. export restrictions placed on ZTE will serve to strengthen Beijing's resolve to nurture domestic development and production of high-end electronics components, a sector that China has long targeted as one of its priorities over the next two decades. As its competition with China grows, the United States has found that control over its technology — not only in tech but also in oil and natural gas and other sectors — remains a valuable advantage that it can use not only to threaten Beijing but also to slow China's ascent.

But make no mistake, the more Washington and its allies restrict China's access to technology, the more resolute China will become in building up its own capabilities. China is following in its neighbors' footsteps, and its emergence as a global force in technology development is only a matter of time.

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