Seizing Core Technologies: China
Responds to U.S. Technology Competition / First part
by Adam Segal
Chinese analysts and policy makers have
interpreted U.S. efforts to prevent the flow critical technologies
through limits on investment, blocks on the operations of Huawei and
other Chinese telecom companies in the U.S. and other markets, and
new export control laws, as part of a strategy of containment
designed to slow China’s rise as a science and technology power. In
response, a newly emerging strategy consists of: a doubling down on
indigenous innovation and developing “core technologies”;
protection of supply chains; diversification of access to foreign
technology; diplomatic efforts that stress the shared benefits of
Chinese technology development; and continued cyberenabled theft of
intellectual property. Even though both sides are likely to lose the
efficiencies that came from the globalization of innovation, such a
strategy may also energize American and Chinese policy makers to
mobilize even greater resources for scientific competition.
While the Trump administration has
caused a fair degree of uncertainty in Beijing about its ultimate
strategic and economic objectives through an unconventional policy
process, shifting personnel, and conflicting messages emanating from
the President’s tweets, there is a widespread consensus among
Chinese policy makers and analysts about the motivations of U.S.
technology policy. Officials and academics are convinced that
Washington is pursuing a strategy of containment, designed to slow
China’s rise as a science and technology power, or, as Fudan
University Professor Zhou Wen argues, “The United States’ real
intention is to suppress the development of China’s high-tech
industries.”1 To be sure, over the last several years both China
and the United States have acted to reduce vulnerabilities created by
the interconnectedness of their science and technology systems.
President Xi Jinping has continued to implement the
techno-nationalist policies introduced by his predecessors.
The 2017 National Cybersecurity Law and
Made in China 2025 as well as large investments in artificial
intelligence, semiconductors, and quantum computing are the most
recent efforts to free China from dependence on the West for critical
technologies.
Washington, anxious about China’s
rising technological capabilities and its program of military-civil
fusion, has limited Chinese investment in U.S. technology sectors,
blocked Chinese telecommunications companies from doing business in
the United States and other markets, and tightened controls on the
sale of technologies.
The long-term effects of the
decoupling of the U.S. and Chinese technology systems are uncertain.
While both sides are likely to lose the efficiencies that came from
the globalization of innovation, such decoupling may also energize
American and Chinese policy makers to mobilize even greater resources
for scientific competition. It is, however, too early to know whether
the costs of eliminating the vulnerabilities created by
interdependence outweigh the potential innovation gains of
competition.
In the short term, it is possible to
identify an emerging Chinese strategy in reaction to U.S. pressure
consisting of: doubling down on indigenous innovation and developing
“core technologies”; protecting supply chains; diversifying
access to foreign technology; making diplomatic efforts that stress
the shared benefits of Chinese technology development; and continuing
cyber-enabled theft of intellectual property. U.S. Strategy The Trump
administration has placed Chinese technology policy front and center
as a danger to U.S. economic and national security, and in response
it has rolled out a fourfold policy response.2 First, the United
States levied tariffs on products benefiting from “Made in China
2025,” Beijing’s initiative to upgrade its manufacturing sector,
placing a 25 percent tariff on 1,300 industrial technology,
transport, and medical products.
Second, Congress has limited Chinese
investment in U.S technology sectors, and the Commerce Department is
revising the export control laws so as to block the flow of critical
technologies to Chinese end-users. In August 2018, Congress passed
the Foreign Investment Risk Review Modernization Act, enabling the
Committee on Foreign Investment in the United States (CFIUS) to
investigate additional investments, for instance minority positions
or overseas joint ventures. The legislation also added new national
security criteria to CFIUS decisions.
The Trump administration has blocked
the sale of the Lattice Semiconductor to a group that included a
Chinese venture capital firm; barred Broadcom’s US$121 billion
offer for Qualcomm; prevented Ant Financials acquisition of
MoneyGram; and demanded that Beijing Kunlun Tech give up its control
of Grindr, a gay dating app. In addition, the 2018 Export Control
Reform Act includes new controls on the export of “emerging and
foundational technologies.”
The Commerce Department, which is
responsible for overseeing such restrictions, has published a list of
technologies that might be controlled, including computer vision,
speech recognition, and natural language understanding.
3 Third, Trump officials have made it
more difficult for Huawei and other Chinese telecom companies to do
business in the United States. Congress has prohibited the Pentagon
from buying network equipment from either Huawei or ZTE, and security
concerns reportedly were behind AT&T’s and Verizon’s
decisions not to distribute Huawei smartphones. The Federal
Communications Commission has proposed making it more difficult for
smaller carriers to use the Universal Service Fund to pay for future
purchases of telecom equipment from Huawei and ZTE, and in April 2019
the FCC opposed China Mobile’s application to provide
telecommunications services in the United States.
4 In addition, U.S. officials have
pressured Australia, Canada Japan, the European Union, and other
allies and friends not to use Huawei for 5G infrastructure. Whereas
Germany and the UK have suggested they can manage the risk of using
Chinese suppliers, Secretary of State Mike Pompeo has threatened to
stop sharing intelligence with allies, telling an interviewer, “If
a country adopts this [Huawei equipment] and puts it in some of their
critical information systems, we won’t be able to share information
with them, we won’t be able to work alongside them.”
5 Others, such as Bahrain, Iceland,
Saudi Arabia, Latin America, and the United Arab Emirates, 3 have
ignored Washington’s warnings and have recently signed deals to
deploy Huawei’s 5G equipment.
6 Fourth, the Department of Justice has
pursued a number of high-level indictments against Chinese companies
for theft of intellectual property. In November 2018, Trump officials
charged Fujian Jinhua with the theft of DRAM—dynamic random-access
memory technology— from Micron. The Commerce Department
subsequently put Fujian Jinhua on a list of entities that cannot
purchase components, software, and technology goods from U.S. firms.
In January 2019, the Justice Department unsealed indictments claiming
that Huawei stole technology from TMobile and that Huawei had a
formal policy of awarding bonuses to employees who stole confidential
information from competitors.
7 The Trump administration has also
responded to the return of Chinese hackers after the brief downturn
in activities in the wake of a September 2015 agreement between
President Xi and President Obama in which both sides pledged not to
become involved in cyber-enabled theft of intellectual property for
competitive advantage. In November 2017, the Justice Department
indicted three Chinese nationals employed by the Chinese
cybersecurity firm Boyusec, charging them with hacking into the
computer systems of Moody’s Analytics, Siemens AG, and global
positioning system developer Trimble Inc. In November 2018, then
Attorney General Jeff Sessions announced a China initiative to
identify priority Chinese trade theft cases, pool FBI and Department
of Justice resources to combat Chinese economic espionage and
evaluate whether additional legislative and administrative
authorities would be required to protect U.S. assets from foreign
economic espionage. Finally, in December 2018 the United States, in
coordination with Canada and the United Kingdom, indicted two Chinese
citizens for hacking more than forty-five technology companies in at
least one dozen U.S. states
.8 Technology Containment Chinese
analysts are clear about the goals and motivations of U.S. technology
strategy. In short, they argue that Washington is pursuing policies
designed to slow China’s rise as a science and technology power.
Or, as Li Zheng of the China Institute of Contemporary International
Relations, has put it, “The United States views technology as the
‘last barrier’ to constrain China’s challenge.” Li continues
that U.S. actions have “risen to the strategic level,” seeking to
“systematically and comprehensively curb the rapid rise of China's
technology industry.” Moreover, Zhou Xiaoming, a former Chinese
diplomat, argues that the containment policies are here to stay: “The
containment of the United States against China will be a normal
state, and it will intensify. We must learn to adapt.”
9 These “containment” policies,
according to most analysts, are not a response to Beijing’s
industrial policies or theft of intellectual property, but rather
they stem from a decline in U.S. power and prestige and a “panic”
about China’s rise in technologies, such as 5G and artificial
intelligence.
10 Analysts and policy makers have used
the blockade of ZTE as clear evidence of Washington’s intentions
and China’s vulnerabilities. In April 2018, the United States
announced a seven-year ban on American firms from selling parts and
software to ZTE after the company violated an agreement that was
reached when it was caught illegally shipping U.S. goods to Iran.
11 Even though the ban was eventually
overturned after the company paid a US$1 billion fine, the ban
threatened ZTE’s survival and clearly demonstrated China’s
dependence on U.S. technology, especially semiconductors. In a series
of speeches after the ZTE ban, Xi Jinping highlighted China’s need
for innovation and technological self-determination. In an April 20,
2018 speech on cyberspace and information technologies, Xi focused on
indigenous innovation and for the first time described “core
technologies” as “important instruments of the state”
(核心技术是国之重器).
(Xi’s 2016 speech on cyberspace also stressed the centrality of
“gaining breakthroughs in core technology as quickly as possible,”
but it did not use the phrase “instrument of the state.”)
12 In May 2018, at a joint annual
conference of the Chinese Academy of Sciences and the Chinese Academy
of Engineering, Xi exhorted the gathered scientists and engineers to
redouble their efforts, stating: “Self-determination and innovation
is the unavoidable path ... to climb to the world’s top as a
leading player in technology.”
13 Xi returned to the same themes in
July 2018, telling the Central Financial and Economic Affairs
Committee that “China must improve innovation capabilities for key
and core technologies and keep a firm hold on the initiative in the
development of science and technology to offer a strong technological
guarantee for China's development.”
14 In September, during a visit to
Heilongjiang, President Xi argued that “rising unilateralism and
trade protectionism” was pushing Chinese companies to adopt a
“self-reliance” strategy, which, he said, was “not a bad
thing.”
15 Days after the Commerce Department
sanctioned Fujian Jinhua in November, Xi called for acceleration of
the development of artificial intelligence, telling a Politburo study
group that China must “control” the technology and make sure it
is “securely kept in our own hands.”
16 China’s Response In the face of
U.S. pressure, Beijing has adopted a five-part response. First,
although China is likely to make some concessions at the margins of
its industrial policy as part of any trade deal, it is equally
expected that it will follow Xi’s repeated calls to double down on
efforts to reduce dependence on the West for semiconductors and other
critical technologies. In a March 2019 speech to the National
People’s Congress (NPC), Li Keqiang made no reference to “Made in
China 2025,” but he stated the government would promote advanced
manufacturing in the same areas covered by Made in China 2025
.17 Similarly, the 2019 draft plan of
the National Development and Reform Commission submitted to the NPC
states that it “will prioritize and strongly develop a number of
clusters of strategic emerging industries in key fields such as
nextgeneration IT, high-end equipment, biotechnology, and new
materials.”
18 At the same meeting, Chinese
lawmakers passed a new foreign investment law that is intended to
stop the forced transfer of technology from foreign companies. There
are, however, serious questions about enforcement of the law, and
there is, in any case, no evidence that Chinese policy makers have
abandoned deeply held beliefs about the need for technological
selfreliance.
China will continue to promote advances
in semiconductors with huge investments in new fabs and technology.
In 2018, China’s chip imports broke US$300 billion, rising from
US$270 billion in the previous year
.20 Hu Weiwu, a Chinese Academy of
Science scholar and the engineer behind the Loongson CPU, believes
that the ZTE incident is a chance for the “domestic chip industry
to turn a crisis into an opportunity.”
21 He suggested that the Chinese
government should take advantage of this opportunity to promote the
commercial application of domestic chips and build China's own
information and communication technology ecosystem. During the last
several years, Beijing has mobilized US$100–US$150 billion in
public and private funds to build an indigenous industry. Local
governments have ramped up investment projects and the central
government has designated a number of companies as national champions
in manufacturing and chip design. China has the most fab projects in
the world, with thirty new facilities or lines either in construction
or in the planning stages.
22 China will also pursue other avenues
for computer and chip design, for example designating a
quantum-computing “megaproject.” The government is reportedly
investing US$1 billion to build the National Laboratory for Quantum
Information Sciences in Hefei, and in 2017 Chinese companies filed
twice as many patents for quantum computing as did American
companies.
23 Chinese technology companies have
signaled that they will follow the government’s lead. As Alibaba’s
CEO Jack Ma said, “Big enterprises have an important
responsibility. If we do not master the core technologies, we will be
building roofs on other people’s walls and planting vegetables in
other people's yards.”
24 Baidu released its smart chip,
Kunlun, in July; Huawei unveiled a 7nm microchip in August; and
Alibaba launched its semiconductor division Pingtouge in September.
This new business will develop artificial intelligence chips for
cloud computing and Internet-connected devices. Huawei also announced
that it has built its own operating systems for smartphones and
laptops in case it is unable to use Google or Microsoft software in
the case of another round of U.S. sanctions, and in April 2017 the
company announced it will establish an Institute of Strategic
Research and invest US$300 million each year for the next five to ten
years to fund research in basic science and technology.
25 Second, Chinese technology companies
will make efforts to protect their supply chains from U.S. sanctions.
After the arrest of CFO Meng Wanzhou for allegedly violating
sanctions on Iran, Huawei’s leaders feared they would face a fate
similar to that of ZTE. Huawei boosted purchases of capacitors,
integrated circuits, flash memory and camera-related parts from
Japanese suppliers, stockpiling components in case of a potential ban
on U.S. sales.
26 Huawei reportedly asked Taiwan's ASE
Technology Holding and King Yuan Electronics, its top chip packaging
and testing providers, to relocate most production to sites in
mainland China. The company also spoke with Taiwan Semiconductor
Manufacturing Co. about moving some chip production to Nanjing.
27 Third, Chinese firms and investors
are diversifying and looking for new technology-investment
opportunities beyond U.S regulations. In 2016, China invested US$18.7
billion in 107 U.S. tech firms. In 2018, because of increased CFIUS
scrutiny the total dropped to US$2.2 billion for eighty deals. As
investment in the United States has fallen, there have been some
notable technology acquisitions in Europe, such as Tencent’s US$8.6
billion purchase of Finnish gaming
company Supercell and CSC Group’s
multimillion-dollar investment in the London-based accelerator
Founders Factory.
28 European governments are, however,
updating or introducing foreign-investment screening regimes, and for
the first time a Chinese acquisition was blocked when the German
government vetoed the takeover of a machine tool company.
29 In addition, Chinese investors are
looking at the Israeli technology sector, where Chinese investment
has grown from US$274 million in 2016 to US$325 million in the third
quarter of 2018.
30 Chinese funders supplied at least
US$20 million in all seventeen financing rounds for Israeli start-ups
during the first three quarters of 2018.
31 In response to these investments as
well as Chinese investments in Israeli infrastructure, the Trump
administration has reportedly told Israeli officials they must
establish a CFIUS process for dual-use technologies and they also
risk harming intelligence-sharing between the United States and
Israel if the infrastructure projects move forward.
32 Fourth, Chinese diplomatic efforts
are likely to stress the global benefits of Chinese scientific and
technological development and the threats to trade and security
emanating from the United States. For example, during his 2019 Davos
speech Wang Qishan called for countries to “work together to shape
the global architecture in the age of the fourth industrial
revolution with the vision to create a better future for all
mankind.” He warned, however, that it is “imperative to respect
national sovereignty and refrain from seeking technological hegemony,
interfering in other countries' domestic affairs, and conducting,
shielding, or protecting technology-enabled activities that undermine
other countries' national security. We need to respect the
independent choices of model technology management and of public
policies made by countries, and their rights to participate as equals
in the global technological governance system.
33 Chinese diplomacy is also likely to
echo the public relations campaign that Huawei has mounted in the
face of U.S pressures, casting aspersions on those who question the
security of Huawei’s products. In an op-ed piece in the Financial
Times and in a speech at the Mobile World Congress in Barcelona, Guo
Ping, chairman of Huawei, drew attention to U.S. intelligence
capabilities. Explaining why Washington was trying to block the
company, Guo argued that Huawei equipment was more difficult for the
National Security Agency (NSA) to hack because the agency maintained
cooperative relations with U.S. telecoms. Since Chinese firms were
unlikely to cooperate if U.S. intelligence wanted “to modify
routers or switches in order to eavesdrop,” Guo concluded, Huawei
“hampers U.S. efforts to spy on whomever it wants.”
34 The Foreign Ministry made a similar
pivot with Australia’s new encryption bill, which requires tech
companies to provide law enforcement and security agencies access to
encrypted communications. Asked whether Australia was engaged in a
double standard since it had banned Huawei from its 5G roll-out
because it did not want companies in their networks that were
beholden to another government, Foreign Ministry Spokesperson Lu Kang
noted “Forcing companies to install ‘backdoors’ through
legislation means protecting one's own security and interests at the
expense of other countries' security and their people's privacy.”
Lu further claimed, “It is baffling how the country concerned could
whip up ‘security threats’ posed by other countries or companies
with trumped-up charges under the facade of cyber security, while
they themselves are engaged in acts that endanger cyber security.