US sanctions have exposed China’s reliance on foreign technologies, especially in semiconductors. As a result, China is experiencing its own ‘Sputnik moment’, triggering widespread unease about the country’s perceived technological lag. At a recent IMA Asia CEO Forum meeting, an expert in US-China business relations commented,
‘Over the last few years, the US has sanctioned almost every major Chinese tech firm. This has pushed China’s most innovative and hardest-charging firms into “Beijing’s corner” to pursue self-sufficiency and technology greatness.’
With the tech giants in its corner, the Chinese government can drive its agenda with a stronger set of accomplices than just inefficient state-run firms. In line with government encouragement, Huawei, for example, now is soliciting cooperation from smaller private Chinese firms to which it never ‘gave the time of day’ in the past.
Shifting the focus to strategic industries
The Chinese government’s recent crackdown on tech companies is part of its effort to shift capital allocation to strategic industries and deter investors from investing in consumer-oriented Internet and online education.
‘The government wants its entrepreneurs to focus on strategic technologies that will contribute to the country’s competitiveness and development.’
Semiconductors are at the heart of China’s focus on strategic industries. Indeed, semiconductors have become a globally strategic obsession.
‘We’re seeing extravagant metaphors used to characterise semiconductors now. Americans call them “oil”, Koreans say “rice”, and Taiwanese characterise them as “the lifeblood of the digital economy.”’ Everyone is keen to invest in semiconductors, which over the longer term, may lead to overcapacity.”
Achieving self-sufficiency in semiconductors is an unrealistic goal for any country, including China and the US. It is especially difficult for China to achieve since it doesn’t have the most advanced technology. The question is when China can reach self-sufficiency with its current capabilities and how much further ahead will the world’s leading-edge manufacturers be by then.
‘China is not trying to develop the leading edge of technology – extreme ultraviolet lithography – to manufacture its chips. In the medium term, China wants to develop “good enough” production equipment.’
Huawei running short of chips
Huawei’s current stockpile of semiconductors is dwindling. The stockpile for smartphone chips already has mostly evaporated. They need dozens of types of chips; there’s no way that Huawei could stockpile enough to be a major smartphone producer of, say, 200 million units a year. The firm has largely given up on that business line.
Adequate supplies of chips for network equipment are easier to secure. Network equipment products require a less advanced set of chips than smartphones. Huawei has been able to stockpile enough of these to satisfy short- to medium-term demand for its mobile network equipment. No one knows how long the supply will last except Huawei, which is keeping that close to its chest.
Funding for China’s industrial evolution is crucial for success. China has successfully moved funding from the banking sector to equity markets. Domestic investors are mostly buying into the story and haven’t been agitated like investors in Hong Kong or other offshore markets.
Beijing, for the most part, is welcoming foreign capital. For example, the vice chairman of the China Securities Regulatory Commission (CSRC) periodically reassures major institutional investors that the tech crackdown is part of a regulatory, technocratic effort and that foreigners are welcome to continue investing in China.
‘The Chinese government is broadly happy that US pension funds and foreign financial institutions are investing in risky start-ups. This is partly because foreign capital does not represent a significant share of China’s overall large funding scheme.’
IMA Asia members can login to download and read the full paper on ‘Unpacking US Sanctions on China’s Tech Sector.’ To learn more about IMA Asia’s memberships or subscribe to our ‘Asia Forum Notes’ or ‘China Forum Notes’, contact us at firstname.lastname@example.org.