Global reset – Technology decoupling (Part 1: Challenges, checkpoints, chokepoints and IOT)
Phuah Eng Chye (12 March 2022)
The epicenter of decoupling is not trade. It is technology and revolves around China’s rise as a technology power. Graham Allison cautions “China, which has displaced the United States as the world’s top hi-tech manufacturer, is predicted to gain on – if it has not already overtaken – the world’s largest economy within the next decade in the foundational technologies of the 21st century, including artificial intelligence (AI)[1], 5G, quantum information science (QIS), semiconductors, biotechnology and green energy”.
A report to the US Senate Committee on Foreign Relations points out “the suites of new and emergent digital technologies that are remaking the face of the U.S. and the global economies – including 5G infrastructure, social media, block-chain, digital surveillance, and genomics and biotechnology – are all widely acknowledged as being on the cutting edge of this new competition and fundamental for U.S. national security in the twenty-first century”. “The United States has been and remains the premier digital innovator on the globe, and as such the primary entity capable of shaping the future of the digital environment. However, China’s rapid rise in key fields, investment in new digital technologies, efforts abroad, and attempts at dominating international rule-making bodies are positioning it to erode the United States’ leadership on technological issues and reconfigure the standards of the domain away from free, democratic values”.
The US Senate report argues “China’s growing influence…enables China to promote an alternative model for the digital domain based on state control. This model stands in stark contrast to what the United States and its allies espouse: a free and open Internet that encourages the free flow of information and commerce in ways that advance innovation and market-driven economic growth…China’s rise as a key player in the digital domain that uses its influence to promote digital authoritarianism presents fundamental security, privacy, and human rights concerns for the United States and the international community at large. Most troubling, China is working to undermine our democratic institutions and values…China is leveraging new technologies to assert increased control over its population and strengthening its ties with other nations around the globe…if left unchecked, China, not the U.S. and our allies, will write the rules of the digital domain, opening the doors for digital authoritarianism to govern the Internet and associated technologies”.
The US Senate report outlines “areas of competition between democratic and authoritarian states therefore encompass concerns about secure supply chains, privacy, human rights, standards, and the rules of the road for how these technologies would be used by the international community, including sharp power practices for technologies that shape and negotiate culture, education, and the media and are situated at the intersection of diplomacy, influence, and technology…In an era in which rising authoritarianism is working to undermine the fabric of democratic institutions globally, the Internet and connected technologies represent a continually evolving domain that will fundamentally shape the future of politics, economics, warfare, and culture. Cyberspace remains relatively undefined and open to new rulemaking, standardization, and development”. In addition, data-driven technologies are now integral to communications, transportation, water, energy and defence systems and this heightens national security concerns.
James L. Schoff and Asei Ito points out “if China achieves persistent or widening technological advantages in emerging fields, this could allow its firms to act like monopolies outside the country, shaping global technology standards to their own benefit and providing economies of scale that boost their revenues, expand their data pool, and fuel future R&D advantages…A commanding technological lead would give China military and national security advantages, especially in the domains of cyberspace and outer space…China could also parlay a persistent technological edge into a commercial advantage, making sure that its telecoms equipment, cloud networks, or cashless payment systems are only compatible with other Chinese-made equipment. There is a risk of inefficiency if this behavior were to result in a decoupling of technical standards, if a China-led standard develops in many countries in a way that limits future economic opportunities for U.S. and Japanese competitors and requires multinational companies to invest in two different systems. U.S. and Japanese firms must guard against IP theft and Chinese industrial espionage too”.
Challenges of technology decoupling
In the early days of the internet, knowledge and data flowed freely across borders. Decoupling reflects the end of technology and information innocence. Today, the technology and information domains are heavily tainted by the cynicism of power rivalries, monopolistic dominance and perpetual litigation. Countries increasingly emphasise on safeguarding their technological knowledge and information assets.
But it is difficult to corral technology and information flows. Martin Chorzempa warns “it is not clear that authorities have thought through all the unintended consequences of these efforts. For example, sharing a controlled technology with a Chinese employee of Google in California would be considered a deemed export with compliance requirements similar to what would be required if the technology was being shipped to Beijing instead of developed with a multinational team in Mountain View. This aspect of the controls could be abused as a backdoor way to kick Chinese employees out of US technology firms, causing the United States to fall behind other countries eager to embrace this talent. Another problem is illustrated by a pilot program from Treasury that requires all foreigners who invest in any US company broadly involved in any technology that Commerce lists as emerging to declare their investments to the interagency Committee on Foreign Investment in the United States (CFIUS). The increasingly fluid, international process of creating technology, with major technology companies using global code bases developed by engineers and programmers located across the world, will further complicate attempts by the US government to draw borders around these technologies”. Technology decoupling thus has the “potential to weaken the global, open model of technology innovation”.
The ambiguity of the nationalities and nature of technology, its usage and ownership (firms and shareholders) make it difficult to construct effective controls. It is challenging to “define emerging technology and apply it to specific technologies to how far new technologies should be developed before they are considered for controls[2]”. “Technology in the export control context has a different, softer meaning…It does not include finished products or items like software and hardware. Rather, it is information and know-how necessary to produce finished products. Therefore, the definitions and eventual lists may be more likely to influence how US firms structure their R&D operations than where they ship products”. “There is little clarity on the specific national security concerns that the controls should address…what sources it uses now to keep up with emerging technologies”. Industry input is needed to help the US Commerce Department “figure out which controls would be useless if the technology is already available from competitors abroad”. “These assessments are difficult in light of the tight lid that industry keeps on this information…Revealing this information may also have the perverse effect of helping China target its legal technology acquisition efforts before controls can be imposed and its clandestine efforts afterwards. Companies and researchers may also be reluctant to give information about their supply chains and foreign nationals involved in their technology development, even confidentially, to a US administration that may well use that information against them in future trade disputes or attempts to bring production back to the United States”.
Martin Chorzempa adds “controls could go far beyond to hit American allies as well…Export controls on technology must be updated, but if the list is overly broad and lacks a targeted country focus, it could force US-based multinational firms to build walls around the United States and throw some of their foreign workforce outside them, without effectively stopping the spread of these technologies. This would disrupt networks of research and development, making everyone worse off and hastening the relative decline of US technology”.
William Alan Reinsch and Emily Benson notes “the Department of Commerce has thus far identified 37 emerging technologies. However, it is also arguable that algorithms that run micro-targeting for advertisements are neither foundational nor emerging and probably should not be regulated by export controls. Similarly, if semiconductors are designated as a foundational technology – and they clearly are foundational in the traditional sense – the result could mean wide-ranging license requirements for standard chips used in everyday items. Enforcement has also changed. More adversaries, more sanctions, and more trade mean a greater enforcement burden, but the biggest challenge has been the digitization of trade, meaning that critical technology exports are increasingly intangible rather than physical products subject to border inspection…Responding to this challenge, enforcement authorities have enhanced their own tactics but have also put a greater compliance burden on exporting companies to exercise greater due diligence in knowing their customers and monitoring the use of their exports. That enforcement challenge has been met through increased resources, outreach to exporters, and overseas presence performing both pre-license checks and post-license inspections”. They suggest export controls could be based on utilising “new software and hardware technology to better track the use of exported items and to restrict access to authorized users. This approach could potentially guarantee that access to certain exported advanced technology would be restricted to authorized end users, and it could give enforcement authorities the capability of knowing if items were being used consistent with the terms of the license authorizing their export”.
Anton Malkin notes China is not only acquiring technology through state-abetted, market-driven acquisitions “but also increasingly by commercialization of IP assets, which includes patent portfolio purchases from their competitors.” “Chinese telecommunications, cellular device and ICT firms have been active over the past decade in purchasing patents with the intent of overcoming challenges associated with entering markets defined by high entry barriers. Huawei – the firm under close media and government scrutiny for its allegedly clandestine approach to technological acquisition – has been an active buyer of patents from defunct brands and established market players alike…Virtually all major Chinese technology firms buy patents from and sell patents to their competitors as a form of technological development strategy”. In addition, “competition law enforcement allows Chinese authorities to limit the market power of foreign multinational firms by forcing the latter to divest from existing technology assets and lower licensing fees for proprietary technology used in China. It also allows authorities to guide investment and divestment in China, give domestic firms access to foreign technology and even influence global M&A conducted by foreign firms”.
However, Anton Malkin argues national security reviews of foreign investment should be approached with caution. “First, cutting off the flow of sensitive technologies such as robotics and AI involves more than blocking foreign acquisitions. In fact, M&A deals are just one of many channels for technology transfer available to private and state-owned firms in China. For many Chinese firms, patent acquisitions, standard setting and R&D spending (as well as talent poaching) are becoming alternative and perhaps more effective tools for catching up to their foreign market rivals. Moreover, for Canada, depriving our technology firms of capital that competitively bids on their assets puts them at a disadvantage with their US and Asian rivals. If the goal is to address Canada’s lack of domestic technology proprietorship, policy makers should consider IP commercialization, VC incentives and other types of industrial policies, rather than blocking foreign acquisitions stemming from one single country. Second, M&A restrictions create disincentives for Chinese policy makers to open their markets and reinforce existing policies promoting indigenous innovation. China’s domestic market is the second-largest and fastest-growing market in the world. Beyond contributing to supply chains, China is a crucial market for the technology that many firms sell. Further, China is no longer the importer of technology across all fields. In AI, ICT and telecommunications, China is increasingly becoming a net supplier of global technology…Chinese firms are growing increasingly less reliant on JVs and restrictive FDI policies to compete with their advanced economy counterparts. Despite headline grabbing news about China’s leapfrogging over technological development stages through forced technology transfers in FDI and global acquisitions, empirical research suggests that the outcomes of these policy tools have frequently been lacklustre…Lastly, talent poaching, trade secret theft and other clandestine forms of IP acquisition remain persistent problems in China. However, these are problems that reach far beyond China, as businesses find it increasingly worthwhile to keep IP private, rather than to register their innovations as patents or trademarks”.
Checkpoints and chokepoints
The US has erected several checkpoints and chokepoints to obstruct activities deemed furthering China’s digital authoritarism. More Chinese entities are being sanctioned[3] or placed on lists. Chinese overseas acquisitions are closely scrutinised for national security concerns, US firms and individuals are prohibited from investing in Chinese companies with suspected military links and there are pending rules to delist Chinese firms from US stock exchanges. The ramifications of US counter-measures against doing business with blacklisted companies extend outside the US and have proven effective in getting more countries to exclude Huawei from their 5G infrastructure, block acquisitions and export of new technologies to China. The operations of Chinese telecom companies[4] in the US and the expansion of its MNCs in Western markets are thus being curtailed.
John Lee adds “in March 2021, the US government served subpoenas on multiple unnamed Chinese firms that provide ICT services within the US…is conducting a review into the US ICT industrial base as a whole, while the Secretary of state is promoting international cooperation to foster a secure and trustworthy alternative to Chinese digital technologies…In June 2021 the US Senate passed a bill, supported by President Biden, that includes a range of measures directed at competition with China in digital technologies and their implementations worldwide”.
Confrontations are apparent across the international communication infrastructure covering land-sea cables, networks, satellite communications, data centres, cloud computing and even research collaborations[5]. Dwayne Winseck[6] observed “ownership and control of core elements of the global internet infrastructure such as the fibre optic submarine cables, autonomous system numbers (ASN) and the internet exchange points (IXP) that constitute the guts of the internet, is steadily tilting [away from the United States and] toward the rest of the world, especially Europe and the BRICS (Brazil, Russia, India, China and South Africa).”
The US Department of Justice[7] held up “a nearly complete trans-Pacific cable[8] project over concerns about its Chinese investor…the Pacific Light Cable Network, could be the first cable rejected by the panel on the grounds of national security – despite being backed by American tech giants Google and Facebook” and stopped a proposed Huawei-backed cable linking Vanuatu with Papua New Guinea. Huang Lanlan and Lin Xiaoyi notes Chinese suspicions were stirred by two-near misses between Starlink satellites, which suddenly descended into lower orbits, with China’s Space Station. “Although SpaceX is a private enterprise, observers found that the firm and its Starlink project have extensive and deep cooperation with the US military”. China has also pointed to the dangers posed to space missions by its plans to “launch as many as 42,000 satellites into orbit” and its ability to “increase the actual combat capability of US’ space force and other military services” and their use for “for espionage missions”.
Semiconductors[9] is perceived as the critical chokepoint. Matt Sheehan explains the US “will likely selectively limit Chinese access to semiconductor manufacturing equipment (SME), effectively preventing Chinese fabs from progressing past the 7 nm node. It will, however, avoid the nuclear option of entirely cutting off Chinese fabs from foreign SME exports…working with allies such as the Netherlands to formalize narrow controls on the export of the most advanced EUV photolithography machines, which are needed to make 5 nm or below chips. These more targeted restrictions – blocking chip sales to Huawei and restricting but not entirely blocking SME exports to China – won’t pose a grave threat to Chinese technology over the next five years. Most Chinese companies will still be able to source leading node chips from abroad, and China’s leading fab will continue making incremental progress toward 7 nm fabrication. But as leading global fabs like TSMC and Samsung progress from 5 nm to 3 nm and beyond, China’s inability to advance past 7 nm will present a major vulnerability for its technology ecosystem. That vulnerability will give the United States, Europe, Japan, and South Korea enduring leverage in dealing with China’s technological advancements”.
Cheng Ting-Fang and Lauly Li highlights US firms are leaders in chip-making technology and control several technologies indispensable to manufacturing semi-conductors. They include Applied Materials (ion implantation, physical and chemical vapor deposition, and chemical-mechanical polishing); Lam Research (etching, chemical vapor deposition and wafer-cleaning equipment); California-based KLA and Boston-based Teradyne (testing and measuring equipment); Dow, DuPont and 3M (special chemical formulas); Synopsys, Cadence Design Systems, Ansys and Siemens EDA (electronic design automation tools); Xilinx and Intel’s Altera (field-programmable gate array); Intel and Advanced Micro Devices (central processing units); and other specialties such as electrochemical deposition and gate stack tools. In addition, “many vital processes were not immediately replaceable with domestic vendors: high-end lenses, precision bearings, quality vacuum chambers, and motors, radio frequency components and programmable chips all still come from foreign manufacturers in the U.S., Japan and Europe”.
China refers the critical points of US pressure as neck-choking. “To build advanced semiconductors, there is presently no way around the leading American players”. Cheng Ting-Fang and Lauly Li points out “this virtual monopoly on chip design and chipmaking equipment sectors has given the U.S. vast powers to control the flow of technology to China, even from non-U.S. companies. Industry leaders like Samsung Electronics, Taiwan Semiconductor Manufacturing Co., Infineon Technologies, SK Hynix and Sony, all still use massive amounts of American technologies on their production lines and in their development processes, giving Washington a veto over their product sales. Once the U.S. names anyone on a trade blacklist, most of the Asian suppliers will see it as a serious warning, and even if legally they could continue to ship to the blacklisted entities, they will self-censor to stop shipping due to political pressure, or consider stopping…No one wants to openly and publicly violate Washington’s will…That could be dangerous, and your own company could become a target too.”
Reuters reported that due to US objections, South Korea’s SK Hynix Inc. was unable to “upgrade a mass production facility in Wuxi, China, with some of the latest extreme ultraviolet lithography (EUV) chipmaking machines made by Dutch firm ASML Holding NV”. The Wuxi factory “makes about half of SK Hynix’s DRAM chips, which amounts to 15 percent of the worldwide total…SK Hynix could stand at a disadvantage against rivals…Samsung and Micron are also shifting to ASML’s EUV machines, but are not using them at factory locations where the machines face export restrictions”. The South China Morning Post[10] reported US-based memory chipmaker Micron Technology will shut down its DRAM design operations in Shanghai by the end of this year, and some of the 150 Chinese engineers at the site will be granted immigration packages to the US or India”.
To be fair, China is only getting a taste of its own medicine. China built its Great firewall to control data flow and internet access. This made it difficult for US platforms to entrench themselves even as China took the opportunity to groom their home-grown champions. To a large extent, China anticipated[11] that when the US felt threatened by its rise as a technology power, the US was likely to resort to drastic actions to restrict China’s advance. Thus, China has always aspired to achieve technological self-reliance and this perhaps contributed to making the US decoupling interventions a self-fulfilling prophecy.
China’s self-reliance plan is also a euphemism for decoupling. Financial Times[12] reported “the Chinese government mandated that all government offices and public institutions must gradually phase out affected foreign technology under its 3-5-2 policy – 30% of hardware will be replaced in 2020, 50% in 2021, and 20% in 2022”. Amanda Lee notes “China is aiming to increase its reliance on domestic production for key components, including chips and controlling systems, to 75 per cent by 2025…Domestic production can currently only provide around a third of the key components required by China, but Li Yizhong, the former industry and information technology minister, said this week that the level would be lifted to 40 per cent by 2020 and 75 per cent by 2025…One problem now is that China lacks 80 kinds of core parts and components. In addition, China still lacks 20 key technical materials and 30 advanced technology processes.”
The Semiconductor Industry Association (SIA) notes “due to the inclusion of Huawei and SMIC on the U.S. government’s Entity List, the Chinese semiconductor industry has largely suspended advanced logic node manufacturing development and redirected most capital to mature fabrication technology. As a result of this change, from September 2020 to November 2021, Chinese wafer manufacturers have added nearly 500K wafer per month (WPM) capacities in trailing nodes (>=14nm), and only an additional 10K in capacity for advanced nodes. China’s wafer capacity increase alone accounted for 26% of the worldwide total. In 2021, China also started commercial shipments of indigenously manufactured mobile 19nm DDR4 DRAM devices, and 64-layer 3D NAND Flash chips and started 128-layer products. While the Chinese memory industry is still at an early stage of development, Chinese memory firms are expected to achieve a compound annual growth rate of 40-50% in output and become highly competitive over the next five years. Regarding backend production, China is a global leader in outsourced assembly, packaging, and testing (OSAT), with its top three OSAT players collectively holding more than 35% of the global market share”.
China is also mirroring the US export controls and developed anti-sanction laws to weaponise its legal system for a future counter-offensive. Bloomberg[13] reports China’s Information Technology Application Innovation Working Committee launched an IT Application Innovation” whitelist known as Xinchuang” which will promote domestic tech companies for critical domestic sectors such as banking and exclude companies that’s foreign-owned by more than 25%. China has also tightened its stance on technologies and companies in data security and forced Microsoft and Amazon Web Services to operate joint ventures for their mainland business activities.
Critical battles in the Internet of Things (IOT)
The decisive decoupling battles may be fought out in the IOT battlefield. John Lee describes decoupling as complex due to “the growing multitude of systems connected to the internet, most of which are being designed by private firms. The IoT’s growth therefore implies the rising influence of a growing range of non-state actors. Business entities already wield significant influence over the security of networks, and over public equities such as free speech and non-discriminatory internet access (net neutrality). Cyber-physical device ecosystems controlled by private firms, increasingly including Chinese companies, are expanding rapidly. As China’s influence over the IoT grows, other nations are being forced to assess the risks of connections to Chinese networks. In many liberal democracies, concerns are increasingly being raised about the CCP’s political values and methods. These are reflected in debates over involvement by Chinese firms in 5G networks and the role of Chinese actors in technical standardization. Concerns about alleged Chinese state-sponsored cyber-espionage and purported state control over firms like Huawei has spilled over into debates on the IoT…Some experts question whether the emerging Internet of Everything can ever be acceptably secured, if it is populated with Chinese-made devices and connected to Chinese networks. This has led to increasingly urgent arguments for complete disconnection from Chinese networks, and from those of countries that refuse to do so. Such thinking likely informed the Trump administration’s Clean Network Program, which encouraged other countries to exclude Chinese actors from their digital ecosystems, and other recent US government initiatives such as the US telecom regulator’s termination of licenses for Chinese operators”.
Matt Sheehan thinks “US export controls on semiconductors will act as a modest brake on China’s new infrastructure rollout”. “In the short term (2020-2022), the greatest impact of US export controls on chips will be hampering Huawei’s deployment of 5G networks in many parts of China…Our base case holds that, in response, China will seek to reconstitute its 5G industry around companies that are not subject to US export controls. Huawei – in consultation with the Chinese government – will likely license its large library of standards-essential 5G patents to domestic and foreign competitors, such as ZTE, China Information and Communication Technologies, and Sweden’s Ericsson. In addition, Huawei’s large workforce of radio frequency engineers experienced in 5G deployment will likely migrate to these companies, transferring their experience across a broad range of companies that attempt to continue building 5G in China”.
Matt Sheehan predicts “by 2025, China’s technology ecosystem will have matured and be on par with Silicon Valley in terms of dynamism, innovation, and competitiveness” with the locus of Chinese innovation shifting from the consumer internet to the industrial internet. “ China will largely succeed in deploying highly capable new infrastructure -cloud computing, 5G networks, smart cities, and surveillance networks, among others – to facilitate this transition to the industrial internet…The term new infrastructure first surfaced in Chinese government language in 2018, but it picked up major steam in policy circles during the first half of 2020. Over the next five years, the push to build this digital infrastructure and use it to upgrade traditional industries will be central to China’s technological development. The National Development and Reform Commission has outlined three categories of new infrastructure: information infrastructure (data centers, cloud computing, 5G networks), integrated infrastructure (smart cities, smart energy), and innovation infrastructure (STEM education, supercomputers). In this triumvirate, information infrastructure is the physical foundation that can accommodate the industrial-scale flow and processing of data. The second pillar of integrated infrastructure consists of the productive applications, often large-scale, that are built atop that foundation. Finally, innovation infrastructure refers to the tools for cultivating and empowering human capital (Chinese researchers, engineers, and students) who can push the frontiers of indigenous technology”.
Emily Weinstein notes “China’s investments in smart cities have yielded a major windfall. China’s smart cities market is estimated to be worth more than $1 trillion, and three Chinese entities dominate smart city patents. These entities include Huawei, the Chinese Academy of Sciences, and the State Grid Corporation, which holds the number one spot. Although Japanese and South Korean firms also sit within the top ten holders of smart city patents, State Grid Corporation’s 7,156 patents in November 2020 was more than double second-ranked Samsung’s mere 3,148 patents. Chinese firms have also successfully marketed the Chinese version of smart cities to countries around the world, many of which share similar, non-liberal governance structures”.
The Semiconductor Industry Association notes in relation to the 5G RAN network that “despite the United States maintaining overall market-share leadership in semiconductors with a 45% share of the global market, substitutes for U.S. components exist for nearly every semiconductor product family required to build a complete RAN infrastructure. In fact, our analysis indicates that of the more than fifty critical semiconductor elements necessary to design, manufacture, and sell a competitive 5G RAN network, only 3 components could face supply constraints outside the United States in the event of an export restriction. For each of those three components, we have further concluded that alternatives are currently being deployed or under active development, especially within China by Huawei’s semiconductor design arm, HiSilicon…We believe that any potential supply chain bottlenecks to the specific semiconductor functional products highlighted in this analysis is merely a temporary blip in the supply chain. While there may be some level of disruption and performance degradation due to the unavailability of these specific products, we expect that these issues will be resolved”.
Others are pessimistic that China would be able to surmount key obstacles. Rhett Hatch points out China is “chronically behind in semiconductor logic design, fabs, and foundries. The most immediate issues China faces in its semiconductor industry are competitiveness and quality” Chinese reliance on high-quality semiconductors produced overseas is highlighted by the fact the U.S. semiconductor industry contributes 39 percent and its allies collectively contribute another 53 percent[14] of the total value of the global semiconductor supply chain. Doug Brake and Alexandra Bruer think “many reports likely overstate the extent of Chinese 5G deployment…Adjusted by the size of population served, the U.S. and China have a similar deployment pace. In 2019, the U.S. companies built 1 cell site for every 7,134 people; China is projected to build about 1 site for every 6,965 people by the end of 2020”.
Alex He thinks “there have been several real breakthroughs in the semiconductor sector by private companies such as HiSilicon and rapid advancement in frontier technologies – artificial intelligence, fifth-generation wireless communication network technology, big data, blockchain and the Internet of Things – by private companies such as Huawei, Tencent, Alibaba and Baidu; however, state-sponsored technological innovation and breakthroughs have been crippled by the existing problems in China’s science and technology research system and a campaign-style catch-up strategy that rewards bureaucrats on short-term goals, as well as by weak links between academic research and industry and a swing between the market-oriented approach for technology acquisitions and indigenous innovation for technology breakthroughs”. “Since it is choked on core technologies because of the US ban, China has no choice but to rely on more strengthened investment for indigenous innovation while resorting to forces of the market for possible cooperation with other advanced economies such as Japan, European Community and South Korea, as well as on the American business community to counter the restrictions”.
Peter Cowhey[15] points out “the outsized Chinese government support for its semiconductor industry becomes even more starkly apparent when comparing the value of total funding assistance as a percentage of the nations’/regions’ value of global semiconductor sales. By this measure, China’s government assistance to its semiconductor industry is equivalent to 137 percent of the Chinese semiconductor industry’s global sales, compared with just 11 percent for Japan, 3.8 percent for Taiwan, 2.3 percent for the European Union, and a miniscule 0.01 percent each for South Korea and the United States”. Ngor Luong, Zachary Arnold and Ben Murphy notes “the Chinese government has invested financially and politically in government guidance funds, public-private investment funds that aim to both produce financial returns and further the government’s industrial policy goals. As of the first quarter of 2020, Chinese officials had set up 1,741 guidance funds, with a registered target size of 11 trillion RMB (1.55 trillion USD). However, these funds had only raised a total of 4.76 trillion RMB (672 billion USD) from private and public sources”.
A Peking University’s Institute of International and Strategic Studies report[16] cautions that “China will suffer a greater loss than the United States from tech decoupling and trails its rival in key areas” such as information technology, AI and space and aerospace technology. The US decoupling strategy of “forming of an alliance of tech democracies to completely isolate China… has also increased a lot of difficulties for China in importing key components from other countries, in gaining hi-tech technology and attracting talent. Chinese researchers appeared to be more worried than their US counterparts about the pace of the country’s catch-up with the US…China has taken the lead in some small areas, but also obviously lagged behind in others, which are in a vacuum and have hit a bottleneck…the daily research and operations of sanctioned Chinese companies and institutions have been limited and many Chinese students find it difficult to plan their studies in the US”. “In comparison, the decoupling has no apparent impact on the information technology industry in the US.”
The Institute of International and Strategic Studies report points out “China lags far behind the US in AI, with the country starting only three years ago to foster talent in the area while American universities have long cultivated such students…only 34 per cent of the top AI talents in China had stayed in the country for work while 56 per cent had moved to the US. For Chinese nationals who studied in the US, 88 per cent remained there with only 10 per cent returning to China for work…It does not seem that Chinese scientists in the AI industry have been brought back to the country due to the worsening of China-US relations”. The report concluded “China should open up academic exchange mechanisms, continue investing in research and development and opt for international cooperation and comprehensive systems to build talent to ensure the gap with the US does not get wider”.
Liu Qianer notes “China will still face a talent shortage of over 200,000 semiconductor professionals in 2023, according to a white paper on Talent in the Integrated Circuit Industry 2020-2021 released by a group of industry associations”. “A survey by MooreElite, an IC design service provider, found that for every 100 people employed by chipmakers at the start of 2021, 14 quit their jobs in the first half of the year”. “Even China’s biggest chip manufacturer, SMIC, faces high staff turnover. In 2020, SMIC lost 17% of its employees…SMIC’s fabs are located in Shanghai and Beijing, including its three most advanced plants. In the past two years, it has become increasingly obvious that chip manufacturing engineers are leaving fabs and pouring into IC design houses” as they offer better pay and less arduous working conditions. “Though building domestic production lines has become China’s priority, manufacturers, especially foundries, are facing a serious brain drain now”. “The talent shortage is a big obstacle on China’s road to a self-reliant chip supply chain”. Apart from enhancing educational programs and increasing benefits for individuals in the chipmaking industry, the participation of leading companies such as Huawei and IC manufacturer Huarong to offer competitive salaries would assist in attracting and retaining talent in fabs.
Rhett Hatch thinks that “in education, where the long-term battle is won, China is behind. According to Hongbin Li, et al.’s article Human Capital and China’s Future Growth[17]…in the United States, 90 percent of the labor force is composed of high school graduates; college graduates make up 45 percent (as of 2015). In China, college graduates and high school graduates made up 12.5 percent and 28.8 percent, respectively, of the workforce. China’s high school and college graduate numbers were lower than Mexico, South Africa, the Philippines, and Malaysia. Although China’s level of innovation is high compared to other developing countries, China cannot effectively compete with developed countries with its low education rates”.
Rebecca Arcesati, Anna Holzmann, Kristin Shi-Kupfer, Kai von Carnap and Claudia Wessling notes that although China is projected to account for one third – 4.1 billion – of global Industrial IoT connections (IIoT) by 2025, it is lagging in advanced manufacturing as “the enterprise-on-cloud rate in China was only 30.8 percent in 2018, compared to 50 percent in the US and 73 percent in Germany”. China still lacks core capabilities for platform development due to “China’s structural dependence on key foreign components like industrial software” and lacks indigenous solutions in key layers of the industrial internet platform architecture such as sensors (China imports almost 80 percent of high-end sensors and up to 90 percent of chips); device connection (95 percent of high-end programmable logic controllers (PLC) and common industrial protocols were imported; lack of interoperability with devices from different foreign companies is another issue); and Software as a service (SaaS) (over 90 percent of high-end industrial software is foreign from companies like SAP, Microsoft and Salesforce)”. “Obstacles to Chinese companies engaging in the IIoT include the lack of interoperability standards and insufficient rules on data ownership and security. China’s regulators therefore want more robust technical standards and a basic industrial internet standardization system by 2020. Most of China’s 324 industrial internet standards are still awaiting formulation”.
Rebecca Arcesati, Anna Holzmann, Kristin Shi-Kupfer, Kai von Carnap and Claudia Wessling notes “China’s government has begun to tackle shortcomings with centrally devised implementation blueprints and its “promotion of the digital platform economy sits within an ecosystem of major policy initiatives, Internet+, Made in China 2025 and China Standards 2035”. China’s Ministry of Industry and Information Technology (MIIT) is orchestrating the “comprehensive effort to build, scale up, regulate and standardize China’s platforms” and there are “bold targets to foster platform development include the establishment of one leading global digital industrial platform, 10 cross-sectoral platforms and 300,000 industrial apps by 2020”.
In its “14th five-year plan for national informatization”, the Central Commission for Cybersecurity and Informatization notes that in China, “the world’s largest-scale optical fiber and 4G networks were completed, commercial use of 5G was a leader worldwide, and the Internet penetration rate surpassed 70%. From 2015 to 2020, fixed broadband household penetration rates grew from 52.6% to 96%, mobile broadband user penetration rates rose from 57.4% to 108%. Rural informatization development level disparities clearly shrunk; the proportion of administrative villages and poor villages connected with optical fiber and 4G networks reached 98%. The Beidou-3 global satellite navigation system was put into use”.
Global Times notes “the development of the 5G+industrial internet sector in China is still at an early stage…since 5G technology has been commercialized for only two years”. Nonetheless, progress has been rapid with the China Academy of Industrial Internet reporting “more than 1,800 5G+industrial internet projects under construction nationwide, covering more than 20 key industries and economic fields”. In addition, the Ministry of Industry and Information Technology (MIIT) announced a second batch of ten application scenarios (virtual site services, logistics monitoring, enterprise cooperation, production process traceability, equipment prediction and maintenance, and other scenarios) and five targeted industries (petrochemical and chemicals, construction materials, ports, textiles and home appliances) for promoting the 5G+ industrial internet sector.
John Lee points out “unlike the legacy stack of internet technologies, development of which was dominated by US and European actors, these new IoT applications are evolving through transnational collaboration and on a global scale. Many important developments are now taking place outside the jurisdiction of Western governments, with Chinese actors featuring prominently. The concentration of electronics manufacturing in China has provided a foundation for the rapid development of IoT products and services, which has been further stimulated by massive domestic consumer demand. By one estimate, China accounted for three quarters of cellular IoT connections worldwide at the end of 2020”. “Although the overall level of digitalization in China’s manufacturing sector remains low, more firms are moving towards automation and industrial IoT applications, with a few becoming global leaders…China’s private digital technology firms have turned to the IoT for new revenue streams, given the saturation of existing product and service markets”. “The performance demands of these emerging IoT ecosystems are in turn driving Chinese firms to become global leaders in enabling technologies… Such developments have potential to reshape the global information and communications technology (ICT) industry landscape and give leading Chinese digital technology firms greater influence abroad, while stimulating economic development at home”.
Conclusion
The pace of tech decoupling has been relatively gradual; with the main protagonists China and the US moving cautiously to forestall severe damage to their own technology supply chain. This picture has suddenly changed following Russia’s invasion of Ukraine. TechStream notes “the United States and its allies have rolled out an extraordinary sanctions regime that aims to deny Russian access to Western financial infrastructure and critical high-tech goods. On the heels of these sanctions, a slew of Western companies, including a host of technology companies, have announced they will no longer do business in Russia. Apple is ending product sales in Russia; Microsoft is halting all new sales; Google and Facebook have stopped ad sales. A number of video game companies have stopped selling their products to Russian gamers. Payment processors Visa, Mastercard, and Paypal no longer service Russian clients. Samsung, Nvidia, Intel, and AMD all will no longer sell microprocessors to Russia. And this list captures only a slice of the companies pulling out – either due to sanctions compliance or for reputational or symbolic reasons”. The decision by Western internet providers such as Lumen and Cogent Communications to pull out of Russia though has been questioned as it only reduces the amount of bandwidth for international internet connections and will “threaten the integrity of the global internet and ordinary Russians’ access to information – and make it easier for Russian authorities to control what information is available to the country’s citizens”.
The ramification of the comprehensive sanctions on Russia is to exacerbate tech decoupling and trigger contagion via spillover effects. The first spillover effect relates to China’s position on the US sanctions. TechStream notes, “U.S. diplomatic efforts are now focused on preventing China from supplying Russia with goods restricted by the United States…U.S. Treasury Secretary Gina Raimondo threatened that the United States could shut down China’s largest manufacturer of microchips, SMIC, if it finds out the company supplies its products to Russia. SMIC is currently subject to U.S. export controls but continues to have access to U.S. chip-design and manufacturing tools due to a broadly worded component in its U.S. designation”.
The second spillover effects relate to potential Russian retaliation from squeezing the supply of essential semiconductor raw materials such as rare gases (Ukraine accounts for 50% of world’s neon gas) and rare earth elements (Russia accounts for 80% of world’s sapphire substrates). Contagion and supply vulnerabilities could interrupt the time-table to bring on new capacity in markets outside China. There are risks of further and more drastic escalation for the two spillover effects.
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[1] See National Security Commission on Artificial Intelligence (NSCAI) recommendations on advancing “the development of artificial intelligence, machine learning, and associated technologies to comprehensively address the national security and defense needs of the United States.”
[2] Authorities tend to avoid broad controls because it means they would be swamped with licensing requests.
[3] See Cheng Ting-Fang and Lauly Li.
[4] Including attempts to ban TikTok and WeChat apps.
[5] See Rebecca Arcesati, Irène Hors and Sylvia Schwaag Serger on “Sharpening Europe’s approach to engagement with China on science, technology and innovation”.
[6] See Blayne Haggart.
[7] See Meaghan Tobin.
[8] Heidi Tworek provides a historical perspective on the international governance of submarine cables.
[9] China imported $350 billion worth of semiconductors in 2020. See Cheng Ting-Fang and Lauly Li.
[10] See Global Times.
[11] Wendy Wu notes “Japan’s semiconductor industry surpassed the US as the world’s largest chip supplier in the early 1980s, causing wariness and discontent in the US over national security risks and its loss of competitiveness in core technologies…Washington accused Tokyo of state-sponsored industrial policies, intellectual property theft from US companies, and of dumping products on the American market. The US punished Japanese companies for allegedly stealing US technology and illegally selling military sensitive products to the Soviet Union. It also forced Japan to sign deals to share its semiconductor technologies and increase its purchases of US semiconductor products”. See Chad P. Bown for a historical overview. See also Huang Lanlan, Li Qiao; and Chen Qingqing on other accounts of US targeting of foreign MNCs.
[12] See George Paul.
[13] See Robert Carnevale.
[14] According to a January 2021 report from Georgetown University’s Center for Security and Emerging Technology on the semiconductor supply chain. See Rhett Hatch.
[15] See Rhett Hatch.
[16] See Kinling Lo.
[17] The Journal of Economic Perspectives.