Nina Xiang is the founder of China Money Network, a media platform that monitors the enterprise and technology sectors in China. She is the author of “Red AI: Victories and Warnings From China Rise In Artificial Intelligence.”
Long before China was seen as a technology competitor to the U.S., Washington held on tight to technological advances in China.
Through agreements such as the Wassenaar Settlement, a multilateral export control regime, the U.S. and its allies ensured that technological advances in China were held back and at a safe pace. The result is that China’s tech sector – despite its size and growth – is heavily dependent on foreign technology.
Huawei Technologies is just one example of how this vulnerability is evident in one company. But China’s entire tech sector is equally vulnerable, and it could collapse if foreign technology suddenly becomes unavailable. A few years ago, a situation like this would have been unbelievable. But the real and dirty policies of the Trump era have led companies to consider these possibilities.
The constraint on China-led China’s technical progress is based on a deeply hostile mindset, in which China is the competitor. “Historically, export controls have been a tool of economic warfare,” according to Mario Daniels, a visiting professor at Georgetown University. “They’ve relied on a clear view of an enemy.”
Even though this tech fight only appeared in the last few years, it was happening long before anyone noticed. For decades, the U.S. has focused on keeping China at least two generations behind global semiconductor manufacturing capabilities. Moreover, when Chinese companies tried to establish a market position at lower technology levels, foreign companies hit them with positive results.
Take lithography devices for example. Around 2015, Shanghai Micro Electronics was trying to launch a sizeable production of 90-nanometer lithography equipment, an emergency device for chip making. Suddenly, a change in the Wassenaar Configuration control list allowed foreign companies to export equipment higher than 45-nm – the higher the number nm, the more technologically advanced – to China because they were considered co- at least two generations behind then avant-garde.
Chinese chip makers rushed to buy 65-nm lithography equipment from the Dutch leader ASML, as they were better than the 90-nm devices developed by Chinese companies, confirming leading foreign lithography manufacturers in China. According to official data, foreign companies have a 100% share of the Chinese market in some lithography equipment, with ASLM accounting for 68% of the market, the remaining 32% being owned by Canon Japan and Nikon.
China’s reliance on foreign technology goes far beyond semiconductors. In the automotive sector, where China is now the world’s largest car market in terms of both production and sales, about 80% of the chips needed for car engines and gearboxes are dependent on imports. This is after China opened the automotive sector to foreign joint ventures in 1978, requiring foreign companies to have no more than 50% participation in any joint venture.
That lasted until 2018, when Beijing began lifting all foreign property restrictions by 2022. Four decades of strict restrictions on joint ventures had not yet allowed Chinese companies to master car engines show that the bottom line idea of a more complex emergency technology move than many think. Needless to say, about up to 98% of car chips made in China are dependent on imports. The current automated chip shortages will alleviate sudden supply disruptions that could lead to factory closures and production chaos.
When it comes to the medical sector, imports make up 80% of China’s high-end medical devices sector. In aircraft engines, China relies entirely on overseas-made cranes for its regional airline ARJ21 and the largest C919 aircraft, both of which use imported engines . In computer-controlled numerical control machines, or CNC machines, so essential for advanced manufacturing – China relies on imports for 90% of its technical needs.
ARJ21 regional jetliner at a factory in Shanghai, pictured in May 2014: China relies entirely on overseas-made jets for the aircraft. © Reuters
China also imports about 80% of mid-to-high-end sensors, while Microsoft’s Windows accounts for 88% of China’s desktop operating system requirements, with Apple’s OS X system a ‘occupying a market share of 5.4%. Android and iOS account for nearly 100% of the Chinese phone operating system market.
To be sure, COVID has increased U.S. trust in China as well. Some studies suggest that up to 80% of the basic ingredients in U.S.-made drugs come from China, which is also a major source of medical devices for the U.S.
The main difference here is that, when it comes to advanced technology, China is dependent on imports because it does not have the capacity to produce these products and there are not many other suppliers. The US, on the other hand, relies on China for low-cost goods driven by cost savings and substitutes are readily available.
The technical war and the pandemic have at least put off the technical part separation process that is unlikely to go backwards. The pace and extent of this separation will depend on ongoing U.S. policies. President Joe Biden should understand that it is in the best interests of the U.S. to try to maintain China’s reliance on technology, and that Donald Trump’s measures certainly accelerated China’s effort to achieve self-sufficiency.
Relieving short-term pressures on Chinese companies will increase China’s dependence on U.S. technology and avoid a severe global production crisis, a far better option compared to violent and rapid disruption.