Consumers test the features of new Huawei smartphones. (Photo: Zhang Peng/LightRocket via Getty Images)
For observers of the U.S.-China geopolitical rivalry, the arrest of Huawei’s CFO, Meng Wanzhou, in Canada, should serve as a wakeup call for the rest of the tech sector. The allegations against China’s telecom giant for breaching U.S. sanctions highlights the escalating technology race and hybrid cold war between the world’s two superpowers.
Washington and Beijing are now at a historical tipping point, and national security priorities are driving policies that will lead to further decoupling of American and Chinese interests. This, in turn, will lead to further fragmentation of global value chains in the tech sector.
Tech companies—or any firms that depend on cutting edge technology—will need to gauge their risk environment around two key factors: First, how to react to a wave of disruptive policy measures such as export controls, sanctions, blocked acquisitions and blocked technology transfers. Second, how to minimize the damage that will come as a result of disentanglement from existing technology ecosystems.
Beijing’s provocative tech agenda
At the heart of this competition is the Made in China 2025 plan, Beijing’s strategy to lead the world in AI, robotics, aerospace and other industries.
China’s rapid advancement in technological capability has in many ways caught Washington and its allies flatfooted. Since 2017, For example, Beijing has been creating a navigational satellite constellation to rival America’s GPS. In 2018 alone, it launched 11 BeiDou satellites, some as few as 17 days apart.
Beijing can now offer its partners an alternate version of America’s GPS, thereby undermining Washington’s geopolitical monopoly in this area, and it can leverage the BeiDou program to extract concessions from its client states, such as agreements to buy more Chinese digital infrastructure and equipment.
In the competition to win the battle of 5G standards— the technology that provides lightning-fast connectivity and better bandwidth in the internet of things (IOT)—China is leveraging its 650 million mobile internet users and its planned infrastructure along the digital Belt and Road to expand its global influence.
In a bid to become self-sufficient and cut its reliance on foreign semiconductor technology, Beijing is reportedly investing $31.5 billion in a National Integrated Circuit Industry Investment Fund, among other funds.
Lately, Beijing’s focus has increasingly turned to what it calls “civil-military fusion.” Recently, a series of state-backed venture capital funds have brought together tech startups and other private companies with the Peoples Liberation Army. In 2017, for example, the Foshan Civil-Military Innovation Industries Fund was launched to the tune of $28.75 billion.
Washington’s technology counter-offensive
The U.S. Department of Defence (DOD) now officially lists China as an “adversary.” A recent DOD report list key areas of strategic focus including Beijing’s efforts to leverage technology to modernize its military, and its plans to harness the Belt and Road Initiative to further enhance its economic clout. This has fed a popular narrative in Washington and beyond that China’s strategic ambitions need to be confronted and contained. Thus, firms should expect to see fewer technology transfers to Chinese companies, the blocking of deals (such as Huawei getting locked out of the U.S., Australia and possibly the U.K. and Japan) and the placement of targeted individuals and firms on sanctions lists. Whether all of this will produce the desired outcome by Washington and its allies is, of course, debatable.
The U.S. Export Control Reform Act, passed in August, will lead to the expansion of an export controls list. There will be new export licensing requirements for a broad range of so-called dual-use technologies–defined as technologies that can be use for commercial and military purposes. In the digital economy, this will impact a wide range of industries: robotics, AI, autonomous vehicles, even facial recognition technology. The effects could be widespread, with collateral damage to foreign firms.
Chinese smartphone maker ZTE serves as a cautionary tale. Its reliance on U.S. technology for both components like microchips and software from the Android operating system highlights China’s dependence on foreign suppliers.
Hikvision, China’s largest maker of facial recognition surveillance equipment, may suffer a fate similar to ZTE, as the U.S. government is threatening to ban Silicon Valley chipmakers from selling it American technology. Unlike ZTE, however, which avoided a likely collapse when Washington agreed to waive the technology ban, Hikvision may not be so lucky.
China’s major Achilles heel continues to be its dependence on foreign semiconductor technology. Every area of Beijing’s Made in China 2025 plan relies on foreign-owned integrated circuit technology, with much of it coming from five American manufacturers: AMD, Intel, Micron, Nvidia and Qualcomm.
Even Yangtze Memory, Beijing’s state-funded national champion, which recently announced that it had developed a state-of-the-art 64-layer 3D NAND flash memory chip, will depend entirely on critical early-stage equipment—needed for mass production—from foreign firms. Primary partners are Applied Materials and KLA-Tencor, both American companies.
The Scale of disentanglement
All of this leaves the global tech sector in a highly vulnerable position. Increasing U.S. export controls that restrict or block access to American technology could cause major damage to Beijing’s geopolitical aims. But foreign firms will suffer collateral damage as well, as they will be penalized for being imbedded with denied parties.
Over the past three decades, for example, the American companies named above have invested billions of dollars in collaborative ventures and production facilities in China. For all the world’s leading semiconductor firms, China will soon become their largest market.
According to PWC’s Global Strategy group, 80% of the corporate research and development (R&D) money spent in China in 2017 came from non-Chinese multinationals. Disentangling these ecosystems will require dismantling complex, intertwined relationships, with potentially heavy economic and financial consequences across global value chains.