Why China’s likely to lose a tech cold war

opinion June 13, 2019 01:00

By Michael Schuman

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It has become almost an article of faith that the US and China are stumbling into a tech cold war – a superpower slugfest for mastery of future technologies and, with them, the global economy.



The US administration’s China policy has been steadily evolving to fight this war, with steps aimed at keeping American know-how out of China’s hands.

In the end, however, this “war” may not feature many major battles. The narrative is based upon a questionable assumption – that China will inevitably become an innovation powerhouse, with “national champions” primed to challenge Intel, Apple and Alphabet’s Google for the commanding heights of world tech. In order for China to grow into such a threat, its companies will have to overcome significant hurdles, none of them especially easy to surmount.

There’s a reason the world economy has so few Qualcomms and Microsofts: What those firms do is extremely difficult. Few companies from anywhere, especially from emerging markets, have proven capable of breaking into the big leagues of global tech. Just ask South Korea’s Samsung about its long and painful slog up the innovation ladder.

The fear in Washington is that China is tilting matters in its favour by massively subsidising its technology industries, from electric vehicles to semiconductors. But those same policies may undercut more than bolster China’s tech ambitions. Modern economic history tells us that pumping government cash into favoured sectors often fails to produce innovative companies. The chances of success may be even lower in China’s case, since a fair chunk of that aid gets funnelled to notoriously bureaucratic and bloated state-owned enterprises.

Instead, the largesse tends to generate excess production capacity that can smother more competitive players. China’s record so far is mixed at best. The state, for instance, has dumped tens of billions of subsidies into the electric vehicle industry, only to end up with a junkyard of inexperienced start-ups, subpar vehicles and unhappy drivers.

The “tech war” scenario also assumes that US technology firms will sit by idly and wait for China to steamroll them. As China races to catch up, of course, American companies and other established players are going to keep running, too. Even though Semiconductor Manufacturing International Corp was established nearly two decades ago, the Chinese chip foundry is still five to six years behind its competitors, according to Linley Gwennap, president of the Linley Group, a research outfit specialising in the chip industry. As he points out, when SMIC tries to close that gap, it will likely discover its competition has jumped ahead again.

Even if Chinese companies manage to produce rival technologies, they won’t automatically become global competitors. Innovating is one problem; finding customers is another. Those firms would have to convince foreign companies and consumers to ditch the suppliers and brands they’ve come to trust, in some cases over decades, and replace them with Chinese-made alternatives.

That isn’t impossible. Chinese telecom giant Huawei has shown the way. But the barriers are high. One reason why Intel and Advanced Micro Devices Inc remain so dominant in microprocessors for computers and servers is that the industry has developed a base of software around their chips, making it difficult for newcomers to break in. As Gwennap puts it, “China can eventually create their own infrastructure and ecosystem, but that doesn’t get them on the world market.”

Instead, China’s quest for tech independence may simply isolate the economy in its own universe, where its companies and consumers use technology that hasn’t been widely adopted elsewhere. That’s already happening. Some Chinese tech giants have succeeded behind the protective Great Firewall – most notably Baidu – but stumbled in finding a global audience.

US President Donald Trump’s policies could help shove China into this uncompetitive isolation by denying Chinese firms access to US technologies. Huawei recently said that it could have its own operating system ready to go by year-end, to replace Google’s Android and Microsoft’s Windows. But Huawei also made clear it would only take that step if Washington sticks to its threatened ban preventing US companies from supplying the Chinese firm. Executives at Huawei are wise enough to know that switching to a home-grown operating system would cut off their smartphones from the software mainstream and could restrict their customers’ access to popular services.

Of course, China will produce some globally competitive technology companies. The country has too many smart firms and talented techies for that not to happen. But that’s very different from China becoming an across-the-board threat to US technology. It still seems unlikely Chinese companies will be able to challenge, let alone surpass, US tech rivals in a wide range of sectors and on a global scale, however much money bureaucrats may be willing to spend.

The best path for China may be to follow in the footsteps of Japan and South Korea – to produce a few leading companies able to carve out a global presence and become an integral part of the world’s tech landscape. But that hardly describes a cold war. It sounds more like capitalist competition.

Michael Schuman, who is based in Beijing, is the author of “The Miracle: The Epic Story of Asia’s Quest for Wealth” and “Confucius and the World He Created”.