The acrimony between China and the US over technology transfers has created plenty of losers during the past year. There are the US companies which have missed out on business as a result of sanctions, and the Chinese groups that have had to find alternative supplies. But there is one group that has emerged as a winner: the security hawks who say they saw it coming and who are now pushing Beijing to be more self-sufficient.
Since the start of 2019, Washington has used sanctions to cut Chinese companies out of US supply chains, denting the telecoms group Huawei, China's supercomputer groups and eight of the country's leading artificial intelligence surveillance companies.
For many policymakers in Beijing, the inevitable trend is towards more decoupling of the two countries' tech supply chains. A truce in the trade war is unlikely to diminish the Trump administration's drive to place controls on exports of advanced technologies.
The result has been a decisive shift in China's approach to the industry. Beijing is accelerating its drive for technological "autonomy" to boost its control over its own supply chain in the face of political risks, such as further US embargoes.
To achieve technological autonomy, Beijing is pursuing strategies that often tread an uneasy balance between increasing its engagement with the outside world and shutting it out. For all the accusations China has faced about stealing other countries' technology, Beijing is now embracing international open-source, or free to use, collaborations.
China is also tapping overseas markets for talent, investing more in countries other than the US.
This acceleration of decoupling will not only affect US groups that rely on China's custom, it will also start to reconfigure the world's tech supply chain, as Chinese companies turn to countries they view as safer allies. The two superpowers are already bullying countries they buy from, and sell to, to take sides.
"Three years ago, there may have been more people thinking that we could rely on some US technologies rather than developing our own," says Yan Ming, a director at the China Computer Federation, a research alliance. "Now if someone is still saying that, I suppose they have just been sleeping for the past three years."
The Trump administration has justified its sanctions so far on the basis of national security concerns surrounding Huawei, as well as a foreign policy objective of preventing Chinese government repression of Uighur Muslims and others in the northwestern region of Xinjiang, which is facilitated by surveillance companies. But within China, these justifications are seen as excuses for a broader agenda: preventing the rise of China as a challenger to the US as a tech superpower.
China's fears are not unjustified. In November, the US commerce department proposed rules that would give the agency the power to review and block any transaction involving "information and communications technology and services" from a "foreign adversary".
US officials have expressed national security fears over a range of Chinese companies, from software tech giants Tencent and Alibaba to the state-owned China Railway Rolling Stock Corp, which is pursuing an estimated US$1 billion ($1.5b) contract with the Washington DC subway. The officials say their concern is not limited to a few tech companies, but that all Chinese companies could be seen as threats because they are potentially subject to the ruling Communist party's control.
As a result a whole host of Chinese groups are assessing their dependency on US technologies. The largest gap is in hardware, especially the design and manufacture of semiconductors and high-end chips, where China lags far behind the US. They also relies on the US for software, from Google's mobile apps for Android smartphones — which are now sorely lacking from Huawei's handsets — to Microsoft's Windows operating system and its Office suite.
More broadly, the Chinese and US tech industries benefit from knowledge sharing. That includes informal discussions within industry alliances and standards-setting bodies, some of which have already been curtailed by export controls on Huawei and other companies. Although not subject to the same controls, US-origin software developed under open-source licences supports much of the basic infrastructure of the internet, and Chinese developers worry that their access may soon be blocked.
Beijing's response to the threat of decoupling dovetails with an ambition enshrined in its 2017 Cybersecurity Law, to ensure components of "critical" infrastructure are "secure and controllable" and "autonomous and controllable".
In light of US sanctions, Chinese experts now argue that the risk of supply-chain disruptions for political reasons should be taken into consideration when vetting components. That includes the knock-on impact of Washington's pressure on non-US companies. US officials have been pressuring their counterparts in Taiwan to stop its largest chipmaker from selling to Huawei.
"Developing autonomous and controllable technology is a solution to being controlled by others," says Yan. He adds that the Trump administration "taught China a lesson" when it temporarily imposed sanctions on telecoms equipment maker ZTE in 2018, taking the company to the brink of collapse. The lesson was: "If you continue like this, you are controlled by others and you won't survive if I cut your supply chain," he says.
Although foreign products could in theory be certified as "secure and controllable", this push largely means stripping out foreign vendors, say cyber security companies. In a confidential directive revealed by the Financial Times, the central government told its departments and public institutions to replace existing computers and software with domestically made versions.
"We're being uninvited to bid. We're not being allowed to even participate any more," Cisco's chief executive Chuck Robbins told analysts in August, referring to the company's business with Chinese state-owned enterprises.
For many countries, technology development nearly always requires piggybacking on international expertise. This year, China has driven engagement with open-source research collaborations — where individuals from around the world can contribute — as a way to circumvent US export sanctions.
Chips are a crucial part of China's drive for self-sufficiency because they are the building blocks for all forms of computer. In October, China's annual government-run World Internet Conference in Wuzhen, near Shanghai in eastern China, debated an open-source chip design project. Born at the University of California, Berkeley, RISC-V is a research collaboration that develops free-for-use designs for the basic architecture used in microprocessors — potentially meaning the end of reliance on Intel and Arm's proprietary designs.
Ni Guangnan, an IT industry veteran, argued at the Wuzhen conference that China has several options when it comes to chip design. Those designed by Intel and the UK-based Arm are subject to possible US sanctions, he said, while chips wholly designed in China, such as by Loongson and Sunway, are rarely used.
But, Ni concluded, Chinese-made chips based on RISC-V architecture are not controlled by other countries and have a future in emerging markets.
China has faced plenty of other problems developing a competitive domestic chip industry. Companies such as Xiaomi and Huawei already use their own in-house designs for chips used in their smartphones.
But designing other high-end chips, such as microprocessors used in high-speed servers that will be competitive with Intel's, could be more than a decade away, says Dan Wang, a tech analyst at the consultancy Gavekal Dragonomics in Beijing.
Chinese venture-capital investment in the US has fallen substantially over the past year as the money instead flows to countries that investors consider beyond US sanctions.
"The Chinese are scouring the world for non-US semiconductor technologies to bridge the gap," says Bas Fransen, lead analyst at the consultancy TenX2, who has helped introduce Chinese investors to Indian chip designers.
"Particularly in Bangalore, you come across many Chinese company reps and also government officials looking for start-ups to acquire or invest in, and to persuade to move to China."
But beyond chip design, Beijing sees open-source projects as an opportunity for China's tech sector to expand. Not only does it underpin much of the technology behind the modern internet, but open-source software is also, for now at least, exempt under US export controls.
The ministry of industry and information technology, China's tech industry regulator, has recently encouraged Microsoft's GitHub, the world's biggest code-sharing platform and host of open-source collaborations, to expand in China. GitHub's chief operating officer Erica Brescia says Chinese officials told the company that open-source projects give a "sense of security" because of the lack of trade restrictions.
"[Due to] the trade war, China's government and its big tech companies have realised it needs to push the development of its own domestic open-source ecosystem," says Mark Ma, chief executive of Open Source China.
The government is also stepping up its talent-poaching programmes to try to bring Chinese emigrants home and attract foreign expertise. Among them is the Thousand Talents Plan, which has continued despite the government telling civil servants and state media to stop mentioning it by name last year because of criticism in the US.
Headhunters in Silicon Valley describe how increased difficulties in the US, such as the tightening of visa rules for talented workers, have led to more Chinese engineers returning home after finishing their studies in the US.
"Some of these [Chinese] researchers in the US do not feel fully safe [any more]," says Zhang Monan, chief researcher on US and Europe at the China Center for International Economic Exchanges in Beijing, a government-sponsored think-tank.
The Chinese recruitment schemes offer a range of incentives, from tax subsidies and research grants to topping up wages in co-operation with large private sector employers.
They often also provide office and laboratory space, and even help with recruiting local researchers.
Last year, the government announced a tax subsidy scheme designed to lure overseas talent to the Greater Bay area on China's south coast, giving high earners an effective tax rate as low as Hong Kong's, according to calculations by KPMG. Elsewhere, officials in Ningbo, near Shanghai, has said it will pay relocation costs of between Rmb150,000 ($32,899) and Rmb8 million to attract specialist tech workers.
Chinese government-backed recruiters have, over the past year, been more cautious about operating in the US. But while the Trump administration has scrutinised university staff with Chinese state funding, it does not seem that the US government is concerned about Chinese engineers leaving the country.
China's private sector is still able to move quickly to mop up talent — although companies under export sanctions, such as Huawei, are careful not to hire competitors' engineers who could be accused of bringing sanctioned technical knowledge to the country.
This push for chip self-sufficiency has boosted smaller private Chinese companies in the industry, according to Charles Kao, a private equity investor formerly on the board of Applied Materials.
"The drive for tech decoupling has increased demand for Chinese start-ups," says Hao. "They used to be thought of as too high-risk and so had no market to sell to; now they're developing because there's demand domestically."
Some Chinese academics talk optimistically about trying to "recouple" rather than "decouple" from the US — a reference to welcoming in more American investment and US companies, hoping this will add to the lobbying pressure in Washington from the parts of tech sector that wants to deal with China.
Examples of this trend include the central bank's decision to allow PayPal to become the first foreign company to acquire payment processing licences, as well as the Foreign Investment Law, which was pushed through in March in a bid to calm overseas investors' concerns.
The law promises that all sectors are open to foreign investment unless they are named on a "negative list", flipping the previous presumption of industries being closed unless otherwise stated, and fulfilling a longstanding US demand.
Yet experts say this strategy comes into conflict with ensuring technologies China relies on are "secure and controllable". Politicians abroad have compared buying Huawei's equipment to giving China an "off switch" for a country's telecoms network.
The Chinese government faces a similar conundrum: if it really wants to allow foreign tech companies to gain market share in China, it must recognise that Washington will have potential influence over crucial technology. Chinese policymakers increasingly believe they cannot bear the risk.
- Additional reporting by Nian Liu.
Written by: Yuan Yang
© Financial Times