Banned component sales. A blocked $142bn chip takeover. Fresh concessions demanded on a second chip deal. If this is just the warm-up, analysts say the US-China tech wars look likely to severely disrupt the global tech sector on both sides of the Pacific. Such disputes are rooted in US anxiety over China’s tech power and the methods it employs to amass it. They are set to intensify with Washington’s Section 301 investigation into the alleged Chinese theft of US intellectual property and practice of forcing technology transfers from foreign investors.
Early strikes have hit at hardware companies, including smartphone and telecoms equipment maker Huawei, which has served as a lightning rod for US fears about Chinese snooping and state largesse, and rival ZTE. Huawei denies its technology is used for surveillance. As US pressure escalates, proposals published this week call for barring US agencies from using technology from Huawei or ZTE and a ban on the US military contracting vendors that work with either.
All this threatens, in the words of one consultant, to wreak “economic carnage”. For its part, China has long fretted over its reliance on semiconductor imports. The nation spends more on imported silicon, which sits is at the heart of smartphones, gaming consoles and other electronics, than it does on oil. For all its advances in artificial intelligence and the internet, the silicon layer on which much of the tech sector sits is threadbare. The resulting conflict, say analysts, strikes at the heart of China’s ambitions and is likely to curb revenues as well as disrupt supply chains at foreign multinationals, many of which see the country as a key market.
But it is also prompting a rethink at the corporate level in China, with tech companies looking to develop their own chips. “The complexity of this issue is mind-boggling because the electronics value chains are much more complex and globally integrated than they were in the past,” said Christopher Thomas, partner in McKinsey’s Beijing practice.
Washington first hit out at ZTE, imposing a seven-year ban on purchases of US components after accusing it of illegally selling restricted equipment to Iran. ZTE relies on US sources for its newest Axon M smartphone, buying protective glass and 60 per cent of other electronics from the likes of Qualcomm, SanDisk and Skyworks Solutions, according to consultancy ABI. The trouble for ZTE and China is that alternative sources, in Japan or South Korea, would not be able to add sufficient capacity, and domestic state-subsidised chipmakers such as SMIC and Tsinghua Unigroup lag well behind their rivals.
As part of its response to last week’s US trade demands, Beijing wants the ban on ZTE lifted, as well as an end to restrictions on US exports of sensitive high-tech products. Chinese efforts to acquire overseas chip assets have also fallen foul of US regulators. Xcerra, the Massachusetts-based testing chip company, was the latest casualty, when it in February ditched its agreement to be acquired by a state-backed fund in the face of regulatory hurdles.
Last year the US scuppered China’s planned purchases of Lattice Semiconductor and Aixtron, a German maker of chip equipment, on national security grounds. Facing these roadblocks, China has taken some pre-emptive steps to wean itself off foreign technology. Max Zenglein, senior economist at the Mercator Institute for China Studies, a Berlin think-tank, points to efforts to woo more workers from overseas, including specific measures this year aimed at attracting workers from Taiwan, home to big chipmakers such as TSMC.
Tech companies also have moved more processes in-house, developing vertically integrated models to try to inoculate them against supply chain disruptions. Those going this route include handset makers Xiaomi and Huawei, which is banned from selling most of its products into the US. Jack Ma’s tech giant Alibaba is working on a neural network chip capable of carrying out AI functions such as facial and speech recognition with substantially less power, and is also acquiring local chipmaker C-Sky Microsystems.
But Chinese tech companies’ progress in developing their own technology, measured by growth in patents or research and development spending, is part of the problem, according to Edison Lee, analyst at Jefferies. He said US President Donald Trump “has definitely come to the conclusion China is going to overtake the US in terms of tech abilities and prowess, because I think his reasoning is China has done a lot of R&D over the past five to six years but where did they get the base from? The base is copying technology from the western world and then improving it and building on it.”
Alibaba is pouring $15bn into R&D, and many of the big tech groups are running joint innovation labs with the government. Another flashpoint highlighted by analysts is 5G, the next-generation wireless standard that Huawei has been working to develop. Qualcomm’s proposed $142bn takeover by Singapore-registered Broadcom was scuttled by concerns in Washington that it might lead to reduced R&D spending by the US company, allowing China to steal a lead in 5G development.
All of this has left the US fretting that failure to clip such groups’ wings will hand China the lead on subsequent generations of key mobile technologies, too. “Will China widen its lead?” asked Mr Lee. “If Nokia and Ericsson go out of business and it’s just Huawei and ZTE [left], the American [telcos] can never upgrade.”