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Opinion

Foreign dependence the Achilles' heel in China's giant tech sector

When it comes to advanced technology, China still relies on imports

| China
ASML's semiconductor lithography tool with its panels removed: Chinese tech sector is heavily reliant on foreign technology.   © ASML/Reuters

Nina Xiang is the founder of China Money Network, a media platform tracking China's venture and tech sectors. She is author of "Red AI: Victories and Warnings From China's Rise In Artificial Intelligence."

Long before China was seen as a technological rival to the U.S., Washington kept a tight grip on China's tech advances.

Through agreements like the Wassenaar Arrangement, a multilateral export control regime, the U.S. and its allies made sure that China's tech advances were kept behind and at a safe distance. The result is that the Chinese tech sector -- despite its impressive scale and growth -- is heavily reliant on foreign technology.

Huawei Technologies is just one example of how this vulnerability is reflected in a single company. But the whole of China's tech sector is just as vulnerable, and could potentially collapse if foreign tech suddenly became unavailable. A few years ago, such a scenario would have been unthinkable. But the extreme and erratic policies of the Trump era have forced companies to contemplate such possibilities.

The U.S.-led containment of China's tech progress is based on a deep adversarial mindset, in which China is the rival. "Historically, export controls have been an instrument of economic warfare," according to Mario Daniels, a visiting assistant professor at Georgetown University. "They have depended on a clear-cut idea of an enemy."

Even though this tech warfare only became more visible in the past few years, it was happening long before anyone paid attention. For decades, the U.S. has been focused on keeping China at least two generations behind global state-of-the-art semiconductor manufacturing capabilities. Moreover, when Chinese companies tried to establish a market position at lower tech levels, foreign companies crashed them with superior products.

Take lithography machines as an example. Around 2015, Shanghai Micro Electronics was trying to launch volume production of 90-nanometer lithography equipment, a critical machine for chipmaking. Suddenly, a change in the Wassenaar Arrangement control list allowed foreign companies to export equipment higher than 45-nm -- the higher the nm number, the less advanced the tech -- to China as they were considered at least two generations behind the-then avant-garde.

Chinese chipmakers rushed to buy 65-nm lithography equipment from Dutch leader ASML, as they were superior than the 90-nm newly developed machines being made by Chinese companies, solidifying foreign lithography makers' dominance in China. According to official data, foreign companies have a 100% share of China's market in certain lithography equipment, with ASLM supplying 68% of the market, the remaining 32% taken by Japan's Canon and Nikon.

China's reliance on foreign tech goes far beyond semiconductors. In the automotive sector, where China is now the world's largest auto market in terms of both production and sales, around 80% of the chips needed for car engines and gearboxes rely on imports. This is after China first opened up its auto sector to foreign joint ventures in 1978, requiring that foreign companies hold no larger than a 50% stake in any joint venture.

That lasted until 2018, when Beijing began to phase out all foreign ownership restrictions by 2022. That four decades of tight restrictions on joint-ventures still had not enabled Chinese companies to master making car engines shows that the concept of forced technology transfer is more complicated than many think. Needless to say, around up to 98% of automotive chips made in China rely on imports. The current auto chip shortages highlight sudden supply disruptions can lead to factory closing and production chaos.

When it comes to the medical sector, imports account for 80% of China's high-end medical devices segment. In aviation engines, China relies entirely on foreign-made chips for its regional airliner ARJ21 and the larger C919 aircraft, both of which use imported engines. In computer numerical controlled, or CNC, machine tools -- so critical for advanced manufacturing -- China relies on imports for 90% of its tech needs.

ARJ21 regional jetliner at a factory in Shanghai, pictured in May 2014: China relies entirely on foreign-made chips for the aircraft.   © Reuters

China also imports around 80% of mid-to-high-end sensors, while Microsoft's Windows accounts for 88% of China's desktop operating system needs, with Apple's OS X system takes occupying a 5.4% market share. Android and iOS take nearly 100% of China's phone operating system market.

To be sure, COVID has made U.S. reliance on China more visible as well. Some studies suggest that up to 80% of the basic ingredients in U.S.-made drugs come from China, which is also the prime source of medical devices for the U.S.

The key difference here is that when it comes to advanced technology, China relies on imports because it has no capability to make those products and has few alternative suppliers. The U.S., on the other hand, relies on China for low-end goods driven by cost-saving and has readily available substitutes.

The tech war and the pandemic have set off at least a partial tech decoupling process that's unlikely to be reversed. The pace and the extent of this decoupling will depend on U.S. policies going forward. President Joe Biden should understand that it is in the interests of the U.S. to try to maintain China's reliance on tech, and that Donald Trump's measures in fact accelerated China's effort to achieve self-sufficiency.

Easing short-term pressures on Chinese companies will prolong China's dependence on U.S. tech and avoid serious global production disarray, a far better option compared to a violent and quick breakup.

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