ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter

US has to live with Chinese lead in 'internet of things'

Technology trade ban would make American companies less competitive

| China

It is hardly a secret that a key goal of the Trump administration in its trade war with China is securing U.S. leadership in high-technology sectors.

But a tougher stance against Chinese tech companies will not give U.S. companies lasting competitive advantage. Instead, Washington's emerging approach will isolate U.S. tech companies from an increasingly interconnected global innovation ecosystem.

Consider Chinese telecommunications equipment companies ZTE and Huawei Technologies. Both have long got the message from Washington that they are unwelcome. No doubt has been left in this regard with the criminal charges filed against Huawei over alleged fraud and technology theft and the, earlier, temporary ban imposed on trade with ZTE.

The issue, though, is that there are no significant U.S. companies which could fill the vacuum that would be left by the two Chinese companies' absence. While the U.S. remains a global leader in the development of advanced microprocessors, it lacks scale and depth in the production of the low-power- consumption microchips, sensors and other wireless technology that drive networked, or "internet of things," devices -- ranging from huge transport systems to simple household appliances. Neither does the U.S. have the capacity to produce smartphones, fifth-generation network infrastructure, nor any other major component for the latest integrated, cyber-physical systems.

China has a lock on the low end of the processor industry, at least in terms of being able to produce at the massive scale and speed the industry believes it needs to accelerate the growth of the internet of things. Telecommunications research company Ovum estimates that there are already 3 billion consumer-oriented IoT devices -- such as smart speakers, TV set-top boxes, smartwatches and other wearables -- in use today.

By 2022, the world will see nearly 9 billion such home devices connected to networks and more than 200 billion in use overall with electricity meters, cars, street lamps, factories and more, according to estimates by global insurer AXA. It projects that Chinese production will account for 95% of the devices, underscoring its dominance.

China's scale and coordination of its markets and its growing leadership in global technological cooperation will mean its technology companies will have clear competitive advantage over their U.S. counterparts as the internet of things grows from concept to reality over the coming years.

While some countries lobbied by Washington are rethinking their openness to the participation of Chinese companies in their 5G networks, much of the world is still likely to rely on Chinese innovation and collaboration to make the leap to the next-generation telecom systems.

The future of the internet of things is bound up with the future of 5G technologies, in which China is still the country with both the largest domestic market and the biggest number of companies with relevant capabilities.

By isolating itself from China's supply of internet of things systems, sensors and devices, the U.S. will effectively exile itself from the greater community of innovation over which China, cyber-malfeasant or not, will continue to wield considerable influence. This lack of participation will hold U.S. players back from being globally relevant more than it will protect them.

This may be a worthwhile sacrifice in the eyes of some U.S. officials. A recent report to the Congress by the official U.S.-China Economic and Security Commission highlighted Chinese leadership in internet of things technologies.

It laid out the competitive threat that Beijing's national coordination and massive scale of sensor production presents to U.S. interests and made note of Chinese efforts to influence global standards for the internet of things. It advised correspondingly closer cooperation between government and industry in the U.S. "Beijing's larger IoT policy should not go unchallenged by U.S. industry and government," it said.

The report suggested that Chinese internet of things devices and equipment installed in the U.S. could gather and potentially misuse commercial, civic and consumer data. It concluded by recommending that Washington adopt stricter regulations around how internet of things data is collected and used.

The U.S. could further restrain China's growth in internet of things technologies. Together with South Korea, Japan and Taiwan, America leads in the production of sophisticated semiconductors and restricted access to such chips could slow China's artificial intelligence aspirations.

A more appropriate approach for the U.S., however, would be controlled engagement with Chinese technology companies. The congressional commission's recommendations around enhanced internet of things security are useful starting points for creating a framework that ensures compliance and appropriate restrictions on the collection and dissemination of data gathered by all entities using such devices and systems.

It is impractical to cut off another country's telecommunications ecosystem from one's own given the complex, interwoven global supply chains which source materials, patents, talent and production capacity across many countries. The more a country hinders its companies and institutions from collaborating with others, the greater the chance that it will fall behind in its own national innovation efforts.

That will also make it harder to participate in the global standards development which increasingly defines telecommunications equipment production. Failing to participate in any generation of network development, particularly the transition to the internet of things-enabled future, will isolate left behind parties from any subsequent innovation and calcify the local industry.

Most of the world's telecoms networks contain Chinese-developed infrastructure. While this may mean all are exposed to an existential cybersecurity threat, carriers, governments and enterprises should have already created effective security systems to mitigate the threat or otherwise they may have already been compromised.

To realize this is not to be fatalistic or resigned to China's technological hegemony. By allowing Chinese companies to supply the systems and sensors that will populate its internet of things, under the auspices of a highly stringent and collaborative security environment, the U.S. can allow its companies a window to best practices and intellectual property that can be used to further their own technology direction. This would keep America's technology companies engaged and competitive.

A protracted technology trade war would permanently kill off such collaboration. In so doing, China will merely lose access to the U.S. market but the U.S. would easily lose access to the rest of the world.

Ross O'Brien is based in Hong Kong as a principal consultant with Ovum, an IT and telecom research company. He has previously acted as a consultant to Huawei.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more