China bracing for US tech war with plan to cut reliance on imports of key components to just 25 per cent

Amanda Lee

China is aiming to increase its reliance on domestic production for key components, including chips and controlling systems, to 75 per cent by 2025, according to a former minister.

The target reflects Beijing’s determination to reduce its dependence on imports by expanding its national manufacturing innovation centres to 40 from the 15 at the end of 2019.

Domestic production can currently only provide around a third of the key components required by China, but Li Yizhong, the former industry and information technology minister, said this week that the level would be lifted to 40 per cent by 2020 and 75 per cent by 2025.

The move, which includes a series of plans to improve weak links in the areas of hi-tech research and crucial component development “one by one”, is seen as part of China’s preparation for a intensifying technology war with the United States.

China spent about US$320 billion to import integrated circuit products in 2018, which was more than the US$240 billion on crude oil imports that year

Li Yizhong

“One problem now is that China lacks 80 kinds of core parts and components. In addition, China still lacks 20 key technical materials and 30 advanced technology processes,” said Li, who is now the head of the China Society of Industrial Economics, a government-affiliated organisation, according to Sina.com.

“China spent about US$320 billion to import integrated circuit products in 2018, which was more than the US$240 billion on crude oil imports that year.”

As part of the plan, China is looking into setting up a national “industrial fundamental academy”, according to Li.

China will also increase the number of “national manufacturing innovation centres” to 40 by 2025 from 11 at the end of 2019 “to cover all major industries”. China’s first national manufacturing innovation centre was launched in 2016, focusing on making and researching electric vehicle batteries.

Li added that the new national plan has borrowed many goals and strategies set out by the Ministry of Finance and the Ministry of Industry and Information Technology under the “Made in China 2025” plan. 

Made in China 2025 was China’s plan to upgrade its hi-tech industries and lessen its dependency on imports, although this has been downplayed due to pressure from its key trading partners, including the US and the European Union.

The US argued that the plan’s ambitious targets relied mostly on government subsidies and forced technology transfers at the expense of American companies.

While China’s industrial policy has often been criticised as ineffective, leading to excess capacity in recent years, there is growing evidence that the top down approach has made a difference when it comes to boosting innovation in some sectors in which it has made significant investment.

China already has a major PC maker, Lenovo, whereas aviation is a much more complex business. So it's a bit more plausible that China can replace certain US technologies in this field

Dan Wang

Dan Wang, a technology analyst at Gavekal Dragonomics in Beijing, said that in fields such as computing where China already has a significant presence, the chance of taking on US technology is much higher.

“China already has a major PC maker, Lenovo, whereas aviation is a much more complex business. So it's a bit more plausible that China can replace certain US technologies in this field,” said Wang.

It is increasingly clear that a technology rivalry between China and US is set to deepen even though the two countries are set to sign a phase one trade deal on Wednesday, with competition in next generation communication, 5G and artificial intelligence key areas of contention.

The US has significantly enhanced the exports controls covering hi-tech good sent to China, while also curbing the exchange of scientific research between the two countries and also targeting Chinese telecommunications equipment maker Huawei.

Washington’s increased restrictions over advanced technologies exported to China has made Beijing deeply uncomfortable over its reliance on foreign suppliers, a situation President Xi Jinping described as “the neck being put into other people’s hands”.

There are, though, challenges to achieving the levels mentioned by Li due to China’s slowing industrial profits, overall efficiency remaining weak and productivity that is still much lower than the US.

“The profit margin of the main businesses of Chinese industrial enterprises was 6.49 per cent in 2018. It might have fallen last year. For various reasons, this figure is not available. I estimate it might have been fallen to 5.9 per cent, while US’s has been 8.5 per cent in the past few years.”

The US is also preparing for the rivalry after a group of senators, including Senate Intelligence Committee chairman Richard Burr and ranking member Mark Warner, on Tuesday introduced legislation to help create alternatives to Huawei in 5G wireless technology by requiring the Federal Communications Commission to set aside US$750 million for a research and development fund.

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