With Tencent (700) and Alibaba now the fifth and seventh most valuable listed company in the world, and Huawei and ZTE (00763.HK) occupying the top and fourth position among global telecommunications equipment makers, China seems to have every reason to be proud of its technology industry.
China also boasts an army of super-unicorns such as Xiaomi, drone-maker DJI and taxi-hailing app DiDi.
Sadly, the US export ban on ZTE has exposed China’s weakest link: it relies heavily on an external supply of chips, the heart of soul of advanced technology.
Be they high-speed trains, base stations of mobile phone carriers, or the latest handsets made in China, the chips inside them all come from outside the country.
Last year, China imported US$260 billion worth of chips, making them the nation’s largest imports. The amount is more than double the money the nation spent on oil imports.
For sure, there are Chinese chipmakers, but they can only churn out low-end products, and they lag far behind their western counterparts.
The Netherlands’ ASML is the top chip-making equipment supplier. Buyers of its extreme ultraviolet lithography (EUV) machines include Samsung, Intel and TSMC.
He Rongming, a chip scientist and chairman of Shanghai Micro Electronics Equipment Co., once admitted that “we can’t make those machines even if they offer us all the design blueprints”.
Even the United States, Europe or Japan cannot master all the core technologies of chipmaking on their own, let alone China.
Huawei’s founder, Ren Zhengfei, has long been aware of the risk of relying too much on trade partners for chip technology and decided to invest in the field more than a decade ago. Yet his company’s efforts in this regard have yielded limited results so far.
This underscores the huge technology gap between China and the Western world, and the fact that one company alone cannot get the job done.
China has been quite successful in applying technology to develop profitable businesses, but in terms of core technology strength, true innovation has been few and far between.
Top hardware makers still draw most of their revenue from contract manufacturing or systems integration, or basically putting together high-tech components sourced from the West.
The US export ban on ZTE is a wake-up call for China. It’s time for the nation to devote more resources to building up its own capability in fundamental research, even though the process may easily take years without providing instant rewards.
Otherwise, China’s tech sector will always be built on shifting sands rather than on a rock solid base.
This article appeared in the Hong Kong Economic Journal on April 23
Translation by Julie Zhu
[Chinese version 中文版]
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