Technology crossroads: innovation in China’s telecommunications and high-performance computer sectors threatened by US stranglehold on semiconductors

ABSTRACT

Chinese companies in the computer and telecommunications sectors have been able to climb the value-added chain and become more innovative and globally competitive in part due to their ability to access global technology supply chains, many with a heavy US company presence. China’s globally active players in these sectors are reliant to some degree on US technology inputs that have now been put in jeopardy by the increasing willingness of the US government to target Chinese firms, and weaponize US company dominance of key supply chains such as software, semiconductors, and semiconductor manufacturing equipment. This paper examines prospects for Chinese companies to continue to innovate and compete globally in the computer and telecommunications sectors given the worsening geopolitical tensions centering on the technology sector.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. For broader view of the drivers of US China decoupling in telecommunications sector, see: Triolo, Paul. The Telecommunications Industry in US-China Context: Evolving Toward Near-Complete Bifurcation. Johns Hopkins, APL. October 2020. https://www.jhuapl.edu/assessing-us-china-technology-connections/publications

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4. Remarks by National Security Advisor Jake Sullivan on the Biden-⁠Harris Administration’s National Security Strategy. October 12. https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/10/13/remarks-by-national-security-advisor-jake-sullivan-on-the-biden-harris-administrations-national-security-strategy/

5. Remarks by National Security Advisor Jake Sullivan at the Special Competitive Studies Project Global Emerging Technologies Summit. September 16, 2022. https://www.whitehouse.gov/briefing-room/speeches-remarks/2022/09/16/remarks-by-national-security-advisor-jake-sullivan-at-the-special-competitive-studies-project-global-emerging-technologies-summit/

6. Lynch, David and Nakashima, Ellen. Economic ties with China take a backseat to national security. Washington Post. October 29, 2022. https://www.washingtonpost.com/us-policy/2022/10/29/china-us-trade-economy-national-security/

7. For more detail on the industry, see Triolo, Paul, and Allison, Kevin. The Geopolitics of Semiconductors. Eurasia Group. September 2020. https://www.eurasiagroup.net/live-post/geopolitics-semiconductors

8. See Addition of Entities to Entity List. 21 May 2019. Federal Register. https://www.federalregister.gov/documents/2019/05/21/2019–10616/addition-of-entities-to-the-entity-list

⁹. ZTE, originally added to the Entity List in 2016, negotiated an agreement in 2016 to accept a fine and disciplining of key executives. In 2018, Trump Commerce Secretary Wilbur Ross determined that ZTE was not complying with the agreement, and put the firm back on the list, denying all export license requests. This put the firm, heavily reliant on US semiconductor and other component suppliers in crisis, and it was soon headed for collapse. In June of 2018, Presidents Trump and Xi agreed to a process to remove ZTE from the list again, in exchange for further fines and agreeing to an intrusive monitoring regime. See, Swanson, Anna. Trump Strikes Deal to Save China’s ZTE as North Korea Meeting Looms, 7 June 2018. https://www.nytimes.com/2018/06/07/business/us-china-zte-deal.html

¹⁰. For more on US government actions against ZTE, see Triolo, Paul. The Telecommunications Industry in US-China Context: Evolving Toward Near-Complete Bifurcation. Johns Hopkins, APL. October 2020. https://www.jhuapl.edu/assessing-us-china-technology-connections/publications

¹¹. See Department of Commerce, Bureau of Industry and Security, Addition of Huawei Non-U.S. Affiliates.

to the Entity List, the Removal of Temporary General License, and Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule). 20 August 2020. https://www.bis.doc.gov/index.php/documents/regulations-docs/federal-register-notices/federal-register-2020/2593–85-fr-51596/file

¹². See Deng, Iris. Huawei sees 29% drop in 2021 sales.

¹³. See Doug Fuller, Cutting off our nose to Spite Our Face. Johns Hopkins, APL, October 2020. https://www.jhuapl.edu/assessing-us-china-technology-connections/publications

¹⁴. See Kevin Wolf, Testimony before the U.S.-China Economic and Security Review Commission Hearing on “U.S.-China Relations in 2021: Emerging Risks” Panel III: “Assessing Export Controls and Foreign Investment Review.” 8 September 2021. https://www.uscc.gov/sites/default/files/2021–08/Kevin_Wolf_Testimony.pdf

¹⁵. See FCC. FCC Designates Huawei and ZTE as National Security Threats. 30 June 2020. https://www.fcc.gov/document/fcc-designates-huawei-and-zte-national-security-threats

¹⁶. See Shepardson, David. U.S. Commerce chief: more action to be taken on Huawei if needed. 23 September 2021. https://www.reuters.com/business/us-commerce-chief-says-further-action-will-be-taken-huawei-if-necessary-2021-09-23/

¹⁷. See Dan Strumpf. Xiaomi Wins Court Ruling Halting U.S. Investment Ban. 12 March 2021. https://www.wsj.com/articles/xiaomi-wins-court-ruling-halting-u-s-investment-ban-11615604756

¹⁸. See Friedman, Allen, Trump administration convinced the Dutch not to ship advanced chip-making equipment to China.

¹⁹. See O’Keefe, Kate. U.S. to Bar Investment in Chinese AI Giant, Considers Banning Key Exports to Top Chip Maker.

²⁰. See St Leger, Henry. New Huawei phones launch without 5 G, as company blames US sanctions. 9 August 2021. https://www.techradar.com/news/new-huawei-phones-fall-foul-to-us-sanctions-as-they-ship-without-5g

²¹. Cotton, Van Hollen, Colleagues Introduce Bill to Cut Huawei and Chinese 5 G Companies off from U.S. Banks. December 13, 2022. https://www.cotton.senate.gov/news/press-releases/cotton-van-hollen-colleagues-introduce-bill-to-cut-huawei-and-chinese-5g-companies-off-from-us-banks

²². See for example. Kawaesem, Kenji. Chinese telecom operators cut back 5 G network construction. 19 August 2021. https://asia.nikkei.com/Spotlight/5G-networks/Chinese-telecom-operators-cut-back-5G-network-construction

²³. See Clark, Robert. China sidelines foreign vendors in giant 5 G tenders.

²⁴. For more on China’s semiconductor industry development, see Triolo, The Future of China’s Semiconductor Industry.

²⁵. For a detailed look at this process in all its dimensions, see Triolo, The Telecommunications Industry in US-China Context.

²⁶. Determining what patents are essential and who holds them is a notoriously complex task. For Huawei’s position, for example, see Pohlman, Tim, et al. Who leads the 5 G patent race November 2021?.

²⁷. See Triolo. The Telecommunications Industry in US-China Context.

²⁸. For more on this, see Triolo, The Telecommunications Industry in US-China Context.

²⁹. See Hemsoth, Nicole. China Has Already Reached Exascale – On Two Separate Systems.

³⁰. See Federal Register. Addition of Entities to the Entity List and Revision of an Entry on the Entity List.

³¹. See Li, Tao, et al. China “has decided not to fan the flames on supercomputing rivalry” amid US tensions.

³². See Hemsoth, Nicole. China Has Already Reached Exascale – On Two Separate Systems.

³³. Reported in detail in Nakashima, Ellen et al. China builds advanced weapons systems using American chip technology.

³⁴. See Addition of Entities to the Entity List. 8 April 2021. https://public-inspection.federalregister.gov/2021–07400.pdf

³⁵. See McCaul, Michael, et al. Letter to Commerce Secretary Gina Raimondo on Export Controls.

³⁶. See Cheng, Tingfang, and Li, Laul. Taiwan chip maker halts business with US-blacklisted Phytium. 13 April 2021. https://asia.nikkei.com/Business/Tech/Semiconductors/Taiwan-chip-maker-halts-business-with-US-blacklisted-Phytium

³⁷. See for example, Sanger, David, et al. China’s Weapon Tests Close to a “Sputnik Moment,” U.S. General Says.

³⁸. First alleged in Nakashima, Ellen et al. China builds advanced weapons systems using American chip technology.

³⁹. Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modification. October 13, 2022. https://www.federalregister.gov/documents/2022/10/13/2022–21658/implementation-of-additional-export-controls-certain-advanced-computing-and-semiconductor

⁴⁰. Ibid.

⁴¹. Anton Shilov. China’s Access to Arm’s Advanced Chip Designs Limited by U.S. Export Controls. December 16, 2022. https://www.tomshardware.com/news/china-access-to-arm-advanced-chip-designes-limited-by-export-controls.

⁴². See for example, Mann, Tobias. Is RISC-V China’s Semiconductor Salvation? SDX Central. 6 March 2021. https://www.sdxcentral.com/articles/news/is-risc-v-chinas-semiconductor-salvation/2021/03/

⁴³. See Triolo, Alibaba’s silicon chip in the age of hypersonic missiles.

⁴⁴. Triolo, Schaeffer. New U.S chip rules could be very bad, for American and Chinese firms. October 5, 2022. https://thechinaproject.com/2022/10/05/new-u-s-chip-rules-could-be-very-bad-for-american-and-chinese-firms/

⁴⁵. For more on the memory issues and the 7 October controls, see: Triolo, Paul. Memory test: The U.S.-China chip war escalates. The China Project, November 11, 2022. https://thechinaproject.com/2022/11/11/memory-test-the-u-s-china-chip-war-escalates/

⁴⁶. Discussions with industry, and senior South Korean and Japanese government officials, January-June 2023.

⁴⁷. For more detail, please see: Triolo, Paul. The Future of China’s Semiconductor Industry. American Affairs Journal, Spring 2021 edition. https://americanaffairsjournal.org/2021/02/the-future-of-chinas-semiconductor-industry/

⁴⁸. See Lee, John, and Kleinhans, Jan-Peter, Mapping China’s Place in the Global Semiconductor Industry. The Diplomat. 7 September 2021. https://thediplomat.com/2021/09/mapping-chinas-place-in-the-global-semiconductor-industry/

⁴⁹. See for example, Segal, Adam. China’s Move to Greater Self Reliance.

⁵⁰. See for example, Che, Pan. US-China tech war: SMIC secures supply of chip-making equipment from ASML as signs suggest easing of sanctions.

⁵¹. See for example, Reuters, US-China tech war clouds SK Hynix’s plans to upgrade memory chip plant in Wuxi.

⁵². Triolo. Memory test: The U.S.-China chip war escalates. November 11, 2022. https://thechinaproject.com/2022/11/11/memory-test-the-u-s-china-chip-war-escalates/

⁵³. Goujon, Reva, Dudley,Lauren, Kleinhans Jan-Peter, and Kratz, Agatha. Freeze-in-Place: The Impact of US Tech Controls on China.

⁵⁴. Discussions with a number of companies in the semiconductor industry, November and December 2022.

⁵⁵. See for example, Ernst, Dieter. Competing in Artificial Intelligence Chips.

⁵⁶. See McCaul, Michael, et al. Letter to Commerce Secretary Gina Raimondo on Export Controls.

⁵⁷. See G7 Leaders’ Statement on Economic Resilience and Economic Security. May 20, 2023. The White House. https://www.whitehouse.gov/briefing-room/statements-releases/2023/05/20/g7-leaders-statement-on-economic-resilience-and-economic-security

⁵⁸. See U.S.-EU Joint Statement of the Trade and Technology Council. May 31, 2023. The White House. https://www.whitehouse.gov/briefing-room/statements-releases/2023/05/31/u-s-eu-joint-statement-of-the-trade-and-technology-council-2/

⁵⁹. Remarks by a former senior official with the Commerce Department’s Bureau of Industry and Security (BIS) at a DC-based think tank conference, June 2023.

⁶⁰. Triolo. The U.S. deals another blow to China’s chip industry and Beijing reacts with a trillion yuan plan. December 22, 2022. https://thechinaproject.com/2022/12/22/a-trillion-yuan-incentive-china-bolsters-its-semiconductor-sector/

⁶¹. See for example, Allen, Greg. Choking off China’s Access to the Future of AI. October 11, 2022, https://www.csis.org/analysis/choking-chinas-access-future-ai

⁶². See Triolo, Paul. ChatGPT and China: How to think about Large Language Models and the generative AI race. The China Project. April 12, 2023. https://thechinaproject.com/2023/04/12/chatgpt-and-china-how-to-think-about-large-language-models-and-the-generative-ai-race/

⁶³. See for example, Triolo, Paul. A Holistic Approach to the Semiconductor Challenge with China, and Fuller, Doug. Cutting off our nose to Spite Our Face, and China’s Counter-Strategy to American Export Controls in Integrated Circuits.

⁶⁴. See Varas, Antonio, Varadarajan, Raj, Palma, Ramiro, Goodrich, Jimmy, and Yinug, Falan. Strengthening the Global Semiconductor Supply Chain in an Uncertain Era.

⁶⁵. See for example Varas, Antonio, and Varadarajan, Raj. How Restrictions to Trade with China Could End US Leadership in Semiconductors.

⁶⁶. See Donahue, Thomas. “The Worst Possible Day: U.S. Telecommunications and Huawei.

⁶⁷. See for example, NCSC, Summary of NCSC’s Security Analysis for the UK Telecoms Sector.

Additional information

Notes on contributors

Paul Triolo

Paul Triolo is Senior Vice President for China and Technology Policy Lead at ASG. He advises clients in technology, financial services, and other sectors as they navigate complex political and regulatory matters in China and around the world. He is also a senior associate with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies. Mr. Triolo is frequently quoted on technology policy issues in media outlets including The New York Times, The Wall Street Journal, The Economist, the South China Morning Post, and others. He speaks regularly at conferences and has authored many journal articles and book chapters on global technology policy and China-related issues.