China’s uphill battle to decouple with US tech

Nearly half of the microchips – tiny processors powering our smartphones, computers and TVs – are manufactured and sold globally by American firms such as Qualcomm and Intel, but China is now gearing up to take a bite out this market.

This October, China set up nearly $30 billion fund to invest in its semiconductor companies like the microchip manufacturer SMIC, indicating the country's willingness to escalate the tech war with the US.

SMIC is one of many little known Chinese tech companies that have seen their stocks rise in 2020, after the Trump administration announced a number of moves to effectively shut down Chinese tech giants out of the US market, including Huawei and TikTok.

Under Trump's leadership, Washington's attitude towards China – particularly when it comes to technology – is that the two countries need to separate. This separation process is called tech decoupling. 

Trump has repeatedly claimed that the US would not tolerate the "security risks posed by Chinese tech companies" such as Huawei – one of the largest telecommunications companies in the world that the US banned last year.

Huawei and the highly popular video sharing app TikTok have been accused of being potential tools for Chinese espionage, and labelled as security threats by the US. But both have firmly denied such allegations claiming that they operate independently from the Chinese government. 

A double-edged sword

As TikTok faces the prospect of being outright banned in the US, and Huawei is prevented from buying microchips from the US and other countries, investment from China has almost come to a halt – down by nearly 90% since Trump took office.

The restrictions startled a number of American companies, which have been lobbying vehemently against the changes. Huawei is a big client for US corporations such as Qualcomm and Intel.

Even the likes of Microsoft's Bill Gates and Alibaba's Jack Ma have said that the recent escalations are counterproductive for both sides. American companies supply a lot of parts to Huawei, and that might stop in the coming days, completely.

But the Trump administration's message to American and European companies is very clear – do not do business with China. 

China's response to the situation

Beijing recently announced it would no longer allow its own artificial intelligence tech – used mainly for facial recognition and data processing – to be exported without new licenses. It also stated its intention to launch its own new set of global data security rules. 

While Washington and Beijing are fighting on a number of fronts, from Hong Kong to Taiwan to South China Sea, tech has become a strategic priority.

China has had a long-standing desire to reduce its dependence on foreign microchip supply. However, it was really not until Trump's trade war that the Chinese leadership realised that they needed to act accordingly on the issue, and fast.

China launched its own version of the American stock exchange NASDAQ last year. Beijing named it the STAR Market, and the stocks are soaring. This phenomenon reflects how much investors think the companies can benefit from the country's quest for self-reliance.

Such a move also indicates China is prioritising its own companies, markets and consumers. 

Microchips are particularly important for China, as the country is the world's biggest consumer of them. China spends more on microchips than it does on oil, and imported $300 billion worth of chips last year.

Beijing has already begun to tout a number of successes. Its economy is forecasted to be the only major economy to grow this year, and that is benefitting its tech giants. Companies like the SMIC might be China's ace under the sleeve.

A complicated matter

Huawei – which is also a global champion in 5G technology – became the number one smartphone seller globally in July 2020, mostly thanks to its domestic market. However, ending its reliance on the US remains a complicated matter.

Back in 2019, Huawei announced that it could produce phones without US chips. But still those substitute parts are made using American technology. In the meantime, the US administration has moved closer to sealing the loophole.

If US regulations do not allow Huawei to buy key components made with US tech, the Chinese telecom giant might simply not be able to produce its hardware. Analysts estimate that Huawei stockpile of US components will only last one or two years.

This situation is an indication that despite heavy investment, Chinese chip companies such as the SMIC are still lagging behind. Although the Chinese manufacturer has accelerated the development of its own microchips, it still relies heavily on US technology.

When it comes to chip tech, China still has a large gap to fill. But time is running out as the US is also making moves. Legislation that could pump an additional $37 billion into American semiconductor manufacturing, research and development is making its way through the US senate.

Now that Joe Biden is set to take over the White House on January 20, we will have to wait and see how this change in the US administration shapes the tech landscape of tomorrow.