New US restrictions will help make China great again

Huawei’s been eagerly recruiting scientists and researchers. Photographer: Qilai Shen/Bloomberg

The US launched yet another broadside at China's technological ambitions this week by blacklisting more than 60 Chinese companies including Semiconductor Manufacturing International Corp., China's leading chipmaker. While the action will be painful, over the longer term it could be a shot in the arm. 

Over the past two years, President Xi Jinping has increasingly stressed the need for China to develop "secure and controllable" supply chains for key technologies. That's easier said than done. The track record of Chinese industrial policy is mixed at best. The government has spent hundreds of billions of dollars on subsidies in recent decades and failed to achieve technological leadership in most industries.

The regime's efforts have failed not just because governments are bad at picking winners. Chinese officials have also relied mostly on government ministries and state-owned enterprises to create a market for homegrown technology. Those players have focused more on meeting political objectives than demanding quality. While the strategy has achieved some success in sectors such as solar panels and high-speed rail, it's produced lackluster results in far bigger industries such as semiconductors and wide-body jets.

China's most dynamic companies aren't the roughly 100 central state-owned enterprises but the broader mass of private firms, which account for the bulk of R&D spending. Companies such as Alibaba Group Holding Ltd., Huawei Technologies Co. and Tencent Holdings Ltd. have generally resisted government pressure to buy domestic, arguing that they need to use the best components on the market if they want to produce globe-conquering products. Other than its processor, for instance, a Huawei phone uses around the same amount of Chinese hardware as the iPhone.

Under the Trump administration, these big companies have become targets. The US government has sought to block Tencent's WeChat service in the US and force the sale of Bytedance Ltd.'s TikTok. In addition to the new curbs on SMIC, the US has slapped export controls on Huawei that have cut off the company's access to almost all advanced semiconductors, threatening its survival.

Many more Chinese companies are now wondering if they too could end up on some poorly understood US blacklist. It's not hard to find executives in Beijing who say they're eager to buy local (or at least non-American) for the first time, as well as American companies that report having to answer uncomfortable questions about whether they can still be credible suppliers. That's suddenly provided the government with new allies in its campaign to achieve self-sufficiency and technological greatness.

This new demand from China's most sophisticated companies could make a huge difference. Local vendors that previously had little opportunity to work with big-name Chinese firms suddenly find themselves with cash-rich new customers, who are willing to pay whatever it'll take to keep their businesses afloat and at the cutting edge of technology.

China's tech giants could thus drive a broader wave of innovation, much as the US defense sector did for Silicon Valley in the 1960s. To fulfill President John F. Kennedy's 1961 pledge to put a man on the moon, the US government bought up semiconductors on the basis of performance, not cost. Companies such as Huawei have similarly high standards, money to spend and technological expertise of their own to bring to the table. Over time, and with continued government support, that should raise the capabilities of Chinese chipmakers and other suppliers exponentially.

It's possible that US sanctions could hobble companies such as SMIC and Huawei before they can measurably improve the quality of local suppliers. But technology lives in people's heads and China's tech champions have been eagerly recruiting engineers, scientists and academics; those employees will inevitably find new homes or start companies of their own. There are no instances in history of a country monopolizing key technologies forever and, given how large the Chinese market is today, big holes of demand won't stay unfilled for long.  

Meanwhile, the Trump administration's attempts to crush China's tech companies are also damaging the bottom lines of their US suppliers. The incoming Biden administration would be better off pouring its efforts into extending the advantages that made the US technology sector the world's leader to begin with — welcoming more immigrants, investing more in basic research and working with industry to cultivate emerging technologies. China can now count on a whole-of-society effort to expand its technological prowess. The US needs one of its own.

Dan Wang is the Beijing-based technology analyst at Gavekal Dragonomics.

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.