China's tech landscape
Rui Ma, Rogier Creemers and John Lee joined the China Research Group to discuss China’s fast-evolving tech landscape. From regulatory changes to semiconductors, they looked at everything from the strategic direction being set by China’s government to the market realities driving change in the semiconductor and AI industry.
You can find the recording here.
Tom Tugendhat
Hello, welcome to this afternoon's session of the China Research Group. We’re very lucky to have three fantastic people with us this afternoon who are going to help us understand China's tech landscape. Now, this is clearly one of those issues that could go into many different directions. And I hope very much that it will. So please join me in helping our speakers this afternoon know exactly where you want to go. So they're going to introduce themselves, obviously, and introduce their ideas and their fields. But as soon as they've done that, please do remember, we will be opening up for questions. And I'd look forward very much to having this directed in various different ways. So look, without further ado, I was going to ask Rui Ma - why don't you introduce yourself, and then I'll go to John, and then I'll go to the Rogier. Oh, sure.
Rui Ma
Hi, everyone. My name is Rui. I am based in San Francisco, California right now. But I've spent at least a decade I guess, in China tech. Eight of those years were on the ground of working in China and a variety of investment advisory roles. And right now I run a media company called Tech Buzz China or a media and consulting company called Tech Buzz China, where we produce content and then also make investments in in China tech, so very pleased to be here today.
John Lee
Good afternoon, everyone. Well, morning is may be the case. My name is John and I run East-West Futures consulting and previously I was a senior analyst with the Mercator Institute for China Studies in Berlin. And before that, an officer with the Australian Department of Foreign Affairs and Trade and Department of Defense previously. My focus areas cover a wide sweep of China's digital tech, but in particular, semiconductors, data regulation, cyberspace, governance, and next generation telecoms, 5G and 6G.
Rogier Creemers
Hello, everyone, I'm Rogier Creemers. I'm an Assistant Professor of the law and governance of China at Leiden University in the Netherlands, previously a lecturer at the Oxford University China Centre. And I'm mostly working on the law and policy of China's digital world, both at home and abroad. In other words, how's China expanding its global digital footprint. I'm also a co-founder of the DigiChina project, which we're doing together with Stanford University, and project leader on two major funded projects won by the Dutch National Research Council and won by the Dutch Ministry of Foreign Affairs working on both domestic and international Chinese digital policy. And I'm very grateful for the Dutch because in fact, I'm Belgian.
Tom Tugendhat
It's extremely good to have such a multinational panel, one of the reasons we got you together was because we knew you could address various areas. One of the things that has come out in the last year is the fact that 2021 has been a pretty extraordinary year for China tech. And here I'm thinking of everything from Tencent and Alibaba's crackdowns, if you will. And even various things like ride hailing app Didi not listing in the end on the New York Exchange. How have you seen 2021? How do you see that landscape going forward? What does this mean, actually, for the Chinese tech industries? Rui, why don't you kick us off?
Rui Ma
Oh, sure. So I think, number one, that you're very correct in identifying that 2021 was a pivotal year in terms of regulations. I think the right way to think about it is, you know, the word crackdown has been thrown around a lot. I personally also use it just because the media has made it extremely popular, so everyone knows what you're talking about. But maybe a more appropriate term is really rectification because a good number of the policies that you see that have come out, are really addressing the fact that the internet industry, in particular was relatively unregulated, previous to this. And part of it was because there is hesitancy about - or there was grey areas - about regulating entities that were effectively you know, these variable interest entities actually incorporated abroad. So there was just all these grey areas where it wasn't really sure which ministries were going to step in and who's really going to be responsible.
But there was also the fact that you know, sometimes regulators are a little slow so the internet industry was growing extremely fast and China was starting to take care of other other things in its economy before directing attention to these large internet platforms. So a lot of the things that you see are actually sort of a rectification, so meaning a catch up to developed country standards. In fact, what the things that Alibaba in particular, and Meituan for example, got fined for would not be legal here in the US and would have been stopped a long time ago.
The second part is, I think a good point I want to emphasise is that I think these policies, now largely that, you know, sort of surface level rectifications have occurred, you're going to see China take a stance about being more proactive and regulating emerging technologies. And that is going to be - that's something I'm watching very, with great interest, because these are things like AI governance, you know, things that, you know, developed countries haven't quite pushed out yet that China wants to get ahead of and actually be world leading on the regulation front. I'm not saying they're necessarily tired of following developed country standards. But there is definitely the sense that, especially for certain technologies, where the penetration is very high in China, there is this need not to let it get to the point, right, where the internet platforms are, where it was so pervasive, and yet the problem so severe that any action you do really spooks the market, and you know, it's seen as very severe. So instead, they want to take a more guided approach to some of these new emerging technologies.
“[Now that] surface level rectifications have occurred, you’re going to see China take a stance about being more proactive and regulating emerging technologies.”
Tom Tugendhat
Look, that raises a whole load of other areas that we can go into from here, John. Perhaps you'd like to pick up on that - and one of the questions I am curious about is what does this mean for the forthcoming development of technology in China, because there are certain individuals who I've been speaking to in recent months, who've been looking at what happened to Jack Ma, and people like that, and wonder whether the correct thing to do isn't to keep your head down a bit more and to aim for the middle rather than the top? Are you seeing that as a danger for the Chinese tech sector?
John Lee
So when it comes to the ins and outs of the regulation and the private internet platform companies, I will defer to Rui and Rogier. Perhaps we'll focus more on the other elements of your question, Tom, regarding what are the strategic priorities. And here, at one level, it's quite explicit - the 14th Five Year Plan, for example, the seven frontier technology categories, and also has a list of priority applications. But if we really want to zoom out and take a macro lens, I would say yes, we are reaching many milestones, we are seeing a maturation of the regulatory regimes and so on. But there is also a great deal of continuity. And of course, China has a very deep seated technonationalist culture, which you can trace all the way back to the Maoist strategic defense projects. For example, in the 1950s and 60s, where as long as the Communist Party has ruled the country, there has always been a priority given to developing technologies which are seen as critical to China's international power.
What you have today, which is different from the world of the most defence projects is a globalised economy, and transnational supply chains, which of course, we're all familiar with now in the context of the semiconductor shortage as an example. But perhaps, can I briefly offer and I would like to leave as much time for Q&A as possible, so we can get into particular things like semiconductors, and the digital Silk Road, and so on then, but three frames for thinking about strategic competition with China in advanced tech.
The first is that China is not aiming for self-sufficiency in critical technologies. I think that it's important to stress this given how much attention is given to talk about self-reliance and import substitution, as far as we can tell the Chinese leadership and this includes the captains of industry and people throughout the bureaucracy, not just at the top understands that China cannot go it alone. And it doesn't matter which technology stack you're talking about. They are more self-reliant in some things than others. But there was a clear understanding that China has benefitted enormously from being part of an interconnected global economy, that many of these technological ecosystems are fundamentally transnational, that you can't untangle the Gordian knot. And so all of their plans are based on this reality. And what you have instead is Xi Jinping, for example, talking about pulling tight international supply chains to China. But the understanding is clearly that the party will achieve its goals and the goals it sets for China in a connected transnational context.
The second frame I would offer for our listeners is this is a reactive dynamic where we talk about technology competition. Everyone's familiar with the concept of weaponised interdependence by this point, but the academics who popularised that phrase are the first to point out, as they did in the original argument that the more you weaponise it, the more the other side finds ways around it. And I think that you have seen this play out in the context of, for example, semiconductor sector, the export control measures taken against Huawei. What we do does affect what the Chinese do.
And I think it's important at a time when there's an increasing focus on the political framework on the nature of the Chinese Communist Party and what this means for decision making by Western policymakers, that it is not true that what we do does not affect the other side's calculations and decisions made with respect to cooperation among like-minded partners, the institution of export controls, and so on do shape the direction that Chinese policy takes. I'm happy to go into more detail in the Q&A.
The final frame before I head to Rogier, is to remind everyone that this is not just the case of the West versus China. And again, an informed audience will no doubt have heard of the phrase the next billion users who are coming on to the internet and using these digital technologies. In Southeast Asia alone, I believe the estimate is 40 million people with access to the internet for the first time, just during 2021. Increasingly, the developing world will be not just the market, but the development ground for the implementation in particular of many of these new technologies. And so they will be a critical part of whatever emerging technological landscape or spheres of influence some come to pass. And this is something that as there is increasing focus on cooperation among like-minded partners, policymakers in the Western economies, in advanced partners like South Korea and Japan really need to bear in mind. But there I will wrap up and pass on to Rogier.
Tom Tugendhat
Rogier, over to you. I mean, there's there are so many areas that we can talk about here. I'm very interested in your views, not just on China, but how you see the European Union's regulation, also feeding into this growing balance between if you like the United States of Europe, and China, perhaps you'd like to pick up some of that, and then we'll then we'll be looking at questions.
Rogier Creemers
And thank you very much, Tom. Well, there's actually a very interesting overlap between some of the things that the EU was doing and some of the things that China is doing. And if we can sort of systematise what's been going on since late 2020, I really think we can sort of break down the Chinese motivations to regulate the tech sector in the way that it has. And this is primarily regulating the online platform sectors, right? Large swathes of the digital economy have been left relatively or completely untouched.
And first categories, things that the Chinese government was going to do anyway, it's just, you know, idiosyncrasies of the system, you know, 20th Party Congress is coming, there's going to be a greater crackdown on content, including the infamous 'sissy boys' regulation. So that's not really new.
The second thing is managing macroeconomic risk. And this is primarily what we see in the FinTech sector, where with the emergence of particularly the Ant financial group, you essentially have the creation of under regulated or unregulated monopolies or oligopolies in a sector that if left uncontrolled, could actually lead to significant volatility at the macro economic level, and one of the things that China really really wants to avoid is a 2008-style meltdown. So what it really wants is to keep capital creation under control and keep the financial industry in what it sees as its proper place, which is, forgive the term, handmaiden to the real economy and not as much a locus for capital accumulation in its own right.
The third is EU style market regulation. And this is really about rebalancing the relationship between large platform companies on the one hand, and users or on-platform operators on the other. And this is something that you can see, for instance, where it comes in personal data protection, but also in some of the new forms of competition regulations, which for instance, obliged on-platform operators to pick only one platform on which they could operate, which meant that they couldn't, that competition between platforms such as Alibaba and Tencent, for instance, would be minimized. And particularly that aspect comes very close to a bunch of things that the European Union is doing, or has been doing with the GDPR. The new deal for consumer protection and the digital markets and services acts which are working their way through Brussels as we speak.
The fourth category is achieving China's development objectives. So a lot of this is about pushing companies to invest in those areas where the Chinese government wants to wants them to invest In. And so a lot of data security regulation, for instance, requires data audits and cybersecurity inspections, which will create a market for the Chinese cybersecurity industry, and will cause that industry to grow, or at least hopefully, in the eyes of Beijing.
The fifth category is fighting enemies at home and abroad. And this is where a lot of the data security interests come in. And particularly looking at things like a lot of export bans on data, and also limiting foreign influence in the digital sphere, for instance, limitation on foreign ownership of companies that have a that have a large amount of personal data on Chinese citizens.
And the last category is what I would call emerging social concerns and Chinese politics. And this is where it gets really interesting. So a lot of regulations were about things like labor standards, on the one hand, you know, the the 996 working culture, which is 12 working hours a day, six days a week that we see with software engineers, but also at the lower end of the socio-economic scale. So a lot of algorithmic regulation was about working conditions for gig economy workers. The whole notion of the the, and here, I do think we can use the word crack down, I'm with Rui that most of it isn't - it's rectification.
But in educational technology, we can talk about a crackdown, where the Chinese government essentially decided to destroy billions of dollars in market cap, in order to send a very clear signal that they are taking seriously the concerns of Chinese parents who are having a difficult time. And this really ties into I think, an evolution that we're under-estimating in the West. And that is the shift in approach of the Chinese government, which in ideological terms we call the 'new era'. But it's going to have very significant repercussions in policy terms, because what the new era means is that the focus on GDP growth at nearly every nearly all costs that we've seen in the 80s, 90s and 2000s, is increasingly going to be replaced by a much more composite picture where GDP growth is not unimportant, but it is not no longer going to be a trump card that overrules everything else.
So there is going to be an approach that Xi Jinping, if you were to ask him, would probably call more balanced. But certainly that is going to take into account other aspects of socio-economic welfare, obviously, as defined by the Chinese Communist Party. And this is not just important, just for the fate of companies in the digital economy, but also for a broader discussions about legitimacy in the position of the Communist Party of China. Because for decades, we've said, you know, what's going to happen when Chinese growth slows down? Will it be able to maintain its hold on power? Will it be able to maintain its legitimacy? Well, actually, one way of looking at this: is the current Chinese leadership, proactively changing the terms of that debate and putting forward new basis for legitimacy, which are not just based on prosperity as measured by GDP, but by other elements of experienced living standards. Thank you for that. It's wonderful being in this in this in this lovely company. And that's one of the benefits on doing these things on Zoom. And I look forward to your questions.
Tom Tugendhat
Thank you very much. Indeed, I've just got to just going to continue with that theme of my man, Rui, forgive me, I'm going to I'm going to throw it at you. Because what I think Roger has just been talking about really is what has been come to be known as common prosperity. And I was just wondering if you could tell me a little bit about how you see the the way in which civil society and tech firms have responded to this, or just, you know, adjusted to these these crackdowns and how they are engaging with the so called common prosperity narrative.
Rui Ma
Oh, yeah, sure. I think, you know, even with common prosperity, it was actually first used, you know, not not just in the past year, a couple years ago, and has now been made into the core goal for the Communist Party for Chinese society in the next, you know, several decades. The initial reaction by Chinese society was also confusing, so that they were also confused, so much so that, you know, ex-government officials and academics had to come out and make all these videos and say, hey, guys, a common prosperity does not mean in fact that we want everyone to be the same. You know, we're not going back to communism, but we actually just want to pull up the floor right? We want to make those who are not enjoying the benefits of economic development as much as some of the other people in society, we want to make sure that they do enjoy the benefits.
And this is very evident, if you if you just look at China's economy on a macro level, even though you know, the national GDP growth is very impressive over the past four decades, but in fact, there's a pretty significant lag between inland areas and China in the coastal areas. And when you of course compound, let's say, you know, 30% in the coastal areas versus 9%, in the inland areas, over many decades that you actually have a very significant disparity. So people then started responding to it and saying, yes, that is actually what we feel in our lives, right. So if I'm living in a non, let's call it first or second tier city, I watched TV and I watch these people's lives, I actually can't identify. Right, it is it is not the world that I'm living in. And it is not the everyday stresses that I have to worry about.
So I think overall, you see that, that the civil society has responded quite favourably, after of course, it was explained. I think that the companies are also seeing this as a necessary adjustment, so that they can find the next stage of growth, right. So especially for the Internet companies, which is actually what I primarily focus on - these digital platforms. You've already seen that in China, it's already tapped out in terms of users. Right, so some billion people online now, penetration of, you know, e-commerce is 30 40%. Your mobile payments is close to 100%. So what you're seeing is that the platform's also realise common prosperity will help them. Like if the country is able to implement this, well, that will also help them find the next generation, the next hundreds of millions of middle class users, which don't exist right now. Right, China has a relatively has a large middle class when we look at the absolute numbers, but in terms of actual spending power, it could be a lot greater.
So I would say the platforms are also largely bought in. There is one little wrinkle, which is that common prosperity, also means the three levels to wealth distribution embedded in common prosperity - on the business level, personal level (and so paying your taxes and, you know, doing all the right things). And now on the third level, it's actually about philanthropy. So we did see that some internet platforms took that to mean, giving money and engaging all these philanthropic projects, and investors responded a little bit by freaking out and saying, is this sort of a tax by the government? I think it's pretty obvious that it isn't. So number one, a lot of these, you know, philanthropic projects are actually investment projects that are sort of longer term, again, meaning to help the companies. And secondly, if you actually read the language, it's really more about getting in the, the government actually wants the individuals to contribute more to society. Chinese corporate giving is actually okay, it's not on developed country levels. But it is not nearly as far as individual giving. Individuals' giving is very, very low in China compared to developed countries. And that is a target that the government sort of wants to change. So now you're seeing you know, the billionaires step up a little bit more and contribute individually from their stock portfolios versus just, you know, using the company's balance sheet. And I think that has been a little better received by the rest of the population.
Tom Tugendhat
Yes, questions as to how voluntary it is maybe one that Mr. Ma would care to answer in a different call. Maybe I can push John, if I may on to the the question about what Western sanctions mean, what US sanctions mean for tech companies? Do you see them as national security motivated, do you see them as commercially motivated? How do you how do you see the the different engagements from nation states?
John Lee
Well, I'd be loath to second guess on the decisions made within the corridors of Whitehall - or for that matter from within the Washington beltway. But I would make the general comment that clearly countries around the world have been re-evaluating the cost-benefit analysis of links with China, particularly in the digital sphere. And this is simply an extension of the security issues that come with the expansion of the Internet of Things and the digitalisation of everything, as the security issues multiply. So the implications of connections with a country ruled by a Party dictatorship in which there was fundamental political distrust from the side of the decision-makers, whether they be in London, Canberra, Washington or other capitals, is of course going to loom larger.
Perhaps I can focus on the efficacy, as we can observe it, of some of the measures that have been taken. So if we take, for example, the export control measures introduced against Huawei, I think it's very clear that that has had material effects. That has drastically undermined Huawei's international smartphone business, the company's revenues. But it has also had, perhaps unintended second-order effects, which are not perhaps so beneficial from the viewpoint of policymakers in the US, who are seeking to perhaps restrict the development of the Chinese technology sector as a whole. Even Huawei is an individual company.
I mean, just to give one example, if we talk about who has taken up the business that has been lost by Huawei, it is primarily other Chinese technology companies, I mean, to some extent, other industry leaders like Apple and Samsung, which also depend very heavily on supply chains, which are deeply integrated in China. So this goes to the point that, of course, nation states will increasingly resort to non-traditional measures such as export controls, and we live in the age of geoeconomics. Again, I'm sure that the audience is very familiar with these debates now.
But we do need to bear in mind that it's not a one way street, and that not only do the Chinese respond, and of course, they have introduced, for example, their own negative investment list, their own version of an entities list, etc. in recent years, but also the second-order effects may not be promoting the policy goals that the measures were intended to achieve. And we've seen examples again, if we use the case of the Huawei export controls, for instance, at least reported cases of American vendors setting up shell companies that they continue selling to Chinese suppliers of Japanese and European companies snapping up business that was lost by American vendors, and because they're not directly subject to export controls in the same way, etc. So bearing in mind that it is question very much of the particular technology and the particular company.
And I think that a very calibrated approach needs to be taken to these discussions. And, of course, we are seeing now an increasing number of forums for doing that I believe that AUKUS has probably already been referenced in our conversation so far. But there is, of course, the new EU-US Trade and Technology Council, and new mechanisms between the quad, for example, or bilaterally between Japan, United States and South Korea, and other advanced technology economies where these issues will be worked out on a case-by-case basis and in detail.
Tom Tugendhat
Look, you raised an awful lot of questions in your answer there. And I wonder if I could pick up on some of them, which is, the first is actually from Dominic Vehnke in the in the question and answer box. So if you have questions, I will try to get to them. Aside from introducing export control measures, how can the United States UK and Europe become more competitive in digitalisation and digital technologies? The question really is, are we hindered by our own regulations? Is this something that we can we can do better differently? Perhaps Rogier, you'd like to pick up on that?
Rogier Creemers
Well, I like to be a bit provocative when I can. And this is perhaps one point where I'm going to be because traditionally, when we talk about regulations, we talk about regulations as being bad for business and generally business don't like regulation. I would also like to throw in the argument into the discussion that regulation can have very interesting creative effects.
You know, if we never had emissions regulations for cars, cars would still be doing three miles to the gallon, and we'd never have seen anything like Tesla. Or if you didn't have security standards for cars, then we would we would have never had the sort of the the anti-collision systems and other protective systems that we have today. So very often, you know, regulation can actually spur creativity, by creating hurdles to overcome.
What I think is the bigger problem to technology adoption, you know, varies from country to country. So when you look at it from the European perspective, you know, one thing that we don't have in Europe is a large platform company to rival either the US giants or the Chinese. And we could talk a lot about policy, but the reality as well is that the European market is 30+ countries with 20+ languages, which is is fragmented. And therefore you can't build out economies of scale in the same way that you can do if you're a Chinese or an American enterprise.
Also, where I think we've dropped the ball a bit is in actually, perhaps taking our hands away too much from the technology sector were, in a way, what we've said after the end of the Cold War is to say, you know, the digital sector is a triumph of the the private industry, we're not going to intervene, but we're also not going to direct. And when you don't direct, you don't get to set priorities, you don't get to sort of bring in ideas either. And so one strength that China does have very often is its ability to integrate resources, provide government support through things like subsidies, incubation areas, infrastructure, government procurement programmes, support for education and research. But that allows for the making of connections between different activities, as we see in the 14th Five Year Plan with this very strong coupling between the digital economy and the real economy, which in an undirected, purely free market environment or less interventionist market may form over time, but much more slowly. That is one element.
The other element, and this is picking up on something that Rui said with regard to common prosperity, part of what common prosperity is about in my understanding is in you know, if we are talking about Jack Ma, it's to make sure that you don't have too many people like Jack Ma, who essentially suck up all of the oxygen from the ecosystem. And I use that word ecosystem advisedly. It is a word that you see time and time and time again, in Chinese development plans, where they recognise that the digital economy needs to be embedded in other socio-economic and political structures.
And that means that what you cannot have is very often what you have here, a situation where you have these large platform companies be they matter, or Google, or Apple or Amazon. And they really hoover up all of the oxygen away from not just other market participants, but also consumers or pre-existing industries. And obviously, you know, we all know, for instance, what happened to print media. And so a lot of what this common prosperity drive seems to be about is capping the extent to which you generate these winner take all effects. That allow a small number of market participants to capture a outsize portion of value added or generated in that market and rather move towards a system where, you know, in a way you cut down on the apex predators so that the smaller animals or the plants or whatever have have a chance to thrive, as well. And that is going to be really interesting because it actually may create incentives for innovation, or for new forms of operation that may be more difficult to develop under the current winner takes all environment.
“So without the US sanctions creating the necessity for all these efforts to try to create a duplicate or self-sufficient whatever supply chain for semiconductors in China, you would not have seen the amount of returnees going back starting companies amount of funding and investor interest.”
Tom Tugendhat
Fantastic. Look, there's there's an awful lot more coming in now. And I'm very grateful that it is - please do keep asking your questions. If I may, I'm going to I'm going to fire on to another area where you'll remember that Dan Wang, was it a few months ago, a year or so ago, argued that the best US talent is being lost to Silicon Valley. How do you think we should funnel our best talent into strategic tech sectors as China is doing? What arguments do you think you can have with the with the companies that make such a difference? I don't know. Rui, you're in the West coast. Perhaps you'd like to give some thoughts?
Rui Ma
Well, well, I think one of the one of the things that has helped China direct talent into, I know Dan's a big fan of semiconductors, is actually US policy, right. So without the US sanctions creating the necessity for all these efforts to try to create a duplicate or self-sufficient whatever supply chain for semiconductors in China, you would not have seen the amount of returnees going back starting companies amount of funding, investor interest, etc. And I just read, for example, that semiconductors or semiconductor talent experienced the highest rise in salaries last year. Again, China has been trying to build up the semiconductor industry since 2014, with its first National Fund, but has not succeeded in directing people into that sector because at the end of the day, I believe that China thinks this this has to be partly government-moulded but also has to be a market reaction. And US policy happened to provide that market opportunity.
In terms of internet, in terms of the fact that, you know, I know Dan, for example, complains that too many people go into Internet and focus on soft tech. There's no evidence really, that the government "policies" have necessarily reduced interest from people in being employed at these companies. What has reduced people's interest is, in fact, the 996 policies, the 996 overwork, that Rogier was talking about, and the fact that these companies themselves are reaching saturation, and have slowed down in growth and are very sensitive to macro economic conditions.
So if, for example, you know, consumption slows down, or in the case of sometimes it's regulatory-oriented, and, you know, when one sector like, education gets wiped out, and there's no more advertising dollars for that sector, then it does affect the employment prospects, but there's not really the fine point shuffling that you see, in terms of talent is really happening, based on reactions to the market. Like AI talent, supposedly has experienced a slowdown or even stagnation of, of salary in China. But that's not because, you know, the government doesn't want to push this, it's because there were so many programmes: education programmes, vocational programs that popped up to support this specific discipline that now you know, the supply and demand has largely saturated.
So I still think that if you want to, you know, try to manage talent, you can have certain, you know, again, subsidies, and you can have certain incentives, but at the end of the day, the market has to be able to support it. If people are just being told that, you know, they should go study semiconductors because it serves the national interest or whatever, it's not going to happen. We see that pretty clearly in China.
Tom Tugendhat
Thank you very much. Now, one of our fellow CRG supporters is James Bethell. James has asked what I think is rather a good question about what are our pinch points in the Chinese tech sector, should there be a deterioration in relations? Do we have a plan B? I don't know whether John, you'd like to cover that. From your perspective. I'm sure you've seen various of the pinch points exposing themselves?
John Lee
Well, I did co-author a two-part essay on the subject of whether China would invade Taiwan for TSMC. Before it became cool as a topic, if I may say so.
Tom Tugendhat
I may be, I may be leading you into the semiconductor question.
John Lee
I would be much more comfortable there then talking to UK Government, and so on or thinking on such subjects. But if we stick with that, for the moment, the short answer. My view there is that China will not invade Taiwan for semiconductors, they may do so for a bunch of other reasons. But what China wants with regards to the semiconductor industry is the situation three years ago, before this became a geopoliticised issue, because that was working quite well for them. And of course, their industry has benefitted enormously from Taiwanese investment, skilled labour and is still extremely dependent on it. So that's the short answer.
Of course, that doesn't mean they won't invade Taiwan. That's a whole separate discussion about the political situation across the Strait. But in terms of mitigation. Again, some of the audience members may be aware that I co-authored when I was still at MERICS, a pretty substantial report on China's semiconductor ecosystem, which includes some very basic - this is a dangerous business, of course - projections over the five to 10 year timeframe for where the industry is going to be in each of the main supply chain segments. And it has some suggestions as a follow up report from before Christmas, in the European policy context, on mitigation measures.
I think that to some extent, this has simply got too much inertia now, for policy, wants to shift the dial a lot. There is clearly a reshoring movement that has legs in on both sides of the Atlantic. I mean, just yesterday, of course, you had the announcement of the EU CHIPS Act earlier than we expected, as it was late last year. And that has some very ambitious goals. Of course, the House in Washington has also adopted its version of the US Innovation and Competition Act, the centrepiece of which is support package for the semiconductor industry. And you have a whole range have other programmes like those being run, for example, by DARPA in the United States with regard to particular segments of the supply chain, whether it's advanced packaging, or reshoring advanced foundry work, clearly the direction is towards bringing more activity home.
The problem is that that is simply unrealistic as a total proposition over any timeframe that analysts, certainly myself would be comfortable with making projections for. So what you have to do is to find a sweet middle way. Where, again, you slice up the cake, and depending on which piece you're looking at, you tailor the measures accordingly. So in our report, from June last year, about China's semiconductor ecosystem, and in fact, in the December one to four European policymakers, we talked about, for instance, differentiating between something like wafer production, or other sections, as in substrate production, other sections of the supply chain that don't have significant national security implications, for example, where increased Chinese capacity may improve resilience at a global level.
Now, that's a very different proposition, obviously, from let's say, having all of your advanced packaging located in China, where you are both, perhaps helping Chinese industry advance the technological frontier, as well as exposing your supply chain to foreign hardware, hex, which is, again, an entirely separate subject. But this is not a subject that lends itself to one-size fits all solutions. Even within a particular technology stack like semiconductors, you need to break it down and look at what are we talking about? What timeframe? And what group of partners do we have available?
Tom Tugendhat
Look, you've you've gone into an area, which I think also raises some questions for the UK Government. Where should we be looking? If you were in the UK Government, what areas would you be looking at? For discussions with China in the digital and tech sphere? What do you think our objectives should be? II'm gonna I'm going to leave it with you for a second, John, if that's all right, because I think the where you have where you have got us to is a rather interesting question, because it's not enough to talk about where the breakdowns or pinch points are, you've got to you've got to think hard about what the next what the next question gets to.
John Lee
So in the interest of fairness to my fellow panelists, bearing in mind it’s 10 to five, and I'm sure that you, Tom, of course, are also extremely busy. I will confine myself to a few minutes. I would say the UK has some clear strengths. People are again, probably familiar with ARM, the company and where that sits in semiconductor supply chain. The UK Government has a review being conducted into that and strategic implications of potentially allowing that to be taken over by a non-British company. I mean, that, I think, is certainly the standout advantage that the UK has.
The other one would be if we're talking about the global semiconductor supply chain as a whole, the other one, of course, would be next-generation compound materials, applications of gallium nitride and silicon carbide, for example, which is also something that the Chinese are focusing on. Again, people will be familiar with the current UK government investigation into potential Chinese acquisition of certain interests within the UK, which are in this particular field. And you know, there are quite specific developmental goals which are being rolled out by the others, the Shanghai Municipal Government, for example, it was in relation to developing I mean, they talked about a silicon carbide valley, for instance, and a complete ecosystem there. This is certainly something that we'll be looking at as a UK policymaker, even if ultimately, the cost-benefit analysis is that we want to do less cooperation with China rather than more. I will, at that point, um, give my fellow panelists a chance to weigh in once more.
Tom Tugendhat
Thank you very much. Rogier, I'm gonna I'm gonna pick up on that, and just add to the question as well, if I may, and say, where's our plan B? Where do you see ours and the Europeans' plan B?
Rogier Creemers
Well, there's a couple of elements here, isn't there. One is simply the extent to which we have become reliant on Chinese supply for pretty much all aspects of our daily lives. You know, there is no alternative at this point in time for a company like Apple producing its iPhones in China. And given the fact that we already see inflation everywhere in the developed world becoming a major issue in political problems, I'm not sure how we would respond if the price of an iPhone were to increase with 30% because we force Apple to move its manufacturing chain out of China. Like it or not, in a way China has allowed us to develop a level of material well-being that we otherwise would not have had. And we pay with that, through dependence.
Now, I am old enough to remember when I was studying international relations, when we saw mutual dependence, or interdependence as a source of stability in the global system. We now seem to have come to see interdependence as a source of vulnerability in the global system, and obviously it is both, and it must be both. It's sort of like in any romantic relationship, you can only, you can only have a true warm relationship with someone where there isn't a dependence, but no one can hurt you as much as someone with whom you are closely interdependent. And so that's going to, that's going to be the difficult thing. I heard our relationship with China described as a difficult marriage without the possibility of divorce. And that is going to be the difficult thing, you know, very often, one hears people come up with, frankly, almost apocalyptic scenarios, which somehow involve either conflict or fundamental political change in China.
And I think that is largely a cop-out to avoid discussing the real question, which is, how does one co-exist, given the fact that China's probably not going to fundamentally change politically, given the fact that we are very dependent on on this for many aspects of our daily lives, and frankly, I don't see any political party in Europe winning elections on the basis of the message that we're all going to be voluntarily poorer, so that we can be less dependent on China. And I don't. And, frankly, I don't think that major conflict is an option. So, you know, part of what we're dealing with is just having to live with the discomfort, of coexisting and and that has to be part of the plan B. In the meantime, we have to recognise that not everything the Chinese government wants it's going to get. Semiconductors is a good example. The interesting thing is most of what the Chinese government has gotten is bycatch that it didn't expect.
Tom Tugendhat
Can I ask one final question - well, I'm gonna ask two final questions, but I'm gonna ask you to be exceptionally brief. You'll forgive me, I hope but Rui, what on earth is going on in the education sector, we see an awful lot of Chinese students coming to study in United States and UK, in Europe. Is the reality that China has got beyond the point where studying abroad is essential to tech progress. Can it now domesticate all of that, or it's still dependent in many ways for students picking up skills in the West before taking them home? And then I'm going to ask you to be exceptionally brief, because my last one is, it's 2022. Now, is it going to be a smoother or a rougher year than 2021? What do you predict? Rui, first, over to you.
Rui Ma
Oh, sure. Education, I think it's really just an economic benefit. So returnees still get a higher salary than local grads, for many companies, although you see that changing. So I do think that the demand for overseas education will be less and less specifically on technology. I think it's very, very, very, very niche programs. A lot of people actually are not are studying abroad, or are not really involved in, in really advanced research. So that might still be China might still be reliant on overseas, but not really for broader undergrad - people are just here for the upgraded salary. And then 2022, I hope it's better.
“I’m not aware of any other major player in the data field that has even begun to think about regulating in this field.”
Tom Tugendhat
But thank you very much for that. John, give us your predictions.
John Lee
As I said, always a dangerous business. I would say that it depends very much on the western countries and not so much on China - simply because their policy settings already quite clear. I mean, we have the 14th Five Year Plan, we don't have all of the implementation documents we expected to follow yet. But I would say, you know, as mentioned, there's a list of priorities, and they also have limited room for manoeuvre. So we talked about the semiconductor supply chain, they are not going to catch up to the cutting edge in leading edge foundry in the next five years, it simply will not happen.
So then the question becomes, what then are the variables and that very much lies, I think, with the advanced economies, it's going to depend on which sector but if we talk about semiconductors, what the US does with export controls how much countries like Germany, the Netherlands, South Korea play along, these are going to shape the geopolitical landscape of tech. So I would say that potentially we could have a much more turbulent 2022. But the waves are not likely to be coming from Beijing there, if anything, like what you said, the Chinese government has already told us what its plans are.
Tom Tugendhat
Thank you very much. Rogier, you have the final word. Give us your prediction.
Rogier Creemers
I can only underwrite what both Rui and John have to say it's always a pleasure being in company making your points for you. So I'll make an additional one. I think 2022 is going to be interesting. I mean, we hope you the had the major shock of the shifting of the momentum. And I think purely in terms of regulatory terms, what we're going to see in the next year is the consolidation, where we move from stage where, you know, these measures were taken at a point in time where they had to be taken quick and in response to events like Ant financial IPO, like the Didi IPO, and so on, and so forth.
What we're seeing now is that they've been digested into the system, that part of the 14th Five Year planning cycle, which is now in full swing for the digital economy. So we've moved from that sort of, you know, that that knee jerk response, almost that responsive mode, event-based mode to a mode where they've actually thought through the bigger picture, and I think of the next year, we're going to see the implementation of that. And that's going to be really interesting.
But what I like to invite our audience to also think a little bit about is, you know, what isn't there yet. And just as an example, to conclude, I would like to mention something like the data security law. And very often, I think we've made the mistake of only looking at China in our terms, you know, are they doing what we are doing? Or are they doing a different thing?
We rarely give them credit for really doing things that we haven't been doing and the data security law is my favourite example. In the West, when we talk about data protection, we're essentially always talking about personal information, the protection of personal interest against harm. Very often in the context of privacy, you know, fundamental rights in the European Union. In China, the data security law, which exists next to the Personal Information Protection Law, is actually there to protect national security. And the public interest from all kinds of data-enabled harms be they relating to personal information, or any kind of information, infrastructure information, industrial control data and data on geographical spaces, natural resources, any kind of data that could be abused, whether national security or public interest related consequences captured by this law. And I'm not aware of any other major player in the data field that has even begun to think about regulating in this field.
And that means that China is a first mover. And it may well become an example of how not to do things time will tell. But in the meantime, it is an example. And this is just one of the many areas where I think China is actually moving ahead and trying to diagnose and understand the externalities that full spectrum full spectrum, digitalisation brings to social, economic and political concerns. And it's moving ahead in a way that, frankly, makes it the only game in town on a number of areas, not just at home, but also increasingly towards the rest of the world, which is also confronted with these questions.
Tom Tugendhat
Fantastic. Look, I am enormously grateful to all three of you to Rui, John, and to Rogier thank you very, very much for your time. Thank you very much for joining us this afternoon to everybody who's been with us live. Thank you for making the effort. For everybody who is going to listen to this on a podcast or on a later broadcast on online, please do look up the rest of the China Research Group outputs you can find it on a website, obviously chinaresearchgroup.org.
And I have some news tomorrow, we have a podcast drop, which the Martin Thorley episode, in which we're talking about a character who's become rather well known here in the United Kingdom, Christine Lee, forgive me, who was identified as an agent of influence by our intelligence services a few weeks ago. So please do look out for that. You know, how to get podcasts, I'm sure. The usual on all the usual usual sites. So thank you very much indeed, in a few weeks time. I'm very much looking forward to having joined this place in the world discussed online here. Again, so thanks to Rui, John, Rogier, and to everybody else has been listening. Thank you very much indeed. China Research Group. We'll be back very soon.