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The Deep Roots and Long Branches of Chinese Technonationalism

China’s development of strategic technologies is increasingly drawing attention from its economic partners. Observers and non-Chinese firms need to understand that China’s interest in strategic technologies has long been a central part of the Chinese policy landscape.

published by
Macro Polo
 on August 12, 2017

Source: Macro Polo

Among the most contentious issues now pitting Beijing against its economic partners is China’s seemingly boundless pursuit of cutting-edge strategic technologies. Nearly every day seems to bring another headline about the fight for preeminence in a new sector: China, The New York Times tells us, wants artificial intelligence to be “made in China by 2030.” In the semiconductor industry, meanwhile, The Wall Street Journal argues that the United States and China are locked in a fight for dominance. And then there’s biotechnology, where, says the Financial Times, these same two countries are battling it out over genetic data as each side’s scientists and engineers seek to lead the industry globally.

The acquisition of technology has always been a central part of China’s economic reform effort. But until recently, the pursuit was characterized mostly by technology purchases—or in some cases, by out-and-out intellectual property theft. China’s government and firms sought technology through business deals and joint ventures. They bought technology products wholesale, and encouraged foreign firms to set up shop in China with technology-heavy operations. Sometimes, they reverse engineered foreign technologies and developed indigenous alternatives, efforts that subsequently helped to modernize China’s own industrial base.

But the last decade has added two additional dimensions.

One is Beijing’s state-backed policy of “indigenous innovation,” which, as my friend Jim McGregor noted in a 2015 report, aims to “enhanc[e] original innovation through co-innovation and re-innovation based on the assimilation of imported technologies.” To put that point a bit differently, China seeks to turn foreign technologies into Chinese technologies, and so it has increasingly made technology transfer a precondition for foreign firms to win contracts or do business in China.

Another new dimension is China’s comparatively flush balance sheet, which includes trillions in foreign exchange reserves and billions more on the balance sheets of state-owned and private national champions.

A hefty chunk of this money has been plowed into investment funds and direct investments overseas. Sometimes, that has included the acquisition of foreign companies whose product suites include critical technologies that China hopes to leverage in its pursuit of global technology leadership. One of the most notable recent deals involves the GMO technology that ChemChina gained when it acquired the Swiss-based firm Syngenta. Indeed, seeing China’s strategy as a threat to national security or underlying competitiveness, some governments have even blocked acquisitions, such as the 2016 Chinese bid for German chipmaker Aixtron.

Another bone of contention is Beijing’s “Made in China 2025” plan, which, as an archetype of industrial policy, apes Germany’s ambitious Industrie 4.0 plan and seeks to move China up the value chain in an array of critical technologies and sectors, such as pharmaceuticals and robotics. Foreign firms and governments, especially in Europe, have nodded to China’s ambitions to be a technology power while also condemning this program as putting foreign firms at a disadvantage, privileging domestic procurement through large-scale import substitution, locking in policies of forced foreign technology transfer, and aiming, ultimately, to exclude foreign firms and technologies from the Chinese marketplace through the use of state policies.

But should any of this really surprise us?

It should not.

And that is because, quite frankly, none of it is particularly new. China’s relentless quest to be a technology leader has deep roots, stretching as far back as the 1950s, when Beijing first began to benchmark its capabilities and ambitions against overseas technology pacesetters.

China’s big and ambitious new programs are not, therefore, solely a result of “new” thinking or of the assertive policies of its current president, Xi Jinping. Rather, they have strong antecedents—in old strategies, policies, practices, and predilections, as well as deeply held ideologies about the relationship between technology and national power.

These have pretty much characterized the Chinese Communist state since at least the Korean War of 1950-53. After all, while the 1950s were an economically and socially different era in China, decision-makers then came to view technology as intrinsically strategic. They defined China’s standing and power in the world, in large part, through the prism of technological progress.

My 2003 book, China’s Techno-Warriors, retells some of this early history, and then traces the story across five decades into the 2000s.

The first manifestations of an inherently “strategic” view of technology in China were mostly military in nature. They arose from national security threats and led to a newfound faith—and big new investments—in cutting edge weapons technologies.

Chairman Mao Zedong, famous for his antipathy to the notion of weapons as a “deciding” factor in warfare, quickly shelved that view when the United States threatened China with attack. Years later, when the Soviet Union cut China off from the supply of key weapons and systems, Mao and his fellow leaders concluded that they must break forever the shackles of dependence on foreigners.

This led a relatively poor China, despite its very pressing needs across the economy and defense production systems, to invest significant resources at the cutting edge. China during these years was, in many ways, an autarky—isolated, semi-contained, and striving for self-reliance. Yet key figures, in particular Marshal Nie Rongzhen, the administrator of China’s nuclear weapons and strategic missile programs, developed arguments for investment in strategic technologies, not just strategic weapons.

Contemporary decision-makers soon began to benchmark foreign competitors, including Japan and Great Britain. And they cited not just military readiness and national security needs but also developmental imperatives as their rationale.

Nie summed it up this way, “Fuel, rice, oil, salt, soy sauce, vinegar, and tea comprise a family’s daily necessities and are called the ‘seven basic items.’ In my view, new materials, precision meters and instruments, and heavy equipment are to military industry and the high technology branches of science what these seven items are to the family.”

Without a range of advanced materials at the cutting edge of technology, he concluded, “we would fail not only to solve the problems associated with the production of missiles, atomic bombs, and auxiliary installations but [also with] electronic installations and components and precision meters for both military and civilian uses.”

Benchmarking and the quest to surpass foreign competitors soon became a central part of this worldview. In the book, for example, I tell a story from 1961 about perceptions of Japan, during a turbulent period when China was gripped by a catastrophic man-made famine.

That spring and summer, a highly classified report on Japanese technical development circulated through China’s Communist Party and military leadership. Contending interest groups in the military industrial complex were sharply divided over whether to invest in conventional weapons and building block technologies or else in strategic weapons and breakthrough technologies closer to the cutting edge.

The report presented decision makers with the harsh reality of growing Japanese capability and persistent Chinese backwardness. It also noted that Japan was on the verge of launching a major new effort to upgrade its technical strengths, including through greater attention to the connection between cutting edge technology and its national defense.

And the report tipped the scales in the debate, with Mao himself weighing in decisively to favor an effort to close the distance with Japan.

Fast forward to the reform era, which began in 1978. Many of these ideas found new life but outside the military sphere. Beijing launched an array of critical technology programs, such as the “863 Plan,” named for the year (1986) and month (March, or “3”) of its inception, a program I’ve written about extensively. Initially, this plan targeted the high technology frontier in seven fields, such as robotics and automation, but civilian scientists and bureaucrats led five of the seven planning groups and the weapons agency just two. Clearly, a strategic approach to technology and benchmarking had spread from the world of weapons to the Chinese industrial and science systems writ large.

Among other things, this longstanding worldview includes three components:

  1. technology as a source of national power,
  2. competition with foreigners, and
  3. the need for indigenous Chinese capability.

These, in turn, have shaped approaches and decisions on everything from industrial investments to big science projects.

Consider this story, which the late paramount leader, Deng Xiaoping, used to tell about why China first invested in an indigenous particle collider:

A European friend, a scientist, asked me, “Your economy is still underdeveloped, how can you propose to undertake such a thing?” I told him, “We look at this from the standpoint of long-range development issues and national interests. It isn’t a matter about which we can afford to be shortsighted … If China hadn’t had the atomic and hydrogen bombs, if we hadn’t launched satellites, it couldn’t be said that China is an influential great power … China cannot afford to fall behind, cannot afford not to be engaged in spite of the fact that we are poor—because if you aren’t engaged, if you don’t develop in these areas, the gap will only become greater and it will become extremely difficult to catch up.

And here’s a story from 1999 involving then-Premier Zhu Rongji. Visiting Jilin, a northeastern province, Zhu heard complaints that American seed research was making China’s own efforts uncompetitive. On the spot, Zhu authorized 500 million yuan (about $75 million), saying the money should be used “to start transgenic plant work.”

Why rehash this history?

For one thing, we need to understand that many current Chinese policies actually have pretty deep roots. It’s true, for instance, that much has changed in China’s technology-related sectors and industries. A generation has now been educated and nurtured outside the country, including in the innovation culture of Silicon Valley startups. So state-backed industrial policies, top down projects, and strategic schemes aren’t the whole story of China’s technology and industrial development. And yet they are a pretty consistent theme.

Such approaches have persisted and cohered across seven decades amid very diverse conditions—when China emphasized military technology and when it emphasized civilian technology; when it was poor and as it has become richer; when it was pennywise and when its coffers have been more flush; and it’s shaped policy under five top leaders (Mao, Deng, Jiang, Hu, and Xi).

In short, we should expect these “strategic” approaches to remain a persistent feature of the Chinese policy landscape—and a focal point for the Chinese Communist Party and state.

Here’s another conclusion: Chinese government, industry, and scientific leaders will continue to push to move up the value-added chain. And in some of the sectors where they are doing so, such as ultra high-voltage power lines (UHV) and civil nuclear reactors, China is already a global leader, deploying these technologies to scale and unmatched in this by few other markets.

That means it should be able to couple its status as a leading technology consumer to a new and growing role as an exporter. China’s sheer market power could enable it to export some of its indigenous technology and engineering standards in an effort to become the default global standard setter for this or that technology and system. In another recent post, I offered the example of UHVs, where China has successfully promoted three indigenous UHV AC standards as international standards of the global standard-setting body.

In any sector that is “strategic” or sits atop the commanding heights of the economy, meanwhile, Beijing seems determined to indigenize rather than rely solely on technology transfers.

Former premier Wen Jiabao famously argued that because China came late to the industrial and information revolutions, it should not miss out on the energy technology revolution. This attitude will affect sectors like aircraft and electric vehicles. China may buy Boeing and Airbus planes now but its manufacturers aim to compete with both firms globally over time—although whether these Chinese firms succeed is another story.

And then there’s intensifying trade conflict: with such deep technonational roots, it’s going to be one heck of a slog, in my view, to persuade China to abandon its use of many of these industrial policy instruments. The game is certainly worth the candle for foreign firms because much is on the line. And I fully expect the Trump Administration and European governments to push China hard. They are right to do so. But China will fight hard to cling to its own national champions and domestic companies, not just in government procurement but also in other contexts, such as the Belt and Road infrastructure initiative.

But there are some big caveats on China’s efforts too: we’ve learned from other countries’ experience that industrial policies can be awfully self-limiting. Just look at Japan, which has been an iconic practitioner of industrial policy and, like Germany and China, has promulgated its own “Industrial Structure Vision.” Japanese firms have such enormous technological prowess, yet Chinese and other foreign firms are increasingly challenging Japan, its firms, its laboratories, and its once unique brand.

And China is at an earlier stage in many of these sectors. It is sure, then, to continue experiencing many problems with top down, “planned” innovation—from misaligned incentives to improper risk assessment.

Here’s the more hopeful scenario: even as it assaults the technology frontier, Chinese firms are integrating into global supply and production chains. Some, such as Brown University’s Ed Steinfeld, argue that this could ultimately change Chinese corporate behavior. And in any case, it has certainly led to some unconventional opportunities for partnership, such as between Chinese and foreign firms in the pursuit of alternative energy vehicles.

At the end of the day, though, many US and multinational firms will face very tough choices. Some may seek to protect intellectual property by investing their Chinese partners in the process—for instance through co-innovation, co-development, or the joint licensing of intellectual property with a Chinese entity. Others may choose to separate China-based production and basic design from more complex and essential design, which they will retain in their home markets or elsewhere outside China.

But many firms will just be stuck. So they may have to meet the challenge in two ways: by moving up the value chain even faster than a China that is very, very determined to assault it, and by leveraging their governments to try leveling the playing field with a China that is actively shaping it to the advantage of its national champions and domestic firms.

This isn’t going to be any old trade negotiation. It touches some of the deepest roots of the Chinese state and system. Non-Chinese firms everywhere need to understand where the Party and state are coming from—and will need to up their game. Without overstating the argument, it’s worth noting that technonational ideas are deeply embedded in the Party and state.

This article was originally published in Macro Polo.