A Blog by Jonathan Low


Jun 15, 2018

The Reason China's ZTE Is So Important

ZTE, a major Chinese telecom equipment manufacturer, was about to declare bankruptcy when the threat of sanctions on its purchase of US equipment revealed how it - and, by extension, much of the Chinese tech sector - remains dependent on the import of US components.  

That may be humbling, but it also provides a useful measure of how and in what sectors renewed tech investment may produce optimal returns. JL

Li Yuan reports in the New York Times:

China is proud of its technology boom. (But) the ZTE incident offers a glimpse of where China stands now. China’s technology boom has been built on top of Western technology. China’s surge in patent filings (didn't) look at whether the patents were good. China still imports 90% of its semiconductor components. The ZTE incident may be the country’s Sputnik moment. Like the United States in 1957, people in China see how far the country still has to go. "No matter how advanced our mobile payment, without mobile devices, without microchips and operating systems, we can’t compete.”
Once derided as a technology backwater and copycat, China is justifiably proud of its technology boom. Its people zip around the country on high-speed trains. They can buy, and pay for, just about anything with their smartphones. For Chinese traveling abroad, the rest of the world can seem slow and antiquated.
Now, that progress has been cast into doubt, and even some of the smartest people in the technology world are asking how they got it so wrong.
The Trump administration gave ZTE, which employs 75,000 people and is the world’s No. 4 maker of telecom gear, a stay of execution. ZTE, which had violated American sanctions, agreed to pay a $1 billion fine and to allow monitors to set up shop in its headquarters. In return, the company — once a symbol of China’s progress and engineering know-how — will be allowed to buy the American-made microchips, software and other tools it needs to survive.
China’s technology boom, it turns out, has been largely built on top of Western technology.
The ZTE incident, as it is called in China, may be the country’s Sputnik moment. Like the United States in 1957, watching helplessly as the Soviet Union launched the first human-made satellite, many people in China now see how far the country still has to go.

“We realized,” said Dong Jielin, an adjunct professor at the Research Center for Technological Innovation at Tsinghua University in Beijing, “that China’s prosperity was built on sand.”
China now feels a new urgency to change that.
This week, I begin a column for The New York Times that looks at the paradox of modern China through the lens of technology. For years, China has defied the axiom that a free political system and economic growth go hand in hand. The thriving tech industry is the epitome of the so-called China model, which says people can rise and prosper under tight government control.
Most people outside China think of it as “1984,” a dystopian society ruled by a repressive government with powerful brainwashing machines, which it is in many ways. But if you live in China, it feels more like that other dystopian novel, “Brave New World.” It’s a colorful, vibrant and consumeristic society. In many ways, Chinese people have more choice than they ever had before — except when it comes to individual liberty.
China offers a competing vision to those who see technology as a global, liberating force. Its robust online culture coexists with stringent censorship. China forcefully espouses a view of sovereignty in the cyber realm that sees a greater degree of government control than the internet’s creators ever envisioned — a view that doesn’t seem as far-fetched as it once did, as politicians around the world grapple with the unintended consequences of technology.
Before we get to that future, however, the ZTE incident offers a glimpse of where China stands now.
ZTE’s near-collapse has shaken tech entrepreneurs, investors and ordinary Chinese people alike. In social media chat groups, at dinner tables, at industry conferences, terms like “semiconductors” and “fundamental scientific research” have become buzzwords. My novelist, economist and philosophy professor friends all ask me: How far behind is China’s microchip industry? How long will it take us to catch up with the United States? (Some ask even more basic questions, like: What’s a microchip?)
“The recent ZTE incident made us see clearly that no matter how advanced our mobile payment is, without mobile devices, without microchips and operating systems, we can’t compete competently,” Pony Ma, chief executive of the Chinese internet giant Tencent Holdings said last month at a science forum.
China feels new urgency to increase its technological abilities. Its current push — called Made in China 2025lies at the root of worsening trade relations between the United States and China. But the problems with ZTE, which had $17 billion in revenue in 2017, will only spur Chinese leaders to push ahead.
“Self-reliance is the foundation for the Chinese nation to stand firmly in the world, while independent innovation is the only way for us to climb the peak of the world’s science and technology,” Xi Jinping, China’s leader, told its top scientists late last month.
As Chinese ask how they can keep up, many are also wondering why they didn’t realize they were so far behind to begin with.
“The best students always think they performed poorly in exams,” said Ding Jichang, founder and chief executive of Mobiuspace, a Chinese mobile app developer, “while the bad students always think they aced it.”
For starters, the idea of China as technology powerhouse isn’t wrong. As Mr. Ding pointed out, Chinese companies early on figured out the power of the smartphone in daily life. ZTE and others are competitive in many areas, like mobile data technology.
But many in China — and many cheerleaders of the Chinese tech scene — also found themselves in a feedback loop of their own making. The powerful propaganda machine flooded out rational voices, said Ms. Dong of Tsinghua University. The tech boom fits perfectly into Beijing’s grand narrative of a national rejuvenation. Innovation and entrepreneurship are top national policies, with enormous financial backing from the government. Even now, some articles critical of China’s lagging semiconductor industry have disappeared from the internet there. And it wasn’t just Chinese people. Michael Moritz, the American venture capital investor, warned that China “is leaving Donald Trump’s America behind.” Peter Thiel, a PayPal co-founder, wondered how long it would take for China to overtake the United States. Three to four years, he concluded.
The boom kept many from asking hard questions. They promoted China’s surge in patent filings without looking at whether the patents were any good. They didn’t ask why China still imports 90 percent of its semiconductor components even though the industry became a national priority in 2000.
The tone has changed. At an annual conference of top venture capitalists in Shanghai in late April, several major investors admitted that too much money went to start-ups that could go public quickly. Few want to fund the hard work that requires long-term research and development. Now, those investors face some of the blame.
“The public is saying that investors are bastards,” said Ni Zewang, chairman of one of China’s top venture firms, Shenzhen Capital Group, according to the conference transcript.
Allen Zhu, who became famous for investing in star start-ups, including the ride-sharing company Didi Chuxing Technology and the bike-sharing app Ofo, said he invested in a few chip start-ups years ago but lost his money. “For investors, the ratio of investment to returns isn’t proportionate,” he said.
Thanks to the ZTE incident, that problem has gone away.
Albert Liu, chief executive of the chip start-up Kneron, says that in the past, only one of four investors he met with would express any interest in his company. But when he had a round of meetings with 50 investors in May, nine of 10 were interested.

He used to have to spend a lot of time explaining why chips are important in the age of artificial intelligence. Now, he says, investors will tell him: “Let’s skip this. I know why.”
Some Chinese companies are doubling their efforts to develop their own chips. Gree Electric Appliances of Zhuhai, the world’s biggest residential air-conditioner manufacturer, started building its own chips for air-conditioners three years ago in an attempt to lower costs and better control its supply chain.
“After the ZTE incident, we realize how important it is to be able to make chips on our own,” says Tang Xiaohui, a senior executive in charge of Gree’s smartphone and chip development. The company’s chairwoman announced on state television recently that Gree would spend $7.8 billion on chip research and development in the next three years.
The chipsets Gree develops may not be as good as the American ones, Mr. Tang said. “But we’ve got to have a Plan B.”


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