China’s rapid expansion into high-tech sectors, both domestically and abroad, will continue to accelerate as the Chinese economy — particularly its technology sector — matures.
Concerns about the true intentions behind Beijing’s overseas investment goals will persist.
As increased technological capabilities move China up the value chain both at home and abroad, the country will initially be perceived as an imitator rather than an innovator, but signs are emerging that it will overcome this perception.
A decade ago, Chinese electronics company Lenovo bought out IBM’s personal computer arm for $1.75 billion in what was China’s first major overseas acquisition in the technology sector. The deal cemented Lenovo’s status as one of the world’s biggest PC manufacturers (it now ranks as the largest), and it launched China’s journey to becoming one of the world’s largest foreign investors in the technology sector. That process has accelerated exponentially; in 2014, for example, Chinese direct investment in the U.S. information and communications technology industry accounted for about half of all Chinese investment into the United States. In some areas, such as semiconductors, biotechnology and green energy, investment came almost entirely from private Chinese investors.
This expansion abroad differs from traditional Chinese outward investment patterns. Chinese state-owned companies dominate overseas acquisitions in most sectors, but high-tech areas are the domain of companies with weak or no ties to the government. Despite the relative lack of Chinese state involvement, the growth of investment will still raise concerns among Western companies and governments, particularly in the United States, over Beijing’s investment strategy and the impact Chinese companies could have on those markets. Meanwhile, China is becoming more innovative itself and evolving into a world leader in some high-tech areas. China’s aptitude in a number of tech-related sectors will only increase, and given China’s size, incremental changes in its capabilities can have a significant impact on world markets.
China’s Changing Investment Goals
China’s foreign direct investment traditionally has focused on resource acquisition, trade facilitation and technology acquisition. In the developing world, this investment pattern has been most visible in Africa and Latin America, where China has invested billions in developing mining projects and the port, rail and electricity infrastructure needed to support those projects. In the developed world, China has supported port and freight rail development as well, but it has also focused on acquiring technology through partnerships in the oil and natural gas industry and other areas.
China is still making traditional investments, though they are becoming less frequent as the country’s demand for raw resources slows and Chinese investors seek more economically viable projects. China is continuing to follow in the footsteps of Japan, South Korea and Taiwan in what is becoming the traditional pathway of development for East Asian economies. The first step is exporting low-end manufactured goods. Next, the economy moves into middle-end manufacturing while licensing foreign technology. Domestic companies then begin imitating or developing technology independent of licensing. The economy then focuses on middle- and high-end manufacturing. Finally, it begins its own innovations.
China’s domestic constraints, such as government-imposed regulations and economic controls, could limit how quickly or how far China can go down this path. However, China’s ambition is clear: It wants to become a high-tech leader, rather than a follower, and leverage its size in the high-tech sector domestically and abroad.
At a higher level, China’s attitude toward technology and scientific development is changing. An article published by the China Science and Technology Daily (the Chinese Science and Technology Ministry’s media outlet) describes this change as moving away from isolation and toward “science and technology diplomacy.” Research and development in these areas is often rooted in collaboration, especially as fields become more specialized. China is restructuring its research and development apparatus to allow for more collaboration among Chinese scientists, as well as with their foreign counterparts. Without collaboration, overspecialization can make commercialization difficult because developing commercial products often requires numerous specialties.
Some Chinese companies want to increase their international market shares but not necessarily move production to China. An example of this is China’s ZTE, one of the world’s largest telecommunications conglomerates. The firm has a long history within China. It began as a small company licensing foreign technology and has become one of the most technologically proficient companies in the world, with research and development in areas such as 5G communications infrastructure and related technologies. ZTE once lagged behind Western companies in terms of developing mobile networks, but now the company is on par with its Western counterparts and is attempting to expand into key markets such as Europe. Earlier this year, European Commissioner of Research, Science and Innovation Carlos Moedas invited ZTE CEO Shi Lirong to participate in several different programs and encouraged the company to continue investing in Europe’s mobile networks.
The scale of these investments and collaborations is largest in electronics, software and related sectors. However, China has been making similar moves in other high-tech areas as well, including green technology, biotechnology, nanotechnology, engineering and health sciences. In 2013, for example, BGI-Shenzhen, a genomics organization in China, acquired Complete Genomics, a leader in human genome sequencing. China is also participating in a Texas-based carbon capture and storage project.
Other Chinese companies want to develop China’s manufacturing capabilities to serve both domestic and foreign markets. For instance, a group of Chinese investors agreed in May to buy OmniVision Technologies, which produces around 30 percent of the world’s digital image sensors. China is the world’s largest and fastest-growing consumer of integrated circuits. Acquiring key high-tech companies has been a goal both for economic reasons and in hopes of developing an indigenous production base for electronics to feed the domestic market.
Concerns About China’s Motives
China’s intentions, both perceived and actual, have not gone unnoticed abroad. Washington has expressed concern about Beijing’s involvement in the high-tech sector in several ways, largely for political reasons. The United States, viewing China as a potential adversary in the Pacific Basin, naturally has expressed more concern than Europe, which does not see China as the same type of threat.
In 2012, the U.S. House Intelligence Committee explicitly voiced concerns about ZTE and Huawei, another Chinese telecommunications infrastructure vendor, expanding into the United States, calling them threats to national security. Although nominally private companies, the two firms do have ties to the Chinese government and sell equipment to the state. These concerns became particularly salient as tension rose between the two countries over cyber warfare and the use of telecommunications infrastructure in intelligence operations.
The tech industry is also concerned. China has shown no intention of slowing its purchases of Silicon Valley companies — particularly electronics firms such as OmniVision. China is the world’s largest consumer and producer of semiconductors, but it relies heavily on the licensing of U.S. or other foreign technology and equipment rather than indigenous components. China hopes that one day its acquisitions will enable it to develop those technologies, either through collaboration or on its own. The potential impact could be significant. Because of the country’s size and other factors, China typically produces goods at a rate that resembles exponential growth. Once a new industry develops in China, it can quickly establish significant market share both domestically and abroad. Other factors, such as the theft of foreign technology, could hasten this process. China will have to adjust its stance on the long-standing issue of intellectual property rights as it becomes more innovative and more concerned about protecting Chinese ideas.
Yet another worry is whether its acquisitions are conducted fairly. Because Beijing has made the high-tech sector a high priority, some Chinese companies could get access to cheap loans or other non-market assistance from the state to finance their acquisitions. This could give the impression that companies bidding to buy a foreign high-tech company are trying to outbid the Chinese government. As Beijing puts more emphasis on the economic importance of the technology sector, it can (and likely will) use these non-market benefits to pursue its aspirations.
Although China has often been criticized for stealing technology rather than developing it independently, in some areas the country is beginning to grow out of that stage of its development and contribute to the growth of technology. In March, for example, Germany’s Deutsche Telekom invited ZTE to participate in its 5G innovation laboratory. This was in line with China’s move toward international collaboration in developing new technologies that eventually will find their way back to its domestic telecommunications networks. China’s progress is evident in other areas as well, such as startups and the Silicon Valley-like culture emerging in places such as Shenzhen. The question is whether this progress can be replicated throughout the country.
In the middle of the 20th century, critics said that Japan and South Korea were excellent at adapting existing inventions but not innovative themselves. By the late 1980s and 1990s, however, Japanese companies were seen as creators rather than imitators. In the 2000s and 2010s, South Korea has advanced similarly. China hopes to replicate their successes. Given its size, if even two or three key locations — say, the Pearl River Delta and the Yangtze River Delta agglomerations — can follow in the Japanese and South Korean footsteps, China could achieve the same effect.
© STRATFOR GLOBAL INTELLIGENCE
Publishing of this report by The Manila Times is with the express permission of STRATFOR.