Using the the twice-a-decade Communist Party Congress as his platform, President Xi Jinping has laid out his sweeping plan to make China a leading global power in influence, innovation and military might by 2050.
But to foreign businesses seeking to stake out a spot in industries that will power China’s bold new future, Xi’s roadmap is far from reassuring: It entails a protectionist bent that will reduce their market share in the world’s second largest economy — an issue that risks driving a wedge between Beijing and Washington in Xi’s second five-year term, analysts warn
Xi did pay tribute to China’s reform plans, pledging in his more than three-hour-long congress speech to further open up to foreign businesses and reduce entry barriers. But whether implementation follows is a matter of debate as his bigger priority is nurturing domestic technology and innovation. Analysts believe foreign companies will be increasingly pushed out in what the Made in China 2025policy initiative views as strategic industries, including aircraft, biotechnology, semiconductor and new energy vehicles. Those who wish to stay must face the daunting prospect of transferring even more core technologies in exchange for market opportunities.
“The leadership made it very clear they want to become a science and innovation power, and that involves reducing dependence on foreign suppliers and U.S. technology companies over time,” said Adam Segal, director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations in Washington, D.C. “Those themes were echoed in Xi’s speech.”
The barriers are significant. In renewable energy vehicles, for example, foreign companies could be required to transfer more core technologies related to motor, vehicle control and power storage to their Chinese counterparts as Beijing seeks to control the future of electric cars, according to the U.S. Chamber of Commerce. When it comes to pharmaceuticals, companies that agree to set up local manufacturing facilities and share knowledge with Chinese firms are given faster regulatory approval for new drugs in this $115 billion market, according to reports by Deloitteand the U.S. Trade Representatives.
The biggest impact will probably be borne by those operating in what China considers as critical information infrastructure related to payment and other financial businesses, said Michael Hirson, head of China practice at New York-based consultancy Eurasia Group. Beijing will increasingly push the likes of Cisco and Microsoft to hand over core source codes, which constitute the building blocks of their software, for regulatory review. It defends the move as protecting national security, but there are mounting concerns that the codes could be leaked to Chinese competitors, raising the risks of foreign products being copied.
“It is reasonable to think it will continue to be difficult for foreign firms to be competitive in China,” Hirson said. “There is more policy support for domestic firms.”
According to Jacob Parker, vice president of China operations at the U.S.-China Business Council, 20% of the 200 respondents to their annual survey said they have been forced to transfer technology as a pre-condition for markets access in China. Mats Harborn, president of the European Chamber of Commerce in China, said European companies continue to suffer from “promise fatigue” in the country, adding that “the overall perception in Europe of China’s reform plans has taken on a level of skepticism unseen during any of our previous visits.”
In the meantime, the challenging environment has led a number of foreign technology companies to rethink their China strategies, such as pulling back certain products out of fear of technology leakage, according to Parker. Others, however, have come to terms with China’s demands.
Qualcomm, for one, is cozying up to China. After agreeing to pay a record $975 million anti-trust fine in 2015, the company has been setting up chip joint ventures with local governments, with its President Derek Aberle telling the state-run China Daily earlier this year that he wants the JV to “take our technology and develop its own systems on chips for the China market.” Matt Hsien, General Motors’s China President, said in March that he isn’t concerned about technology transfer in the country. The company will bring its “best electrification solutions to our customers in China,” a G.M. spokesperson said in an e-mailed statement.
But the risk is that they could be fostering powerful competitors down the road. Chinese companies aren’t just content with adapting foreign technologies for the home market — they are using the know-how to compete globally, selling cheaper services in third party countries.
Chinese train makers, for example, have acquired many core technologies from Japan’s Kawasaki, as the latter won the bid to build high-speed railways in the country in 2009, setting up local supply chains and teaching Chinese engineers the know-how as required by local governments. These technologies are later used by China to win railway construction projects worldwide, undercutting Kawasaki’s global competitiveness.
When it comes to more advanced technologies like robotics and semiconductors, Chinese companies are still generations away from catching up with the west. But Beijing’s concerted effort at home and abroad to acquire foreign know-how already sounded the alarm in Washington.
In August, U.S. Trade Representative Robert Lighthizer formally launched an investigation into Beijing’s intellectual-property practices, looking at whether policies related to technology transfer and innovation hurt U.S. commerce.
There are also talks to reform The Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee that vets foreign investments in the U.S. Analysts and lobbyists have proposed that CFIUS be given broader powers to examine more Chinese investments in U.S. technology firms, complicating deals like Ant Financial’s acquisition of payment service provider Moneygram.
In September, President Trump acted on a CFIUS’s recommendation, blocking a China-backed fund from acquiring Lattice Semiconductor, whose chips are used for communication, computing and military purposes, out of national security concerns.
“The U.S. is taking a really close look at forced technology transfer in China,” Eurasia Group’s Hirson said. “But given these industrial policies remain a key in Xi’s economic agenda, this will definitely lead to more conflicts in the second five years.”