China’s
Hidden Tech Revolution
How Beijing
Threatens U.S. Dominance
In 2007, the year Apple first started making iPhones
in China, the country was better known for cheap labor
than for technological sophistication. At the time, Chinese firms were unable
to produce almost any of the iPhone’s internal components, which were imported
from Germany, Japan, and the United States. China’s overall contribution to the
devices was limited to the labor of assembling these
components at Foxconn’s factories in Shenzhen—what amounted to less than four
percent of the value-added costs.
By the time the iPhone X was released, in 2018, the
situation had dramatically changed. Not only were Chinese workers continuing to
assemble most iPhones, but Chinese firms were producing many of the
sophisticated components inside them, including acoustic parts, charging
modules, and battery packs. Having mastered complex technologies, these firms
could produce better products than their Asian and European competitors. With
the latest generation of iPhones, this pattern has only accelerated. Today,
Chinese tech firms account for more than 25 percent of the device’s value-added
costs.
Although the iPhone is a special case—as one of the
most intricate pieces of hardware in existence, it relies on an exceptional
range of technologies—its expanding footprint in China captures a broader
trend. In a majority of manufactured goods, Chinese firms have moved beyond
assembling foreign-made components to producing their own cutting-edge
technologies. Along with its dominance of renewable power equipment, China is
now at the forefront of emerging technologies such as artificial intelligence and quantum computing. These successes challenge the notion that
scientific leadership inevitably translates into industrial leadership. Despite
relatively modest contributions to pathbreaking research and scientific
innovation, China has leveraged its process knowledge—the capacity to scale up
whole new industries—to outcompete the United States in a widening array of
strategic technologies.
In its growing rivalry with Beijing, the U.S.
government has sought to limit Chinese access to critical Western technologies
and reinforce its own tradition of scientific innovation. Thus, in 2022, the Biden administration imposed broad new restrictions on
selling advanced Western chip technology to Chinese firms while bolstering U.S.
technology through the $280 billion CHIPS and Science Act. That piece of
legislation, in addition to the Inflation Reduction Act, meaningfully helps the
United States recover some of its leadership in the production of
semiconductors and renewables. But the steadily advancing technological prowess
of Chinese firms suggests that this approach may be missing a more central
issue: China’s rise is not merely the result of copying
and stealing from Western firms; nor has it depended on scientific
breakthroughs. To a significant degree, it has been fueled
by improvements in China’s own industrial capabilities—gains that have come
from the country’s vast and sophisticated manufacturing workforce. Already,
these strengths are apparent in China’s response to U.S. chip restrictions of
the past few years. Previously, Chinese firms tended to avoid domestic Chinese
technologies, preferring to buy the best—which was usually American. Now that
Washington is preventing them from doing so, they are working harder to
cultivate a thriving domestic chip industry.
For the United States and its allies, China’s arrival
as a major tech power holds crucial lessons. Unlike the West, China has
grounded its technology sector not in glamorous research and advanced science
but in the less flashy task of improving manufacturing capabilities. If
Washington is serious about competing with Beijing on technology, it will need to focus on far more than
trailblazing science. It must also learn to harness its workforce the way China
has, in order to bring innovations to scale and build products better and more
efficiently. For the United States to regain its lead in emerging technologies,
it will have to treat manufacturing as an integral part of technological
advancement, not a mere sideshow to the more thrilling acts of invention and R
& D.
Many observers are justifiably skeptical
about China’s tech leadership. For one thing, the country has created few
multinational firms or globally recognized brands. Unlike Japan and South
Korea, China has failed to establish new categories of consumer electronics,
such as digital cameras or game consoles; nor has it been able to compete with
Europe and the United States in automobiles or airliners. Instead, for the most
part, Chinese companies have concentrated on making products they can sell at
lower price points in the developing world. The relative lack of prominent
Chinese brands has reinforced a Western understanding of China as a factory
floor rather than a hotbed of innovation.
China also remains well behind the West in several
critical technologies. China’s chip industry has a few notable achievements,
including in the design of mobile phone chips and certain advanced memory chips.
But in the fabrication of logic chips—the processors inside all digital
products—Chinese firms are at least five years behind TSMC, the Taiwanese
company that is the global leader in advanced semiconductors. They are even
weaker when it comes to developing the specialized tools required for making
chips. For the all-important lithography machines, used for printing patterns
on silicon wafers, and metrology equipment, used for quality control in a
production process that demands hundreds of steps, Chinese firms rely
overwhelmingly on imports from Japan, the United States, and Europe. And they
are barely out of the starting gate in creating the software tools needed to
design the most advanced chips.
A similar dynamic exists in China’s aviation industry.
Consider the Commercial Aircraft Corporation of China (COMAC), China’s answer
to Airbus and Boeing, a state-owned venture backed by an estimated $71 billion
in government funding. Fifteen years after its founding, it has scarcely begun
to produce its first operational commercial airliner. Chinese firms in both the
chip and the aviation industries are achingly aware that many of their core
components continue to be supplied by the West: production equipment and
advanced software tools in the case of chip manufacturers, and the engine as
well as the avionics systems in the case of COMAC jets. It is this kind of
reliance on Western technology that gives new U.S. chip restrictions the
potential to throw Chinese firms into turmoil.
But amid these serious vulnerabilities, China is
making rapid progress in many other technologies. Chinese firms have quickly
gained ground against their European and Japanese counterparts in the
production of advanced machine tools such as robotic arms, hydraulic pumps, and
other equipment. As the iPhone demonstrates, China now rivals Japan, South
Korea, and Taiwan in its mastery of the electronics supply chain. And in the
digital economy, despite recent efforts by President Xi
Jinping to
tighten government control of Internet companies such as Alibaba, Tencent, and
Didi, China remains strong. Chinese companies can still offer spirited
competition to Silicon Valley’s tech giants, as ByteDance’s
TikTok has been doing to Facebook. China leads the
world in building modern infrastructure, including ultrahigh-voltage
transmission lines, high-speed rail, and 5G networks. In 2019, China became the
first country to land a rover on the far side of the moon; a year later, Chinese
scientists achieved quantum-encrypted communication by satellite, pushing the
country closer to creating unbreachable quantum communications. These
achievements are emblematic of China’s steady effort to master more and more
difficult tasks.
Taken as a whole, then, China’s technological
development is considerably more dynamic than the country’s image suggests.
China remains behind in several critical areas, and some of its most important
tech firms face regulatory squeezes—whether from Washington or Beijing itself.
Regardless of these challenges, Chinese industries are reaching world-class
standards, and the country’s science is steadily advancing. Along the way,
Chinese firms have begun to make significant innovations of their own,
including in strategic areas that the United
States has
prioritized.
One of China’s major tech triumphs in recent years
has been in renewable power equipment. When a commercial market emerged for
solar technologies early in the twenty-first century, most innovations came
from the United States, and it seemed logical that U.S. firms would drive the
industry. In 2010, however, China’s State Council, the central government’s executive
branch, designated solar power generation as a “strategic emerging industry,”
triggering a cascade of government subsidies and business creation, much of it
aimed at expanding manufacturing capacity. In the process, Chinese firms
learned the basics of solar photovoltaics and began to improve on existing
methods of producing them. Today, Chinese firms dominate almost every segment
of the solar value chain—from processing polysilicon used in solar cells to
assembling solar panels. They have also advanced the technology itself. Chinese
solar panels are not only the cheapest on the market; they are the most
efficient. The breathtaking decline in solar costs
over the past decade has been driven by manufacturing innovations in China.
Over the last few years, Chinese firms have also
staked out strong positions in the production of large-capacity batteries that
power electric vehicles. As the world moves away from internal combustion
engines, advanced battery technology has become the most critical component in
car manufacturing. China has led the way: CATL, a Chinese company founded in
2011, is now the biggest battery manufacturer in the world, partnering with
major car companies such as BMW, Tesla, and Volkswagen. In addition to having
far greater manufacturing capacity than its rivals—which matters for lowering
costs—CATL has taken the lead in developing new and more efficient chemical
mixtures, for example in its sodium-ion batteries, which can be produced
without using scarce lithium and cobalt minerals.
The Biden administration has recognized the risks of
depending on China for the critical technologies it needs for the United
States’ green transition. But various rounds of U.S. tariffs, as well as U.S.
investigations into forced labor allegations in
China’s polysilicon supply chain, have failed to dislodge Beijing from its
dominant position in the solar industry. One such investigation by the U.S.
Commerce Department, which threatened retroactive tariffs on solar imports of
up to 250 percent, threw American solar buyers into turmoil, and in June 2022,
President Joe Biden was forced to issue an executive order forestalling any
tariffs for the next two years. Meanwhile, although Biden’s Inflation Reduction Act, passed in August 2022, aims to
dramatically accelerate the transition to electric vehicles in the United
States, the legislation is off to a halting start because it has made many
current EVs on the market potentially ineligible for federal EV subsidies. For
now, the United States and many of its Western allies will remain significantly
dependent on China in their drive to decarbonize.
China has not achieved dominance in such industries
as solar components, EV batteries, and electronics in a vacuum. This rapid
progress connects directly to the country’s strengths in manufacturing and
quality control. From the early 1990s to today, the Chinese workforce has moved
from producing simple toys and textiles to conducting the extraordinarily
complex operations needed to produce sophisticated electronics such as the
iPhone. Along the way, Chinese firms have often made significant advances of
their own: in China, tech innovations have come not from universities and research
labs but through the learning process generated by mass production itself. At
the heart of the country’s ascendancy in advanced technology, then, is its
spectacular capacity for making things.
By any account, China’s technological progress has
come at enormous cost. In the most generous reading, Beijing has established
the country’s position through a fantastic waste of government resources. These
giant subsidies have a distorting effect: a study published in December by the
National Bureau of Economic Research in Cambridge, Massachusetts, found that
Beijing has a poor record of picking winners and the recipients of Chinese
government subsidies tend to have lower productivity growth. More often,
according to many critics, Chinese advances have been spurred by extreme
protectionism and widespread intellectual property theft.
Although there is some truth to all these claims,
they are not sufficient to account for China’s rise. For every example of a
Chinese industry that has benefited from protectionism—such as the Internet
platform Baidu, which thrived behind the Great Firewall—there is another, such
as China’s car industry, for which such measures have failed to produce world
class companies. Forced technology transfers and intellectual property theft
may well have helped the development of some industries, and it is right for
the United States and its allies to push back on these practices. But they do
not explain China’s emergence in such fields as batteries, hydrogen, and
artificial intelligence.
Instead, the most important factor in China’s
burgeoning tech industries is its manufacturing ecosystem. Over the past two
decades, China has developed an unrivaled production
capacity for tech-intensive industries, one that is characterized by a deep labor pool, dense clusters of suppliers, and extensive
government support. This strength draws in part on China’s industrial history.
In earlier decades, the government gave industry special importance:
disastrously during Mao Zedong’s Great Leap Forward, and more effectively under
Deng Xiaoping in his Four Modernizations. Beginning in the 1990s, central
government initiatives were less important than market drivers, with China’s
manufacturing capacity taking off in the wake of the country’s accession to the
World Trade Organization in 2001.
Over the past decade, Xi has put China’s industrial obsession into overdrive. Two years
after taking office, he launched Made in China 2025—a sweeping policy framework
aimed at lifting China’s manufacturing base from labor-intensive
industries to high-technology sectors. And in 2021, in its latest five-year
plan, the central government announced a campaign to turn China into a
“manufacturing superpower.” That is not an idle goal: over the past few
decades, Beijing has directed vast sums of cheap credit and energy to advanced
tech firms, even when they are years away from profitability.
The solar industry is a case in point. By showering
subsidies on all comers, the government encouraged too many firms to enter the
field. But it also provoked greater entrepreneurial risk-taking, creating a
brutally competitive industry in which the strong muscled out the weak. As a
result, Chinese firms today dominate a strategic industry that the rest of the
world depends on. This approach—promoting manufacturing to the point of excess
capacity—is in sharp contrast to the economic orthodoxy in much of the West,
which stresses high-value activities such as R & D and product branding
while downplaying the value of physical production as something that can be
done cheaply offshore, often in Asia.
Beijing’s manufacturing-driven approach has become
critical to its ability to challenge the West in advanced technology. To
understand why, it is crucial to recognize the forces that go into successful
innovations. Producing new technology can be likened to preparing an omelet: ingredients, instructions, and a well-equipped
kitchen are helpful, but they will not in themselves guarantee a good result.
Even people with the fanciest equipment and the most exquisite recipe may not
be able to make a delicious omelet if they have never
cooked before. An additional element is required: practical experience—skills
that can only be learned by doing. These skills can be referred to as process
knowledge, and they are part of what has helped China become a major tech
innovator.
Although process knowledge is difficult to measure,
it can be gauged by a workforce’s general level of experience and by the
creation of clusters of varied industrial activity. China has notable strengths
in both. The country’s most significant technological achievement over the past
two decades has been its development of a vast and highly experienced skilled
workforce, which can be adapted as needed for the most tech-intensive
industries. For example, Apple still counts on China as the only country that
can call up hundreds of thousands of highly trained workers on short notice,
quickly access dense networks of component suppliers, and rely on government
support to help solve the manifold problems that come with producing millions
of iPhones each year.
Equally striking, however, is the way that China has
used foreign firms to help build industrial clusters, or what economist Brad
DeLong calls “communities of engineering practice.” American firms such as
Caterpillar, General Electric, and Tesla have become large employers in China.
And most of Apple’s products are produced by contract manufacturers such as
Foxconn and Pegatron, which manage workers in China. Unlike Japan, which maintained a mostly closed market
during its decades of postwar growth, China has
significantly boosted its industrial rise by learning directly from foreign
firms. Despite U.S. President Donald Trump’s trade war, Beijing refrained from
significant retaliation against U.S. firms in China, partly because it
recognizes the managerial expertise they bring and their transmission of
manufacturing skills to Chinese workers.
Through continual exposure to the world’s leading
manufacturing processes, Chinese workers have acquired skills they can take to
domestic firms. Consider the production of EV batteries. Manufacturing these
units requires around a dozen discrete steps, each of which demands a
near-perfect handoff from the preceding stage. Chinese engineering managers
have gained the process knowledge needed for this task through experience in
consumer electronics. This transfer of manufacturing know-how has also been one
of the keys to China’s dominance of the solar industry. Goosed by subsidies and
aided by their ready access to skilled labor, Chinese
firms were soon producing better and cheaper solar panels than their U.S. and
German counterparts. And these manufacturing innovations have increasingly
defined the global industry: the advances in solar over the last decade have
been driven less by breakthroughs in science—America’s specialty—than by
driving costs down through more efficient production, which is China’s
strength.
The rise of Shenzhen as a global tech center is itself a validation of the importance of process
knowledge. In the years after it began mass producing the iPhone in 2007, the
city developed a vibrant local tech industry optimized for producing intricate
devices; soon, workers used their engineering and production expertise to
invent other products. With R & D labs right next to manufacturing
facilities, Shenzhen’s engineers had unparalleled access to component
suppliers, experienced workers, and skilled designers. Today, Shenzhen has
staked out a leading position in consumer drones, virtual reality headsets, and
other novel electronics. Behind this dominance is a skilled workforce that has
spent years mixing with daring entrepreneurs in an era in which electronics
components such as cameras, batteries, and screens plummeted in cost. Thus Shenzhen now resembles the Bay Area, where university
researchers, entrepreneurs, workers, and investors continually rub elbows.
Small wonder that Shenzhen has become the Silicon Valley of high-tech hardware.
In the decades after World
War II, the
United States used its scientific leadership to dominate many emerging tech
industries, from computers to aviation. For Washington, this made sense at a
time when design breakthroughs and laboratory innovations were a major part of
the Cold
War rivalry with the
Soviet Union. The science-driven approach also seemed to find support in the
market. In the 1990s, Stan Shih, the Taiwanese electronics entrepreneur,
observed that most of the profits in tech industries are made at the beginning
of the value chain—design, research, and development—and at the end, in
marketing the product. The least amount of profit is made in actual
manufacturing, which is the middle of the value chain. This so-called smiling
curve is exemplified by Apple, the world’s most valuable company, which handles
the development and marketing of its products, leaving the low-margin
manufacturing work to be done by its partners in China and elsewhere in Asia.
Drawing on this insight, U.S. companies have spent much of the past two decades
concentrating on R & D and marketing while relying on China in particular
for many of their manufacturing needs.
One result of this longtime
emphasis is the continued U.S. leadership in some industries that demand the
complex integration of different scientific disciplines. Although Intel and
Boeing have seen better days, the United States continues to be an industry
leader in semiconductor production equipment and aircraft engines.
Significantly, both industries are highly interdisciplinary: semiconductor
technologies demand synthesizing fields that include electrical engineering,
chemistry, and computer science; aviation involves aerodynamics, materials
science, mechanical engineering, and other highly specialized fields. Unlike
the United States, China does not have a tradition of pushing scientific
frontiers. In fact, it does less of the groundbreaking
science in these industries and has a relatively poor track record of
commercializing useful research.
But all is not well with the U.S. tech sector. Many
companies have taken the logic of the smiling curve too far in recent decades,
putting ever more resources into the tips of the curve while leaving
manufacturing capabilities to wither. Since 2000, the United States has lost
around five million manufacturing jobs—about a quarter of its manufacturing
workforce—prompting cascades of skill loss among not just line workers but also
machinists, managers, and product designers. In the long term, this decline has
left the United States in a poor position to dominate emerging technologies.
For example, with its own science leading the way, the United States should
have dominated the solar industry. And Washington was prepared to help it do
so: as early as 2012, U.S. President Barack Obama imposed tariffs on Chinese solar imports in an effort to protect
domestic producers. But even with these protections, U.S. manufacturers could
not compete. Whereas China had ready access to a huge base of skilled workers
and suppliers and could scale up production almost without limit, the United
States, after successive layoffs of millions of workers, had lost much of its
stock of process knowledge and did not have the capacity to build a healthy
manufacturing base. As a result, by 2022, U.S. imports of solar technology
reached $8 billion, much of it coming from Chinese companies producing in Southeast
Asia.
The failure of the U.S. solar industry is part of a
bigger story of decline in U.S. manufacturing. To a degree, this trend has been
driven by increasing automation. But the sector is also beset by internal
weaknesses. Consider the early days of the COVID-19 pandemic. Like other countries, the
United States needed vast quantities of personal protective equipment and other
medical supplies. Yet U.S. firms struggled to adapt their production lines to
make facemasks and cotton swabs— uncomplicated products by any measure—because
they had lost much of the requisite process knowledge. By contrast, Chinese
manufacturers were quickly able to retool for the emergency and produced many
of the medical supplies that the United States and other countries needed.
So far, U.S. efforts to reshore
manufacturing jobs from Asia have been disappointing. A big push by Apple to
make more desktop computers in Texas, for example, floundered after 2012
because it lacked a supporting industrial ecosystem of component parts. One
exception has been the United States’ rapid production of messenger RNA
vaccines, which have proved more effective than China’s inactivated virus
vaccines. To compete against China’s advanced industries in the years to come,
however, the United States will need far more than a one-off biotech victory.
Even as it challenges the West’s approach to tech
advances, Beijing has recognized its weakness in scientific knowledge. In his
report to the 20th National Congress of the Chinese Communist Party in October
2022, Xi declared that science and technology will be one of the party’s
top priorities. And although improving its research culture will take time,
China has been making steady progress, including in such areas as space
exploration and quantum communications. Beijing is especially keen to augment
domestic semiconductor development now that Chinese telecommunications giant
Huawei and Chinese chip maker SMIC have been denied access to U.S. and European
semiconductor technologies. One unintended result of Washington’s new chip
restrictions has been to jump-start Chinese investments in science and R &
D.
By contrast, the United States has not yet come to
grips with its own deficit in process knowledge. Certainly, Congress’s passage
of the CHIPS Act and the Inflation Reduction Act in 2022 constitute major steps
forward in industrial policy, given that both allocate billions of dollars of
federal funding for advanced industries. But too much of U.S. policy—including
this legislation—is focused on pushing forward the scientific frontier rather
than on building the process knowledge and industrial ecosystems needed to
bring products to market. As such, Washington’s approach to its growing tech
rivalry with China risks repeating the mistakes it made in the solar industry,
with U.S. scientists laying the foundation for a new technology only to see
Chinese firms take the lead in building it. Take the production of electrolyzers, which extract hydrogen from water and have
become the crucial tool in the production of green hydrogen. As with solar, China is poised to dominate the green
hydrogen industry by manufacturing the most efficient products at scale.
To avoid repeating the solar story, the United States
will have to give greater priority to advanced manufacturing. Andy Grove, the
legendary CEO of Intel, recognized this problem a decade ago, when he urged the
country to focus less on “the mythical moment of creation” and more on bringing
innovations to market. “This is the phase where companies scale up,” he wrote
in an influential article in 2010. “They work out design details, figure out
how to make things affordably, build factories, and hire people by the
thousands.” But to get better at scaling up, the United States will also have
to learn to think differently about the value of manufacturing work.
Policymakers must resist the urge to scorn manufacturing as a mere
“commoditized activity” that can be done overseas. Instead, the mass production
of new technologies needs to be seen as equal in importance to the innovations
themselves—an activity that depends on the kinds of deep process knowledge that
can only come from the better training and integration of workers, engineers,
and scientists.
The new U.S. investments in tech industries that flow
from the CHIPS Act and the Inflation Reduction Act will help reverse the tide.
But as China understands well, money is only the beginning of the process of
building a durable technology sector. Such investments must also be accompanied
by efforts to end the cost overruns that plague U.S. efforts to build better
infrastructure. Local colleges and elite universities must better train
students for advanced manufacturing. And Washington should learn to follow
Beijing’s lead and court greater foreign investment. Like the Trump administration before it, the Biden administration has
invited Japanese, South Korean, and Taiwanese firms to build chip factories in
the United States; these companies should also be welcomed for their expertise
in batteries and the broader electronics supply chain.
The economic reality, of course, is that the United
States will always be a relatively difficult place to make things. Because of
its smaller population and higher wage requirements—and the fact that the U.S.
dollar remains the global reserve currency, raising the relative cost of
producing goods domestically—the United States cannot outcompete China in most
high-volume manufacturing. Nor is a campaign to revitalize U.S. manufacturing
capability likely to create many jobs; any such effort will involve highly
automated lines that rely more on capital than on labor.
And of course, the United States should not attempt to make absolutely
everything. U.S. policy must target strategic industries in which it has a
plausible comparative advantage.
Indeed, in several such industries, the United States
is well-positioned to outperform China. By strengthening its manufacturing
potential, the United States could expand its lead in biotech, semiconductor
production equipment, and aircraft engines. It should make sure it does not
lose next-generation energy technologies such as hydrogen electrolyzers.
And it could attempt to recover some of the electronics supply chain from Asia.
Moreover, in the wake of Beijing’s repeated COVID-19 lockdowns and after Russia’s invasion of Ukraine, investors are increasingly rattled about
the risks of investing in China, and the United States has an exceptional
opportunity to win back manufacturing jobs. But as an ideological starting
point, a new industrial policy will need to be centered
on workers and their process knowledge rather than on financial margins.
Otherwise, it is likely to be China, not the United States, that leads the next
technological revolution.