Technology hype

China has taken some giant leaps recently but it still has some way to go before it can call itself a high-tech powerhouse

Is China the next technology capital of the world? So one might think, given the breathless hype that has accompanied China's sudden emergence as a big producer of consumer electronics. The hype has been stoked by the grandiose ambitions of Chinese planners, who have backed attempts to create a Chinese computer operating system (to replace Windows), a Chinese computer chip (to replace Intel's) and a Chinese mobile-phone technology standard.

04-1-14But as the old song says, it ain't necessarily so. Today China is a low-cost manufacturing base for foreign (including Taiwanese) technology firms. This role will expand rapidly, as foreign tech firms continue to move capacity to the mainland to exploit lower costs and a growing consumer market. But China's indigenous technology capacity is still quite weak and will grow far more slowly. Chinese industry is lying on a low-tech bed, dreaming high-tech dreams. It will be many years before the dreams become reality.

Research done recently by economist Daniel Rosen of the Institute for International Economics shows that of China's US$325 billion in exports in 2002, just over 20%, or US$68 billion, were classified by Chinese statisticians as "high tech". In Chinese-made goods destined for domestic consumption, the high-tech component is far smaller.

Exports are a key indicator, because they show at what technological level Chinesemade goods are globally competitive. And on close inspection, most of these exports turn out to be not very high tech at all. Most of them are either components or low-margin commodity consumer electronics (such as DVD players).

Neither are these exports very Chinese. A staggering 85% of China's high-tech exports are produced by foreign-invested enterprises. And 61% of total high-tech imports come from wholly foreign owned enterprises, meaning there is no transfer of technology to a domestic partner.

Of the share of high-tech exports produced by domestic firms, 11% (out of a total of 15%) come from state-owned enterprises. Only 2% come from the more dynamic private sector, which embodies China's main hope for climbing the world technology curve.

China is well known for its big trade surplus. Less well known is that in high-tech products China runs a large trade deficit. This high-tech trade deficit grew from US$7.6 billion in 1997 to US$15 billion in 2002.

The biggest contributor to this deficit is semiconductors. Five of China's top nine technology imports are different types of integrated circuits. China's much-touted technology superstar, Legend Computer, by various estimates imports 85-95% of the chips powering its computers.

Two or three years ago the press was filled with stories about how China was about to become a major semiconductor manufacturer. Even now, every month or two brings news of a global semiconductor firm setting up a plant in China.

But all of this hype is profoundly deceptive. The semiconductor industry has three major elements: chip design, manufacture and assembly/ test. The truly high-tech part of this chain is in design and high-end manufacture, and is dominated by global players like Intel, IBM and Samsung Electronics.

The middle ground is occupied by Taiwanese "foundries" which manufacture chips designed by other firms. At the very bottom comes assembly/test, which is essentially a glorified packaging operation.

Not surprisingly, almost all the semicon ductor investment in China has been in lowend assembly/test plants. The vast majority of semiconductor manufacturing capacity on the mainland is devoted to very simple chips that go into things like washing machines and electronic toys. Taiwanese-style foundries are just starting to get off the ground, but they rely exclusively on foreign technology and remain several generations behind their counterparts in Taiwan. China possesses no serious semiconductor design capacity.

Of the US$4.2 billion in revenues generated by all of China's semiconductor plants in 2002 – a figure in itself less than the revenues of one Taiwanese company, Taiwan Semiconductor – 85% was assembly/test. Even the most optimistic estimates predict assembly/ test will still account for over three quarters of Chinese semiconductor revenues in 2008.

Well, what about the future? China produces more engineers and science graduates than any other country on earth – around a half a million in 2002. Chinese scientists decoded the rice genome, have made worldclass advances in stem-cell and cloning research, and most recently sent "Taikonaut" Yang Liwei into orbit around the earth.

There's no question that Chinese scientists will make great contributions, and it's quite possible that their work will help China eventually reach the leading edge of world technology. But it is important to realise how very far from that goal the country still is.

State-sponsored "prestige" science operating without budget constraints has little to do with developing a broad technological base in industry. The Soviet Union beat China into space by 40 years, yet Russia is not today a global technology powerhouse. Similarly, the huge number of science and engineering graduates obscures the fact that the qualifications of those graduates are generally poor. In 2002, the top five US pharmaceutical firms spent more on R&D than all industries and government entities in China combined.

And what about the Chinese chip, the Chinese operating system, the Chinese mobile phone standard? The first two plans have been quietly shelved. The Chinese-developed third generation (3G) mobile technology lives on (thanks in large part to help from German engineering firm Siemens) but is plagued by technical problems and is unlikely to pose a serious threat to competing US and European standards.

China has a promising future, and will develop rapidly. But it's far from being a technology giant today.

Arthur Kroeber is managing editor of the China Economic Quarterly, an independent provider of data and analysis on the Chinese economy and business environment. For more information go to http://www.theceq.info.