The Great Tech Wall of China

May 18, 2022 / Ben Bajarin

My fascination with the Chinese market started at the beginning of the smartphone era. The market itself, and the Chinese consumer, represent one of the largest economic opportunities for both companies local to China and global companies looking to provide goods and services to the Chinese people.

One of the more interesting developments to watch of late has been China’s move from a mostly copycat style of innovation to beginning to have some unique and differentiated homegrown products and services. The main difference between these and imported technologies, though, is that these unique offerings are largely successful only in China and not adopted at scale and universally accepted by the rest of the world. While a small number of Chinese smartphone OEMs like Huawei and Xiaomi have had limited success in certain foreign markets with their smartphones, many of their same-branded products have not gained any traction internationally. In my mind, a Chinese global success story would look more like Samsung, whose product portfolio is widely accepted in nearly all global markets.

China, as a whole, has a great deal of ambition technologically. And foremost in that ambition is technological independence from the rest of the world. The Chinese government has been funding technologies that range from semiconductors to software platforms and operating systems, all with a hope to replace their dependence on foreign products. I refer to this strategy of striving for full technological independence, and as a result keeping foreign tech companies out, as the great tech wall of China.

With that context, it was interesting to see this news break that Chinese officials were looking to mandate that government agencies and other state-sponsored or -operated firms stop using PCs from foreign brands like HP, Dell, Microsoft, and Apple. Such a move would favor local PC companies like Lenovo and Huawei in particular. This seems like just the first step in mandating more support for local tech companies and making it difficult for foreign companies to compete in the Chinese market.

All that being said, I think the journey will be extremely difficult if China decides to go down this road.

Core Technologies Are Lacking
One of the biggest challenges facing China’s technological independence is the fact that the country’s core technological IP is lacking. One of the primary areas in which this becomes obvious is semiconductors. China has been pouring hundreds of millions of dollars into developing core semiconductor IP and yet they still lag drastically behind the rest of the world in everything from process technology to packaging, manufacturing, architecture, and more. This has been a pain point for China, and continues to irk them as they have tried to acquire a number of foreign companies that own proprietary IP around semiconductors, but have failed due to other governments blocking the sale.

Operating systems, and the ecosystems that surround them, are another critical point of weakness for China. This became painfully evident when the US government blocked China from using some of the most critical features Google offers for Android, including many apps and services, which led to Huawei unsuccessfully attempting to recreate critical parts of the Android ecosystem on its own. Users not having access to all of Google’s apps and services led to one of the weakest sales years Huawei has seen in recent times, with sales dropping by double digits percentages in markets outside of China.

President Trump’s ban on China is easily the best example to showcase how deeply China relies on technology from the US and many other countries. And without access to those critical technologies, Chinese companies were hurt financially.

Domestic Prosperity Requires International Success
The last challenge I want to point out has to do with the Chinese governing party’s promise of economic prosperity to its people. My contention is that China’s ambition of technological independence, which leads it to put up walls making it hard for foreign companies to get in, will also have the adverse effect of keeping their homegrown technologies from getting out.

The economic prosperity China promises its citizens is not possible if proprietary Chinese innovations are only economically successful within China. Despite a country of ~1.3 billion people, China needs its tech companies to achieve economic success on a global scale to truly bring about the economic prosperity promised to its people. A main reason I make this point is that a key strategy of Chinese companies is to compete on price, along with exceptionally low margins, and so scaling at a global level is necessary to create any sizable profit. Therefore, to bring their technological ambitions fully to fruition, China not only needs a plan for how to catch up on core technological IP but also the ability to compete in the global market. It is difficult to see either of those needs panning out, given the technological challenges China has faced in the past and the increased pressure on Chinese products from many western governments.

Ultimately, my hunch is the deeper China entrenches itself behind its tech wall and alienates foreign companies, the more their technology will be alienated by foreign countries, making it that much harder for Chinese companies to be successful anywhere but within their own borders.

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