Technology: China reboots its superpower ambitions

Financial Times | 19 Mar 17

By Louise Lucas and Emily Feng

Tim Byrnes is an unlikely symbol of China's bid to become the world's high-tech superpower. For a start he is Australian. Yet the 39-year-old quantum physicist's decision to swap a research post in New York for Shanghai goes some way to explaining the lengths to which Beijing is going in its efforts to upend the world order.

"Quantum physics is very strong in China," says Mr Byrnes. "The top groups are as good as anywhere in the world . . . and doing some amazing things."

Mr Byrnes is working to develop new technologies that will ultimately, he hopes, help deliver the holy grail of the sector - a quantum computer. His position as assistant professor of physics at New York University Shanghai is the result of a global recruitment drive to hire 10,000 of the world's brightest minds. Recruitment forms part of a broader strategy to build China's technological might alongside efforts to restructure its industrial policy through a scheme known as Made in China 2025. Billions of dollars have been pumped into research and the acquisition of overseas assets, unnerving global rivals.

In the past two years alone, China has announced more than $110bn worth of tech merger and acquisition deals, according to Dealogic,triggering national security fears due to Beijing's role in some of the deals. The Made in China plan was characterised by Robert Atkinson, president of the Information Technology and Innovation Foundation, to the US Congress in January as an "aggressive by-hook-or-by-crook strategy that involves serially manipulating the marketplace and wantonly stealing and coercing transfer of American know-how".

Born out of a drive to modernise its army and navy to keep pace with the US and Russia, China's state-backed programmes in science and technology have acquired a more civilian bent in an effort to put the country at the forefront of areas including artificial intelligence, biopharmacy and electric cars.

President Xi Jinping last year set out the objectives behind the spending, describing science and technology as "the main battlefields of the economy". These priorities were further reinforced at this month's session of the National People's Congress ,China's parliament.

If successful, the plan could mark a fundamental shift from an economy that earned a reputation as a copycat manufacturer to one that is setting the pace. China has some form. Its "BAT" tech trinity of Baidu, Alibaba and Tencent has enhanced the models those companies aped from Google, eBay and Facebook, but its goal to create national champions in areas like semiconductors and AI represent a far bigger step. The Mercator Institute for China Studies, a Berlin-based think-tank, last year described the plan as being the "building blocks of an overarching political programme", adding: "In the long run, China wants to obtain control over the most profitable segments of global supply chains and production networks."

Mr Xi's clarion call is recognition that competitiveness in technology is one of the three pillars, along with economic and sovereign might, on which any modern superpower stakes its claim. The need is made more acute by slowing domestic growth and concern that the much-touted rebalancing, from an investment-led economy to one driven by consumption, is failing to convince.

There is also an element of old-fashioned fear: the concern of being reliant on technology from overseas has only intensified after Donald Trump's election as US president on the back of protectionist trade rhetoric.

"From semiconductors to ecommerce, Mr Xi has unabashedly trumpeted the goal of making China the 'master of its own technologies'," Mr Atkinson told Congress.

Made in China 2025, launched two years ago, is one of a patchwork of schemes designed to advance the country's tech goals. Modelled on Germany's Industrie 4.0, it forms a blueprint for diverting manufacturing away from the low-value labour-intensive plants for which the country is best known into the age of smart technology - doubly useful as the cost of labour rises. Leveraging big data, cloud computing and robotics, it proposes vast automation of industry and aims to lift the domestically produced content of components used in China to 70 per cent by 2025,from between zero and 30 per cent today.

Beijing has done this before in individual sectors. Frustrated that it was spending more on importing semiconductors than oil it has, since 2014, spent $150bn through a mixture of M&A and domestic subsidies on developing the sector. It has also poured money into its own national champions, led by Semiconductor Manufacturing International Corp, while encouraging multinationals such as Intel and Qualcomm to set up shop in China.

The expansion has not been without controversy. Regulators, most notably the US Committee on Foreign Investment (Cfius), have blocked several deals over fears on national security. Casualties last year included a $3bn Chinese consortium offer for a US-based lighting unit of Philips, the Dutch group, which was thwarted by Cfius. In Europe, the €670m sale of German chip equipment makerAixtron to Chinese investors also fell foul of regulators.

Most experts predict that there will be even tighter scrutiny on Chinese bids to buy overseas tech assets in future.

However, with a growing number of Chinese companies setting up research and development centres or small operations in the US and other markets, that could become less of an issue. Daniel Roules, managing partner at law firm Squire Patton Boggs in Shanghai, says these ventures could be used as conduits for acquisitions, undermining the national security argument.

"If a foreign-owned company that has operated in the US for several years acquires a tech company today I'm not sure how much Cfius would look at that or people would worry about it," says Mr Roules, adding that Chinese companies operate on long-term horizons.

If semiconductors represent Beijing's boldest foray into shaping the tech industry, the influence of the state can be seen in other private sectors. Baidu, Alibaba and Tencent, which are listed overseas and boast a combined market capitalisation of around $600bn, have worked on joint projects with the state.

The National Development and Reform Commission, which sets economic and social strategy, last year announced the creation of 19 national data labs, most at universities, as part of the Made in China programme. Alibaba's cloud business is participating in two labs: the first to support online data mining and cloud-based processing for the industrial sector; the other will build a platform for big data software.

"China has been tapping into global commercial and scientific networks, promoting technology transfers, foreign R&D investment and training of Chinese scientists and engineers overseas," says Michael Raska, assistant professor at the S Rajaratnam School of International Studies at Singapore's Nanyang Technological University. "The underlying strategy behind this endeavour became the concept of 'indigenous innovation': to identify, digest, absorb, and reinvent select foreign technologies in both civil and military domains."

Luring specialists like Mr Byrnes to China is "no different to what they do with football - buying footballers so they can pass skills on", says Paul Haswell, Hong Kong-based partner at Pinsent Masons, the law firm.

State-backed schemes, notably Qianren Jihua or Thousand Talents - which brought Mr Byrnes to China - are designed to pluck some of the sharpest minds out of Silicon Valley, Boston and elsewhere and transplant them to hotspots like Beijing or Shenzhen.

Launched a decade ago, the Thousand Talents programme offers deals that most multinationals would struggle to match. On top of a Rmb1m ($144,000) welcome package, there are guaranteed school places for children and job offers for spouses. Applicants are assessed for their qualifications and achievements, but owners of technology or intellectual property score highest. Successful candidates can choose to take up roles in the public or private sector.

Anecdotally, the scheme has spawned developments in areas ranging from gene sequencing to clean energy and national security technology.

In return, the Chinese employer takes a cut of any patents or inventions - important markers in Beijing's efforts to measure its progress. Mr Byrnes has 42.5 per cent ownership of any patents he develops, while the rest goes to the NYU Shanghai - a joint venture of New York University and East China Normal University of Shanghai. The ratio is the same as the one he obtained in the US.

The programme has secured significant brainpower and in the process has lured some Chinese scientists home. Zhang Liang-jie, who left the country for the US after a PhD from the prestigious Tsinghua University, is one such recruit. With 40 invention patents to his name he has returned home to work on AI as chief scientist at enterprise software groupKingdee in Shenzhen, the entrepreneurial cradle of China and Asia's nearest rival to Silicon Valley.

These national programmes are supplemented with a proliferation of local schemes, especially in tech hubs like Shenzhen and Hangzhou. Beyond these schemes there is also direct poaching of the sort that is common in the west but has a shorter history in China. Late last year Baidu, the search engine, hired Lu Qi, a Microsoft veteran, to lead its push on AI. "If you can't buy the company, buy the head," quips one analyst.

The results have been mixed. Programme 863, which was created three decades ago to "fill the vacuum" of technologies with military and civilian applications, has pulled off some impressive coups. It built the world's fastest supercomputer wholly powered by Chinese-made processors, and implanted 3D-printed blood vessels made from stem cells into rhesus monkeys - raising the hopes of printing organs for human transplants.

But it has also been linked to murkier aspects of Beijing's drive. Scientist Huang Kexue was jailed for seven years in 2011 for stealing secrets from his employer, the US agribusiness group Dow AgroSciences. Among the groups he said he sent information to was Programme 863.

China is also drumming up plenty of work for lawyers on patent disputes and infringements. "IP, product liability, industrial espionage - these are used as competitive weapons," says one lawyer who works in China and the US.

Huawei, which holds the world's biggest trove of patents, fellow telecoms infrastructure group ZTC and the leading internet companies are "buying licences like crazy", says one lawyer. "Any company in China, if they have cash they will buy patents."

As testified by the M&A frenzy, subsidies and global talent drive, cash is not in short supply. The same, some feel, cannot be said for other countries, where funding is less consistent.

The US is the birthplace of information technologies, the internet and both the civil and military information revolutions, John Costello, a senior analyst at intelligence agency Flashpoint, told Congress last week. "China's rise as a leader in quantum and related emerging technologies would signal an eastward shift in the locus of innovation."

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