China isn't playing tech catch up - it's leapfrog and it may get dirty

It goes against the narrative of technological achievement trumpeted by Beijing, but he was right about how far China lags behind the US.

If you were to believe much of the media coverage, you would think that China was already a world-beater in technology. Endless news stories recount how China now turns out more graduate engineers each year than any Western country, publishes more scientific research papers and files more patent applications.

However, these statistics indicate little about technological prowess. According to business managers, many of those three million annual science and technology graduates lack crucial analytical and communication skills, and are barely employable. Similarly, a large proportion of those 430,000 research papers have little or no scientific value.

ZTE almost collapsed amid threats the US Commerce Department would not allow American firms to do business with the smartphone-maker. Photo: Reuters

And many of China's 1.4 million yearly patent applications are destined to prove worthless. In fact, fewer than 20 per cent of China's applications even claim to be for new inventions; the vast majority are for lower-tier design or utility model patents, which typically cover minor incremental changes to existing products.

Sceptics argue that few of these have any merit, pointing out that the explosion in China's patent applications in recent years has not been driven by a surge of innovation, but rather by province-level promotion programmes that offer generous subsidies and tax refunds to companies holding local patents.

In short, quality is not quantity. A more telling measure of China's relative technological standing is how it performs in the international marketplace. Yes, China exports a lot of hi-tech stuff, but two-thirds of it is produced by foreign companies that like China as a location for low-cost assembly. Many of the high-value components are still shipped in from abroad. China's biggest single import line by value - exceeding even crude oil - is semiconductor chips.

This dependence on foreign components was brutally exposed in May, when the US Commerce Department briefly barred American companies from doing business with Chinese smartphone-maker ZTE as a punishment for its violation of the terms of an earlier penalty for breaching US sanctions on Iran.

A vehicle operating on Baidu's Apollo autonomous driving system at the CES Asia 2018 show in Shanghai, China. Photo: Bloomberg

With US semiconductor manufacturers Intel, Broadcom and Qualcomm among ZTE's top five suppliers, the Chinese company would have been forced to shut down its operations within days had the ban not been reversed.

Inventive economies generate handsome international income streams by licensing their technologies to foreign companies, which then pay them intellectual property royalties.

In 2016, China earned just US$1 billion from the rest of the world in intellectual property payments. In contrast it paid out US$24 billion (and according to many critics, it should have paid a great deal more).

Now compare those numbers with the equivalent figures for the US, which last year earned US$128 billion from licensing its intellectual property to other countries, while paying out US$48 billion. Meanwhile, Japan earned US$35 billion, and paid out US$18 billion.

Chinese visitors watch a robot at the 21st China Beijing International High-Tech Expo in Beijing. Photo: EPA

So while the US earned a net US$80 billion from its innovations, China paid a net US$23 billion for the privilege of using other people's. This discrepancy gives an idea of the two countries' relative technological sophistication. Given the sheer scale of the gap, it might seem that the editor of Science and Technology Daily was right to speak about the difficulties China faces in catching up with the US in technology.

However, it would be wrong to think that China intends to catch up. It doesn't. Instead, it plans to leapfrog the US and other Western economies to seize global dominance in a range of emerging technologies.

Over the past couple of years, Beijing has rolled out plans to drastically raise China's game in around 20 hi-tech industries including semiconductors, robotics, aerospace, high-speed rail, electric vehicles, pharmaceuticals and new materials.

Much of the international attention has focused on the old-fashioned import substitution elements of these plans, with Beijing typically aiming for Chinese companies to capture a three-quarter share of the domestic market over the next 10 or so years.

But Beijing's plans go far beyond import substitution. In semiconductors for example, state planners want Chinese companies to command a third of the international market by 2030. And in artificial intelligence, they are aiming at nothing less than global dominance.

This article originally appeared on the South China Morning Post (SCMP).

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