China's chip war: From Xi Jinping's call to technology transfer

When Chinese President Xi Jinping stood before world leaders on the stage of Davos in Switzerland in 2017, his voice was filled with a message of peace. While newly elected Donald Trump was calling for 'America First', Xi spoke of 'mutual benefit' in global trade - the media gave him the title of 'protector of globalization'. But behind that seemingly calm and generous declaration, a different plan was going on inside.

A few days before the Davos speech, Xi Jinping held an important meeting in Beijing. Huawei's Ren Zhengfei, Alibaba's Jack Ma, and other Chinese technology giants were present. The president gave them a clear instruction: "China must achieve success in core technologies as quickly as possible." This 'core technology' was none other than semiconductors or chips, which are the lifeblood of everything from modern weapons to common gadgets.

China's dependence on foreign chips was enormous as being the world's largest chip buyer, China's share of global production was only 6%. The United States alone accounted for 39%, South Korea 16% and Taiwan 12%. China's share of chip design software was less than 1%, a sector that is completely controlled by the United States. As a result, almost all advanced chips made in China depended on technology from the United States, Japan, the Netherlands, South Korea, and Taiwan.

This dependence was a huge thorn. In 2017, China's chip import cost was $260 billion, which is more than oil or aircraft imports! Xi feared that if it could not produce its own chips, both China's technology and defense would remain dependent on foreign countries.

To change this dangerous situation, China announced a historic plan: 'Made in China 2025'. The goal was to reduce the 85% import dependency on chips in 2015 to 30% by 2025. That is, not to merge with the global economy, but to develop its own supply chain and become independent from it.

To make this dream a reality, the 'Big Fund' was formed in 2014. Hundreds of billions of dollars were poured into chip projects from the Ministry of Finance and state-owned enterprises. But there was also a lot of waste due to excessive initiative and inefficiency of local governments. Despite receiving government sponsorship, China's largest chip manufacturer SMIC remained far behind Taiwan's TSMC in technology. Despite big subsidies, they continued to be weak in competition due to bureaucratic complications.

China's attempt to become self-reliant was like shaking the export economy of Asia. Because in 2017, 36% of Taiwan's exports, 21% of the Philippines', and 15% of South Korea's exports were semiconductor-dependent. China's transformation had the potential to shake the entire global supply chain.

When its own production was not yielding the desired results, China then adopted a second strategy – ‘technology transfer’. Instead of stealing, it began to entice or pressure foreign companies to share their chip designs and technology in exchange for access to the Chinese market.

This is where China won one by one:

• IBM: IBM, the symbol of US security computing, came forward to mend ties after losing 20% of the Chinese market. They offered to share their famous ‘Power Chip’ technology with Chinese partners. As a result, IBM regained the market, and China gained the know-how to make server chips.

• Qualcomm: Smartphone chip maker Qualcomm was under investigation in China for allegedly charging excessive prices. As part of the deal, they formed a joint venture with the Chinese government to make server chips. Although the project failed, its engineers and experience later went to another Chinese military-related company called Phytium.

• AMD and x86: The most talked-about incident was AMD, which was in financial trouble. In 2016, they sold 85% of their packaging plants in Malaysia and China and licensed a modified version of the x86 technology to a Chinese government consortium. This technology went to Sugon, a Chinese company involved in defense projects. Although Sugon was banned in 2019, AMD chips were found on their boards, which proves that the technical knowledge was in China's hands by then.

• Arm Holdings: After being acquired by Japan's SoftBank, the British company Arm (whose design is used in almost all smartphones in the world) sold 51% of its Chinese branch for a nominal price. Company officials later admitted that this deal allowed Chinese partners to make their own chips for military and surveillance projects.

IBM, Qualcomm, AMD, and ARM - each acted in their own interests. Some wanted to enter the Chinese market, some wanted to survive, and some wanted to make a profit. But the collective result of their “rational” decisions has accelerated China’s technological rise. In just a decade, China has acquired x86, ARM architecture, advanced server chip design and manufacturing know-how through licensing and partnerships, much of it through contractual transactions, not theft.

Xi Jinping’s call to “attack the core technology fortress” has thus become a real strategy. That quiet speech at Davos has ultimately evolved into a global semiconductor competition that will determine the balance of power in the 21st century.

(Adapted and abridged from chapters 43 and 44 of Chris Miller’s groundbreaking book Chip Wars, “Call for the Assault” and “Technology Transfer”)

Author: Mahmud Hossain, a BUET graduate, has over three decades of leadership experience in Bangladesh's telecom and ICT sectors. He played a key role in introducing mobile technologies in the country. He now serves as a Commissioner at BTRC, following senior leadership roles in several national and multinational industry-leading companies.