China is accelerating efforts to substitute Western-made technology with homegrown solutions as the United States tightens restrictions on high-tech exports to its Chinese counterpart, according to reports by Reuters.
This revelation, based on government tenders, research documents, and insider sources, sheds light on a surge in domestic substitution initiatives since the preceding year.
The telecom and financial sectors are likely next in line for this technological transition, say insiders familiar with these industries. Additionally, state-backed researchers have identified digital payments as an area particularly susceptible to potential Western hacking, indicating a probable push to indigenize such technology.
Government tenders, military contracts, and projects undertaken by state-linked entities aimed at nationalizing equipment more than doubled from 119 to 235 in the twelve months following September 2022, per a finance ministry database accessed by Reuters. During the same period, the value of awarded projects in the database soared to 156.9 million yuan, marking a more than threefold increase from the previous year.
China allocated a staggering 1.4 trillion yuan ($191 billion) towards replacing foreign hardware and software in 2022, signifying a year-on-year surge of 16.2%, according to IT research firm First New Voice. Despite these efforts, analysts assert that China’s limited advanced chip-manufacturing capabilities may hinder the complete substitution of foreign products.
Kendra Schaefer, Head of Tech Policy Research at Beijing-based consultancy Trivium China, said “Previous domestic substitution efforts stalled because China did not have the ‘technical chops to pull off localization until now, and to a certain extent they still kind of don’t.”
To expedite the transition, state-owned enterprises (SOEs) received instructions last year to replace office software systems with domestic alternatives by 2027. This marked the first time specific deadlines were set, reportedly according to a September 2022 directive from China’s state asset regulator.
Recent domestic replacement projects have targeted particularly sensitive infrastructure, as indicated by tenders. For instance, one tender allocated 4.4 million yuan to replace equipment in an intelligence-gathering system for a specific government department in Gansu province.
Experts suggest that these initiatives could lead to a more secure technological landscape for China, although challenges persist. Despite Western tech companies sharing source code and partnering with Chinese firms in the past, some believe these measures may not suffice for China’s security needs.
The push for domestic substitution in China’s tech industry has already resulted in significant shifts. Huawei, a prominent Chinese tech conglomerate, has emerged as a frontrunner in this replacement cycle, recording a 30% increase in sales for its enterprise business in 2022.
China’s move to reduce its reliance on Western technology is in line with national security concerns and efforts to protect critical infrastructure from external threats. However, this shift has raised concerns among foreign businesses regarding procurement practices and competitive fairness.
While China’s push for domestic substitution does not appear to violate international agreements, it reflects a broader trend of countries seeking to bolster their domestic technology industries while reducing reliance on foreign suppliers.
The continuous push for technological self-sufficiency underscores significant shifts in the global tech industry. While foreign firms are still dominant suppliers for certain critical sectors like banking and telecoms, China’s ambitious endeavors are reshaping the landscape and challenging existing market dynamics.
