Reports out of Beijing that ZTE is “paralyzed” by the ban on import of U.S. technologies necessary for its production of mobile phones highlights an underlying twist to the truth that China, to put it gently, often acquires technologies without benefit of either cash or contract.
The twist is that they haven’t acquired them all.
Which begs the question, why not?
China, not only exposed to, and through imports, in possession of, the most advanced components and software in the world, has shown the willingness and capability to adopt any technology within its grasp by any means whatsoever, yet it has not done so in an industry so deeply important to its prestige and economic development. It has had means, motive, and opportunity. Why hasn’t China followed through? Why is ZTE left so vulnerable?
Decades ago China began analyzing and reverse engineering machinery and equipment from abroad, Chinese who were involved with the practice say. Beginning largely with equipment temporarily imported into China for the few trade shows then held in the country, by the 1980s Chinese teams of technicians and engineers would dismantle, diagram, and photograph equipment left overnight in the trade hall, reassembling it in time for the following day’s show.
By the 1990s, when joint ventures and wholly-owned foreign enterprises (WOFEs) were in full swing, state-of-the-art core technologies began to flow for sale, manufacture, and finally, research, into permanent workplaces in China. Foreign managers routinely encountered Chinese employees faxing and copying confidential, proprietary documentation to their counterparts in government design institutes for that industry. Personnel departments, particularly in large joint ventures, and typically headed by Party members, tacitly supported this “I work for China” mindset, and little disciplinary action was taken to stop the practice.
With the willingness to engage in such chicanery, and a unified political will to get away with it, why has the foundation technology in every sector not been wholly adopted domestically in China?
Five factors can be identified that create obstacles for Chinese technological independence in core technologies, a weakness exposed — and exploited — in the ZTE case.
The first is that copying technology is not the same as organically developing it.
The problem with copying a technology in order to use and absorb it is that the R&D process that developed the technology is absent from the technology transfer. Naturally, well-educated engineers will and do catch up, but with the original learning curve excised, the foundation of the innovation has been compromised.
Secondly, a nation’s successful development of cutting-edge technologies is underpinned by a rigorous domestic academic training, research, and development platform, which acts as an incubator for emerging technologies. China has been spending its way into improved academics, particularly in STEM, and has achieved results. But a rigorous scientific method not inspired by the freedom to create, to collaborate, and to challenge current wisdom stunts the innovation process. Unfortunately, many Chinese academics and students report that they work in an environment that discourages such freedoms.
Third, successful advancements in science and technology often arise out of technology created for a country’s military and space programs, as in the United States. Not only are public budgets for these programs enormous, but they are also supported by behemoth commercial sector programs in the defense industry (which themselves often dovetail with academic programs). The relationship between the Chinese military and the Chinese private or even state commercial sectors in no way resembles the partnerships found in the United States. If anything, although the PLA is being encouraged to develop technologies, and is bolstered by the Military Science Research Steering Committee established last year, it remains to be seen whether military technological development in China can close the gap needed in core technologies. This leads to a fourth plank supporting the development of successful, cutting-edge technology: profit.
China, still tied to a mix of state and private enterprise, and a Communist Party stronger than it has ever been, is always mindful of the political risk of any new steps it takes. What may have been safe politically yesterday, might not be today. Ten years ago, many Chinese were confident that there was “no going back” to a traditional Communist straight-jacket in either politics or business. Today, however, many of the beneficiaries of opening up and reform are having their wings clipped; think of billionaires forced to repatriate investments from overseas. In a political climate that may punish or at least constrain innovative business thinking and approaches, Chinese companies may be less motivated to invest in expensive, lengthy R&D in core technologies, if confidence and expectation of long-term profits is called into question.
Finally, deep and systemic corruption spoils the system in China from R&D through to commercial adaptation. Even in a country such as the United States, with a strong legal framework, relative transparency, freedom of information, and a free press, the military contracting system is nonetheless fraught with waste, insider relationships, and overbilling. Opaque, one-party rule in China, supported by strict controls over information and media, magnifies the effect of a graft and patronage system many times over. Best practices in innovation and advancement pay the price.
China, aspirational, eager, and hungry for a renewed resurgence, still finds itself at arm’s length from achieving true excellence in cutting-edge, core technologies. Having shown its willingness over several decades to copy and clone foreign technology, institutional barriers of the Chinese model nonetheless, and counter-intuitively, override much of China’s ability to reach many of its developmental goals.
Forced by these circumstances to purchase from abroad, ZTE exposes not only its own unwillingness to abide by the terms of a trade agreement, but also the systemic weaknesses of the Chinese model that drove it to buy from foreign markets in the first place.