The Microchip Battle in the US-China Trade War

China’s theft of intellectual property is concentrated in the tech sector, a field that the Chinese Communist Party is determined to dominate. (Image:  Riley Porter via  Flickr CC BY 2.0)
China’s theft of intellectual property is concentrated in the tech sector, a field that the Chinese Communist Party is determined to dominate. (Image: Riley Porter via Flickr CC BY 2.0)

Of the disputes between China and the United States, intellectual property theft is one of the biggest. The U.S. government has cited the trillions of dollars lost to Chinese espionage as a main reason for the ongoing trade war between the two countries.

China’s theft of intellectual property is concentrated in the tech sector, a field that the Chinese Communist Party (CCP) is determined to dominate.

According to overseas Chinese analyst Cheng Xiaonong, the CCP has increasingly resorted to stealing following a long history of unsuccessful attempts at homegrown research and development (R&D), particularly in the microchip industry.

In an article translated and published by The Epoch Times, Cheng explained how the Chinese state-run efforts at developing microchips had begun in the 1970s, following similar programs that created China’s first nuclear weapons and satellites. These centrally directed and funded programs, however, suffered from lack of innovation and efficiency.

Chinese state-run efforts at developing microchips had begun in the 1970s, following similar programs that created China’s first nuclear weapons and satellites. (Image: Public Domain)

Chinese state-run efforts at developing microchips had begun in the 1970s, following similar programs that created China’s first nuclear weapons and satellites. (Image: Public Domain)

Cheng cited two examples of Chinese microchip projects that attempted to make products for a civilian market — Microchip Projects 908 and 909. The first project, begun in 1990, resulted in chips that were several generations behind international technology when finally ready for production. Microchip Project 909 similarly failed “to find a breakthrough point in the microchip industry.”

“National R&D systems were slow to implement technological upgrades and had difficulty coping with complex market changes,” Cheng wrote. “Even less were they able to meet the huge demand of the civilian market. In short, the militarized R&D system was seriously lacking in industrial ethic and the capacity for upgrade and innovation.”

“In the civilian sector, high-cost technology developed through domestic researches is not as cost-effective or reliable compared with purchasing foreign technology,” he wrote. “At present, China’s commercial chips still rely on copious imports, and the high patent royalties associated with foreign supply is a big pain for the Chinese government and its enterprises.”

Buying and stealing

Cheng said that in 2017, China imported US$88.9 billion worth of memory chips. And instead of trying to do the research independently, the Chinese turned to acquiring foreign technology by all means available. This meant “acquiring foreign high-tech companies and with them their patents, technology, and production lines; or poaching technical personnel from foreign companies.”

Additionally, Chinese spies, or simply those working in abroad for foreign companies, stole technical data and other classified information and brought it back to China.

In 2017, China imported US$88.9 billion worth of memory chips. (Image: ッ Zach Hoeken ッ via Flickr CC BY-SA 2.0)

In 2017, China imported US$88.9 billion worth of memory chips. (Image: ッ Zach Hoeken ッ via Flickr CC BY-SA 2.0)

The U.S.-China Economic and Security Review published a report on Aug. 1, saying that “China’s engaged in a buying spree of international semiconductor firms…What they can’t develop on their own, they intend to buy, if they can, or steal, if they must.”

In November, the U.S. Department of Justice brought lawsuits against a major Chinese microchip company called Fujian Jinhua and an affiliated Taiwanese company on charges that they had stolen US$8.75 billion in intellectual property from Micron, an American tech company.

Jinhua was banned from doing business with American firms and lost its Taiwanese connections as well. “Aside from [Chinese] government investment, Jinhua literally has nothing else,” Cheng wrote. He compared Jinhua to the abortive microchip projects of the 1990s: “Once its source of upstream technology was interrupted, it became an ‘unfinished project.’”

The recent controversy surrounding China’s biggest tech company, Huawei, has called attention to the company’s reliance on U.S. suppliers for critical hardware. And at the beginning of the year, Huawei’s domestic competitor, ZTE, was nearly crippled by a U.S. government business ban that was later downgraded to a large fine.

Both Chinese flagship companies were charged with violating U.S. sanctions imposed on Iran, and both companies are widely suspected of being complicit in technological theft from the United States.

The recent controversy surrounding China’s biggest tech company, Huawei, has called attention to the company’s reliance on U.S. suppliers for critical hardware. (Image: Kārlis Dambrāns via Flickr CC BY 2.0)

The recent controversy surrounding China’s biggest tech company, Huawei, has called attention to the company’s reliance on U.S. suppliers for critical hardware. (Image: Kārlis Dambrāns via Flickr CC BY 2.0)

The dead end of domestic development

In his article, Cheng Xiaonong said that the failure of Chinese research and development in the field of information technology ultimately point to the failings of the communist economic model, which retards creativity and independence in order to minimize risk.

“Competition in the information economy requires huge amount of venture capital. The returns from intellectual property not only cover the benefits of successful R&D investment, but also the costs associated with failed investments,” Cheng said.

Because technological development entails high-risk ventures, the costs associated with successful development have to be high: “Chinese government and companies often complain that charges for the use of Western intellectual property charges exceed the direct R&D costs that went into the technology. This perception stems from limitations in the Chinese vision.”

In the Chinese system, money is simply handed out by the government to state-run projects, where researchers and administrators don’t have much incentive to “gamble with their own professional future,” as Cheng puts it. Moreover, “bureaucrats in decision-making roles do not have the vision that front-line R&D personnel possess,” so they fail to follow and take advantage of the trends in tech development.

“The U.S. government knows very well that China is not only after the gains to be made by emulating the intellectual property American companies, but also hopes to spend minimal sums in ‘taking away’ technology and using it to crush U.S. companies and damage the foundations of the American information economy,” Cheng Xiaonong explained.

Cheng noted that China’s communist authorities have generally tried to avoid detailed negotiations, offering only vague responses to American demands.

Meeting with President Donald Trump in Argentina on Dec. 1, Chinese President Xi Jinping indicated a willingness to discuss specific points in the U.S.-China relationship in exchange for a 90-day truce in a trade war that has squeezed the struggling Chinese economy.

But without making fundamental reforms, Xi faces an insurmountable deadlock in the Communist Party’s economic and political system.

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