By Zhou Xiaoyan

Amid already fierce trade frictions between China and the U.S. are signs of a technology war between the worlds two largest economies， with a leading Chinese telecom equipment maker caught in the crossfire.

On April 16， the U.S. Department of Commerce （DOC） imposed a seven-year ban on ZTEs purchase of crucial U.S. technologies， commodities， components and parts， including chips， for its alleged violation of the terms of a sanctions settlement. Given that the ban is to last until March 2025， the full duration of the Made in China 2025 plan， some believe that the United States real intention is to throttle Chinas hi-tech development.

On April 20， ZTEs Chairman Yin Yimin said at a news conference in Shenzhen， south Chinas Guangdong Province， that the DOC is playing up subtle issues and politicizing trade disputes.

He called the initial decision “unfair and unreasonable” and said that ZTE will safeguard its legitimate rights and interests through all available legal means. On April 20， the DOC granted ZTEs request to submit more evidence.

Since ZTE mainly imports microchips， a key component used in telecommunications equipment， from its U.S. suppliers， industry insiders predict that the companys production will come to a halt once its current chip inventory is used up. It remains to be seen whether the company can find a way back from this seemingly insurmountable setback.

One thing however is certain—the U.S. ban has brought into focus Chinas overreliance on chip imports and the stagnant development of indigenous chips， especially in terms of high-end products. Many in China are now calling for the country to speed up plans to develop and patent domestic chip technologies. The stock prices of Chinese chip makers rallied on the news as more resources will likely be diverted into the sector amid a national bid to gain self-reliance in key technologies.

Laggard development

China is the worlds largest market for integrated circuits （IC）， accounting for more than half of total consumption worldwide.

However， the country mainly relies on imports for major IC products. According to data from the General Administration of Customs， China has been importing over$200 billion worth of microchips a year since 2013， with this figure reaching a record high of $260.1 billion in 2017， roughly double the value of Chinas crude oil imports.

Data from the CCID Research Institute， a think tank under the Ministry of Industry and Information， show that 13 out of the top 20 semiconductor manufacturers are from the U.S.， with sales of $66.7 billion in the Chinese market in 2017. Leading U.S. chipmakers Qualcomm， Broadcom and Micron realize half of their global sales in China.

Gu Wenjun， chief analyst with ICwise， a leading provider of market research and advisory services to Chinas semiconductor and electronics industry， said that the reason why China relies so heavily on chip imports is because domestic producers lag behind their global peers in almost every way， and that everyone has a share in the blame for this shortcoming.

“Chip users prefer global suppliers over domestic chip makers， unless domestic ones have the same performance as global chips but cost less. They even use domestic companies as a bargaining chip when negotiating with their global suppliers，” Gu told Beijing Review， explaining that this has significantly narrowed the profit margin of Chinese chip makers.

“Things are the same when it comes to the chip makers. They too prefer global suppliers over domestic ones and continuously squeeze their suppliers profit margin，” Gu said.

In recent decades， indigenous Chinese chips have had some success， but mostly in the case of certain technologies or companies， and not across the entire industrial chain. According to Gu， the semiconductor industry is complicated and dynamic， covering dozens of subjects， hundreds of technologies， thousands of products and tens of thousands of businesses. No country in the world has a fully independent， complete and manageable industrial chain.

If a country were to attempt to build a complete industrial chain， it would be a long-term and strategic goal that could take 30 to 50 years or longer， said Gu.

Yuan Lanfeng， an associate researcher with the University of Science and Technology of China， said in an interview with Guan Video that the ZTE fallout has raised social awareness of technology selfsufficiency and could present a precious development opportunity for Chinese chipmakers.

Yuan said that the chip industry is extremely capital-intensive， requiring substantial investment to make technological breakthroughs.

“Chip users and chip producers have to cooperate from the very beginning—customizing chips according to user demand， testing chips in a real environment and finally starting production. The expenditure on developing and testing one kind of chip can easily run into the tens of millions of yuan before production，” Yuan said.

“China has invested too little in the chip-making industry. China established an IC Fund in 2014， which accumulatively invested 81.8 billion yuan （$12.94 billion） in the sector from 2014 to 2017. But Intel invested $12.7 billion in 2016 alone，” Yuan said. “You cannot expect Chinese researchers to achieve more with less funding than their global peers.”

“The more we spend on research and development （R&D;） now， the more well save in the future，” Yuan said.

Seeking a new edge

As the foundation of the modern information industry， experts predict that the domestic chip sector will enter a new phase of development as a result of the U.S. ban.

According to Yuan， the key to the development of the chip industry lies in more investment and alluring more talent.

“Once more and more chip users realize that they cannot rely on foreign products， they will start using Chinese chips. Building a production line requires considerable investment. But once production starts， the marginal cost of producing more chips will be lower as shipments increase，” Yuan said.

According to Yuan， the fact that China is the worlds largest chip consumer is a strategic weapon that could have a transformative effect if used properly.

“If we use Chinas market size to collectively negotiate with foreign suppliers， we could create more favorable conditions and a development miracle in which China leapfrogs its competitors， as happened with Chinas high-speed railway sector，” Yuan said.

The rapid growth of domestic chip makers depends on a supportive environment from chip buyers， one in which they are willing to spend time， energy and resources to grow together.

“Chinese companies should strengthen internal control， intensify investment in R&D;， and attach greater significance to core competitiveness，” said Gu. “Chinese telecom equipment manufacturers should support domestic suppliers and not only rely on foreign chips for convenience and lower costs. They should diversify their supply structure and give domestic suppliers a chance，” he said.

The government is increasing its support for the industry. From January 1 this year， domestic chip makers will enjoy tax exemptions ranging from two to five years and covering low-， medium- and high-end chips used in electronic devices ranging from computers to smartphones.

In June 2014， China released a guideline on the development of the IC industry， predicting that the annual revenue of Chinas IC industry will reach 870 billion yuan （$137.6 billion） by 2020， with technologies in key areas to reach leading global levels and materials and equipment entering the global supply chain. A fund has also been set up to support the industrys development.

Gu suggested targeted government support be provided to industry leaders.

Instead of investing or running companies by the state， “the government should support leading market-based businesses by creating platforms and a healthy environment，” Gu said. “The reward mechanism should be carefully designed to sponsor chip makers with strong R&D; capabilities while punishing fraudulent activities.”

“The training of talent and the stricter protection of intellectual property rights is also necessary. Moreover， Chinas homegrown chip industry should be integrated into the global industrial chain and an atmosphere of cooperation should be created，” Gu suggested.

According to industry experts， artificial intelligence and the cloud-based Internet of Things are two major areas where Chinas homegrown chips stand a good chance of being able to compete with global players.

Chinas e-commerce giant Alibaba Group announced on April 20 that it had acquired IC design house Hangzhou C-SKY Microsystems in a bid to increase its own chip-making capacity.

Alibaba has previously invested in five chip manufacturers， including U.S. AI chip designer Kneron and Barefoot Networks.

The companys research institute DAMO Academy is now developing a neural network chip to be used in artificial intelligence. The cost performance of the new chip is reportedly 40 times that of similar products currently on the market.

In addition to Alibaba， Chinas search engine giant Baidu is sparing no effort in the development of new-generation chips. In March 2017， Baidu released the DuerOS smart chip and began strategic cooperation with domestic and foreign chip producers. In August 2017， Baidu launched a new type of chip in collaboration with U.S. chip maker Xilinx.

According to Gu， the growing presence of tech giants in the sector will definitely boost the chip industrys development. “But it will still take time and require diligent work，” he said.