America’s Tech Challenge Against China

By Michael Megarit

In 2007, when Apple first initiated iPhone manufacturing in China, the nation was primarily recognized for its affordable labor and not for its technological advancements. Chinese companies were predominantly reliant on importing iPhone’s internal components from nations such as Germany, Japan, and the USA. Essentially, China’s role in the iPhone production process was primarily restricted to assembling these parts at Foxconn’s facilities in Shenzhen, a contribution that was less than four percent of the total value-added costs.

Fast forward to the launch of the iPhone X in 2018, the technological landscape in China had undergone a significant transformation. Apart from still being the assembly hub for the majority of iPhones, Chinese enterprises began manufacturing numerous intricate components, such as acoustic components, charging mechanisms, and battery units. These Chinese entities, having honed complex technologies, started outperforming their competitors in Asia and Europe. In the newer iPhone iterations, this trend has only intensified. Presently, over a quarter of the iPhone’s value-added costs come from Chinese tech companies.

While the iPhone, with its intricate design and reliance on diverse technologies, is unique, its growing production base in China exemplifies a larger shift. Chinese enterprises, in most product categories, have progressed from merely assembling parts from abroad to pioneering their own state-of-the-art technologies. Paired with their leadership in renewable energy tools, China is now spearheading in next-gen tech domains like artificial intelligence and quantum computing. This trajectory challenges the belief that leading in scientific endeavors directly results in industrial supremacy. Even with limited groundbreaking scientific contributions, China’s expertise in scaling industries has given it an edge over the US in numerous pivotal tech fields.

In the backdrop of its escalating competition with China, the US has aimed to curtail China’s accessibility to vital Western tech and amplify its own history of scientific invention. Hence, in 2022, the Biden regime implemented comprehensive restrictions on the sales of advanced Western semiconductor technologies to Chinese businesses, while strengthening US tech through the $280 billion CHIPS and Science Act. This legislation, along with the Inflation Reduction Act, has enabled the US to reclaim some of its prominence in semiconductor and renewable production. However, China’s relentless tech advancements signify that merely curbing access or amplifying research might not be sufficient. China’s technological ascent is not just about replicating or illicitly acquiring from the West. It is a manifestation of China’s continuous enhancement of its industrial capabilities, rooted in its extensive and adept manufacturing workforce. The shift towards domestic technologies by Chinese companies, in light of the US restrictions, stands testimony to this.

For the US and its partners, the emergence of China as a technological behemoth offers significant insights. China’s tech evolution isn’t solely based on cutting-edge research but also on refining its manufacturing prowess. If the US truly wishes to match Beijing’s tech dominance, it will have to prioritize more than just pioneering science. The focus should also be on maximizing its workforce, mirroring China’s strategy to upscale innovations and produce superior products. For the US to resurge as the leader in emergent technologies, it needs to view manufacturing as a pivotal component of tech progress, rather than a secondary aspect overshadowed by research and development.

China’s Ambitious Technological Ventures

While many critics doubt China’s stance in the global tech landscape, it’s worth noting that China hasn’t birthed as many international corporations or brands that have global acclaim. Distinctly different from countries like Japan and South Korea, China hasn’t introduced fresh categories in consumer electronics or significantly rivaled European or American players in the automotive or aviation sectors. Predominantly, Chinese corporations have focused on producing items for developing markets at affordable rates. This trend has somewhat painted a picture of China as a manufacturing hub rather than an epicenter of groundbreaking innovation.

It’s also evident that China still lags behind the West in several pivotal tech areas. Although China’s semiconductor domain has its successes, especially in designing mobile phone chips and certain high-end memory chips, it remains significantly behind in the manufacturing of logic chips. Here, firms like Taiwan’s TSMC lead the race. Moreover, when it comes to the highly specialized equipment needed for chip production, Chinese companies largely depend on imports from nations like Japan, the US, and Europe. The aviation sector presents a parallel narrative, where the Commercial Aircraft Corporation of China (COMAC), despite significant state backing, is yet to solidify its place against giants like Airbus and Boeing. Both these industries in China are painfully aware of their dependency on the West for fundamental components and technology. This very dependency gives recent U.S. restrictions on tech exports the power to unsettle Chinese corporations.

However, despite these palpable challenges, China is making commendable strides in a myriad of other tech areas. They are catching up quickly with European and Japanese companies in advanced machinery production, including robotics and hydraulic systems. As the iPhone’s production indicates, China now contends fiercely with nations like Japan, South Korea, and Taiwan in electronics production. Even with increasing state oversight on internet giants like Alibaba and Tencent, China’s digital realm remains potent. Chinese entities, like ByteDance with its TikTok platform, can go toe-to-toe with Silicon Valley heavyweights. China’s modern infrastructural feats are noteworthy too, with their advancements in high-speed rail, 5G technology, and breakthroughs in space exploration and quantum communications, reflecting their determination to achieve mastery in an array of fields.

In essence, China’s technological trajectory is more nuanced and vibrant than it might appear on the surface. While there are areas where they’re playing catch-up and face regulatory hurdles, either from international entities or their own government, China’s commitment to achieving global standards in multiple sectors is evident. Their consistent advancements and homegrown innovations in strategic tech domains, many of which the U.S. emphasizes, bear testimony to this commitment.

China’s Renewable Revolution

China’s ascent in the realm of renewable energy technology is one of its standout achievements in recent history. While the dawn of commercial solar technology in the 21st century saw major innovations from the U.S., setting expectations for American firms to lead the pack, China swiftly pivoted to capture this emerging sector. By 2010, with the State Council recognizing solar power as a pivotal industry of the future, the nation witnessed a surge in subsidies and business initiatives, particularly focusing on amplifying manufacturing prowess. Consequently, Chinese enterprises not only grasped the nuances of solar photovoltaics but also enhanced the established manufacturing processes. Currently, China’s influence is pervasive across all facets of the solar production spectrum, from refining polysilicon to assembling solar modules. Their solar panels aren’t just economical; they stand out for their exceptional efficiency. The remarkable price drop in solar technologies over recent years can be primarily attributed to China’s groundbreaking manufacturing innovations.

In a parallel vein, China has carved out a commanding position in manufacturing high-capacity batteries essential for electric vehicles (EVs). As the global auto industry pivots from gasoline engines, state-of-the-art battery tech has ascended as the linchpin of automotive production. Here, China has showcased its leadership. Consider CATL, a Chinese establishment from 2011, which has evolved into the globe’s top battery producer, collaborating with automotive giants like BMW, Tesla, and Volkswagen. CATL’s supremacy isn’t just about expansive production capabilities, which undeniably aid in cost reductions, but also their pioneering efforts in creating innovative and efficient chemical compositions. Their sodium-ion batteries, which bypass the need for rare lithium and cobalt, are a testament to this.

The Biden administration has not been oblivious to the potential pitfalls of relying on China for pivotal green technologies. Yet, despite various U.S. sanctions and probes into potential forced labor in China’s solar sector, China’s dominance remains unchallenged. In a significant move, a U.S. Commerce Department investigation, hinting at imposing hefty tariffs on solar imports, created a ripple of uncertainty among American solar stakeholders. Consequently, in 2022, President Biden had to intervene, postponing any potential tariffs for a subsequent two-year period. Even though the Inflation Reduction Act of 2022 sought to expedite the U.S.’s shift to electric vehicles, its initiation has been somewhat shaky. This is primarily due to its provisions that could make numerous EVs ineligible for federal grants. As of now, both the U.S. and several of its allies continue to be considerably reliant on China in their pursuit of a greener future.

This dominance by China in areas like solar technology, EV batteries, and electronics didn’t happen in isolation. It is intrinsically linked to China’s unparalleled capabilities in manufacturing and quality assurance. Transitioning from crafting basic products in the early ’90s to crafting intricate devices like iPhones today showcases this journey. Notably, in China, technological progress has predominantly emanated not from academic institutions but from the hands-on learning entrenched in mass production. Central to China’s rise in tech innovation, then, is its unparalleled talent for creation and assembly.

The Recipe Behind China’s Tech Prowess

While China’s journey towards technological preeminence has been marked with controversies, there’s no denying the immense resources Beijing has pumped into achieving its status. Detractors argue that China’s prodigious tech gains are thanks to rampant intellectual property theft and protectionist policies. And while the National Bureau of Economic Research in Massachusetts points out Beijing’s ineffectiveness in choosing industry frontrunners, these concerns only paint a partial picture of China’s technological ascent.

For every industry like Baidu, which flourished behind China’s protectionist policies, there are sectors, like the automobile industry, where protectionism failed to produce global titans. While concerns over forced tech transfers and intellectual property theft are valid, they don’t solely account for China’s expertise in sectors like AI, batteries, and hydrogen technology.

At the heart of China’s tech evolution lies its manufacturing ecosystem. Over the past two decades, China has cultivated unparalleled manufacturing capabilities with a vast skilled labor force, an intricate web of suppliers, and significant government backing. Historical industrial initiatives, from Mao’s Great Leap Forward to Deng’s Four Modernizations, paved the way. The real momentum, however, began post-2001, after China’s induction into the World Trade Organization.

Under Xi Jinping’s leadership, China’s industrial ambitions have been turbocharged. Policies such as “Made in China 2025” and the recent five-year plan propel China towards being a global manufacturing titan. The country’s solar industry showcases the effectiveness of this manufacturing obsession. Although a glut of companies entered the fray, thanks to lavish subsidies, the endgame saw the most innovative and competitive firms emerge at the top, solidifying China’s control over this pivotal sector.

This “manufacture-till-you-make-it” approach starkly contrasts with the Western focus on high-value R&D and branding, relegating manufacturing to cheaper offshore locations. This manufacturing-centric model has become China’s key weapon in the global tech race. Analogizing tech production to cooking an omelet, while having the right ingredients and recipe is crucial, the real magic lies in the hands of an experienced chef. Similarly, in the tech realm, process knowledge, accrued from hands-on experience, is invaluable.

China’s seasoned workforce, adept at adapting to high-tech industries, and its industrial clusters, referred to by Brad DeLong as “communities of engineering practice,” attest to this. Major international brands, from Apple to Tesla, rely heavily on China’s manufacturing capabilities. China’s openness to learning from foreign corporations has also accelerated its industrial journey, even amidst trade tensions.

This continuous immersion in top-tier manufacturing processes has equipped Chinese workers with skills readily transferable to local companies. The EV battery industry, for instance, benefits from the expertise engineers gathered from the consumer electronics realm. The same applies to China’s solar sector, where a combination of subsidies, accessibility to skilled labor, and manufacturing enhancements have outpaced rivals in the U.S. and Germany.

Shenzhen’s emergence as a global tech hub encapsulates the essence of process knowledge. Post the iPhone’s introduction in 2007, Shenzhen evolved into a tech metropolis adept at crafting complex devices. With proximity to R&D and manufacturing facilities, engineers had direct access to supplies, experienced professionals, and innovative designers. Today, Shenzhen leads in cutting-edge gadgets like drones and VR headsets. This city, brimming with expertise, collaboration, and innovation, mirrors the dynamism of California’s Bay Area, earning its title as the hardware equivalent of Silicon Valley.

The Primacy of Innovation vs. Execution

In the post-World War II era, the U.S. capitalized on its pioneering scientific insights to lead burgeoning tech domains, from computing to aviation. This strategy was cemented during the Cold War rivalry with the USSR. The market also seemingly endorsed this science-forward focus. Stan Shih, a Taiwanese tech magnate, noted that major tech profits come from the innovation and marketing ends, not from the manufacturing middle. Apple, a prime example, manages its product innovation and marketing, but outsources the manufacturing mainly to Asia.

This model did secure U.S. dominance in sectors requiring a mix of scientific expertise. Although Intel and Boeing faced challenges, the U.S. retained its grip on the semiconductor and aircraft engine sectors, each blending multiple scientific disciplines. Conversely, China traditionally lagged in frontier sciences and struggled to commercialize innovative research.

However, there’s a downside. Many U.S. companies over-invested in innovation and marketing, neglecting manufacturing, leading to a loss of nearly five million manufacturing roles since 2000. This shift impacted the country’s ability to lead in new tech fields. Despite having the scientific advantage, the U.S. lagged in the solar industry. When Obama levied tariffs on Chinese solar products in 2012, it didn’t revive the U.S. solar sector. China’s robust manufacturing capabilities contrasted sharply with America’s diminished manufacturing expertise. By 2022, U.S. solar imports hit $8 billion, with a significant chunk from Chinese entities.

U.S. manufacturing’s decline is multifaceted. The early COVID-19 days highlighted the U.S.’s lack of capability to produce basic medical supplies, unlike China, which adapted swiftly. Attempts to bring manufacturing back to the U.S. from Asia showed mixed results. Although the U.S. excelled in mRNA vaccine production, this isn’t enough to compete with China’s rising industries.

Building Industries, Not Just Innovations

China acknowledges its scientific shortcomings but is actively addressing them. Xi emphasized science and tech’s significance in 2022. Meanwhile, China advances in fields like space and quantum communications. The U.S. embargo on semiconductor tech to firms like Huawei pushed China to invest more in science and R&D.

The U.S., however, has been slower to realize its manufacturing knowledge gap. Legislative steps in 2022 funneled billions into tech sectors, but the emphasis remained on science rather than the holistic product development cycle. This could see the U.S. repeat its solar missteps, with U.S. discoveries commercialized more efficiently by China. In advanced tech like green hydrogen production, the U.S. must prioritize manufacturing. Intel’s Andy Grove once emphasized the importance of commercializing innovations over mere creation.

Recent U.S. investments in tech will aid, but funds alone won’t ensure a resilient tech industry. Efficient infrastructure, skilled workforces, and foreign expertise are vital. While the U.S. faces challenges in competing with China in large-scale manufacturing, targeting strategic industries where it has an advantage is vital.

The U.S. can still lead in biotech, semiconductor tools, and aircraft engines. Capturing the next wave of energy tech and regaining parts of the electronics supply chain is possible. With investor concerns around China and the geopolitics involving Russia, the U.S. has a window to reclaim manufacturing roles. However, a worker-centric industrial policy, valuing hands-on expertise over just profit margins, is crucial. Otherwise, the torch of technological leadership might shift to China.