China tech ambitions could upset trade order

Washington officials and major global companies increasingly worry about a new generation of deals that could give China a firmer grip on the technology of tomorrow.

Under an ambitious plan unveiled two years ago called Made in China 2025, Beijing has designs to dominate cutting-edge technologies like advanced microchips, artificial intelligence and electric cars, among many others, in a decade. And China is enlisting some of the world’s biggest technology players in its push.

Sometimes it demands partnerships or intellectual property as the price of admission to the world’s second-largest economy. Sometimes it woos foreign giants with money and market

access in ways that elude American and global trade rules.

When concerned officials in Washington began blocking China’s ability to buy high-end technology last year, one Bay Area company found a way to help its Chinese partner around those limits.

Advanced Micro Devices of Sunnyvale avoided scrutiny by licensing its exclusive microchip designs, rather than selling them. The Chinese partner got access to the technology to make its own products. Advanced Micro Devices got a big payout.

The rules of global commerce are changing — and China and the United States are racing to create a future that aligns with their own distinct visions. The result could be an overhaul of 20th century trade rules for a 21st century global economic order, in which money, ideas and influence could become as closely watched and tightly regulated as hard goods packed on a ship and sent abroad.

Even before the Communist Revolution, China obsessed about absorbing foreign technology as a way to end a century of humiliation and restore its national strength. But Made in China 2025 is more ambitious than anything the government has ever attempted, a national industrial policy to project a new type of global might and influence.

China is directing billions of dollars to invest in research at home as well as to acquire innovative technology from abroad. A Beijing-directed semiconductor fund is thought to have more than $100 billion at its disposal, and another plan aims to grow China’s artificial intelligence companies into a $150 billion industry by 2030.

Such efforts have some U.S. government officials and business leaders calling for a rethinking of how the United States approaches trade. Lawmakers are pushing for tougher rules on technology purchases, which do not usually cover the types of deals that China increasingly prefers. Officials are also investigating whether China is stealing intellectual property.

“There are a few U.S. companies that have been leaning too far about sharing technology with countries that are potential enemies of ours,” Secretary of Commerce Wilbur Ross said in September remarks regarding information technology that were widely seen as referring to China.

“I don’t think that’s a very good idea. I think it’s the ultimate shorttermism to give up very valuable IT in order to get a few quarters or a few years of improved sales.”

China looks to the West for much of its technology. Even some of its most sensitive systems that run government computers, banks and laboratories use chips from Intel and Qualcomm and software from Microsoft or Oracle, a dependence it sees as a long-term vulnerability.

The government hopes to change that. It is backing the effort with money: $45 billion in cheap loans for its companies, $3 billion for advanced manufacturing efforts and billions more in other financial support, according to the Mercator Institute for China Studies, a German think tank.

Made in China 2025 “is going to have substantial resources and focus devoted to it, especially at the local government level,” said Kai-Fu Lee, a prominent venture capitalist in Beijing.

The goal is not simply to beat the United States. China is preparing for a day when cheap manufacturing no longer keeps its economy humming. It wants to embrace industries offering skilled jobs that do not blacken its skies and cloud its rivers.

The plan itself has specific targets and quotas. By 2025, it envisions China meeting nearly three-quarters of its own demand for industrial robots and more than a third of its demand for smartphone chips. Other targets cover new-energy cars, like electric cars, and high-performance medical devices.

Where technology cannot be purchased, the government wants Chinese companies to extract it from foreign firms through deals or tough new laws.

China will soon require foreign auto companies to make electric cars there if they want to continue selling gasoline-powered vehicles in what is now the world’s largest car market. General Motors, Volkswagen and others have been scrambling to form joint ventures with Chinese partners to do so.

Cybersecurity laws enacted this summer give the Ministry of State Security the power to conduct security reviews of technology sold or used in China, said James Lewis, senior vice president of the Center for Strategic and International Studies. Such a step could require companies to expose some of their most valuable secrets.

At some companies, Chinese security officials conduct the inspections in corporate “clean rooms” in the United States, with the Chinese officials traveling on business visas, Lewis said. The companies argue that the access takes place under controlled circumstances that limit what Chinese officials might learn.

“If American companies have a big market in China, they say to the Ministry of State Security: ‘Come in,’ ” Lewis said. “Everyone fears retaliation. No one wants to lose the China market.”

Wary of the push, the United States has used existing rules to stop Chinese purchases of foreign businesses in areas important to national security.

But many of those tools do not apply to today’s deals, as AMD’s Chinese pact shows.

AMD’s joint venture with its Chinese partner can be found in a gleaming industrial area of the city of Chengdu called Tianfu Software Park.

The park represents Beijing’s vision of the future. Trees and sidewalks jammed with ride-sharing bikes sit beneath a vast strip of office towers, hotels and apartment complexes. Offices of China’s most innovative companies, like Huawei and Tencent, sit next to outposts of their foreign analogues, like SAP and Accenture.

Inside one of its glass towers, AMD works with its Chinese partner, a company called Sugon, to produce new chips.

Under the nearly $300 million deal, AMD agreed to license chip technology to a Chinese joint venture with Sugon to make chips for servers. Because AMD controls that joint venture, the technology is considered to remain in U.S. hands.

But AMD struck a second partnership that the Chinese company controls. That joint venture works on applications such as integrating the chips with servers. The two ventures are on the 11th and 12th floors of the same building.

Experts say the dual partnerships could help China develop a new generation of powerful supercomputers. China already makes the world’s fastest computers, but they run on homegrown chips that cannot read commonly available software for supercomputers. With AMD’s help, experts say, Sugon could develop chips that could make China’s supercomputers more versatile and adaptable and replace those from foreign firms.

“We have worked closely with and been very clear with U.S. government officials on the strategy and specifics of the technology, which is classified as permitted for export,” an AMD spokesman said in an email. He added that the processors are also lower performing than other options that AMD sells in America.

“Everyone fears retaliation. No one wants to lose the China market.” James Lewis, Center for Strategic and International Studies