He won the 2016 Wincott Foundation award for Financial Journalist of the Year. His prize-winning 2006 book, “China Shakes the World”, was a bestseller translated into 19 languages.
He spent 25 years reporting from Asia with postings in China, Japan, former Soviet Central Asia and Southeast Asia. He is chairman of FT Confidential Research, having founded “China Confidential”, a research company, in 2009.
Sarah Chen interviewed James Kynge on November 18, 2019.
The United States and China are engaged in a technology war in many aspects, with global artificial intelligence and cyber-domain dominance at the forefront of the competition. What was the first shot in this “tech war”? What are their main motives?
The first shot that really registered was the ZTE (Zhongxing Telecommunications Equipment Corporation) issue, where the U.S. put ZTE on the entity list last year. Since then, there has been a large number of Chinese companies that the U.S. has put on the entity list. In fact, the other week I was checking and the total number is about 140 now. There were eight recently, Chinese AI companies like Hikvision, Megvii, SenseTime, so it has been quite a comprehensive move.
There is a difference between the professed motivating factors behind the U.S. doing this and the actual motivating factors, like in the case of Huawei. The ostensible reason for putting Huawei on the entity list was that Huawei was violating sanctions against Iran because Meng Wanzhou did some deals with Skycom. Huawei was managing to export some equipment to Iran in contravention of U.S. sanctions, so that was the reason given for putting it on the entity list. In the case of the eight Chinese companies that were recently put on the entity list, that was because they supposedly have operations in Xinjiang. They were accused of human rights violations. In reality, there is a strong overlay of a sense of competitive threat in tech the U.S. is feeling from several of these companies. Not just competitive threat, but also national security threat. In the case of Huawei, it was pretty obvious that the U.S. did not want Huawei laying its basic telecoms equipment across the U.S. because there was a fear that there could be backdoors in the Huawei equipment so that the Chinese might be able to use that equipment to find out what’s happening in the U.S.
In the case of some of the facial recognition companies, motivations were the same. Take Hikvision for example. It already has business in the U.S. I met with a Hikvision executive in charge of the U.S. the other day, and he told me that the revenue coming out of the U.S. is about 400 million U.S. dollars a year now, so they already have considerable presence in the U.S. Their cameras are in many parts of the country. In some cases, their cameras appear to be on U.S. military bases, at least that is the story that a colleague of mine at the FT wrote.
In the case of Hikvision, it was a national security issue that was up in most in the minds of U.S. policy makers, and possibly Megvii and SenseTime fall into the same category. But, as far as I am aware, there has been no documented evidence of surveillance taken by those companies in the U.S.
The entity list is a whole gamut of different issues, and some of the real issues are different from the professed issues. Some of the real reasons for which those companies have been put on the entity list are different from what the U.S. says is the reason.
In which technology sectors do you see the greatest rivalries taking place? Which companies seem to be the major players?
The technology rivalry is pretty much across the board. The most critical area is AI. Unless the regulators get to work on AI and prevent it from becoming so, AI is the technology that can change the way humans work, our relationships with technology, our relationship with each other, our relationship with the government. We are just at the foothill at the moment with the implications of AI for the way that we live and therefore, the regulatory environment has yet to catch up. So I do think there is a very big “if” over how AI will be popularized in a society like the U.S., it may be tied up in all sorts of regulatory notes.
Let’s suppose for a moment that the U.S. and China adopt AI without regulatory impediment. This area will be the key area, mainly because when both countries have 5G telecoms, the internet of things will become standard. That means that automation of functions that we carry out at the moment on a day to day basis will be done through some algorithm, through some AI function. AI is going to be absolutely crucial.
The enabling factor behind that is going to be the 5G telecoms. Here, it is absolutely clear that the U.S. is far behind. By the end of this year, China will have installed 130,000 5G base stations, already, 5G is working in certain parts of Southern China such as in Shenzhen, Guangdong province. Already, as a Chinese consumer, you can buy a 5G phone and that phone will work.
This is going to mean that by the middle of next year, 5G is going to be widely available, at least in some developed areas of Southern and Eastern China. That means China is going to get a head start in developing the Internet of things, and because the regulations surrounding big data in China are so much more permissive than those in the U.S., that will lead to a whole slew of new products, some of them in the AI space, some of them of a more basic nature. This will power a new 5G-driven economy. Unless the U.S. gets moving on this, it will be left behind in that economy. Now is the right time to start thinking about the policy implications of this. The U.S. as a country and as a political culture does not like being left behind. The whole U.S. narrative since the second World War at least has been that, when it comes to tech, when it comes to new innovations, the U.S. leads the world. But this time this is not going to be the case. It’s going to cause a huge amount of painful introspection in this country when China is leading in these areas.
That’s 5G, AI, and there are other areas of competition.
Supercomputers, China is already ahead. Ultra-high voltage transmission, China is already ahead, so much so that the U.S. isn’t even in the game. High-speed rail, China is already ahead, again the U.S. isn’t even in the game. Solar power, wind power, the U.S. does have companies in those areas, and I wouldn’t be surprised if they upped their game quite a bit. Electric vehicles, the U.S. does have companies in those areas so we’ll have to see what happens in that regard. But, in terms of popularization of electric vehicles, China will move far ahead of the U.S. because the market is so much bigger and once things take root in China, they move so quickly. While we’re on the subject of cars, self-driving cars is absolutely key. Huawei and several other companies like Baidu are developing their own self-driving cars, often in cooperation with European or U.S. car manufacturers. Again, it is quite possible that China will lead in this area as well. It’s looking really bleak for the U.S. I would say, an area where the U.S. might remain ahead is biotechnology.
The U.S.-China technology war has been a large factor in the on-going trade war. You argued in an August article of this year, that the Chinese view the U.S. trade war as “ku rou ji, or ‘bitter flesh strategy’ — wounding yourself to gain advantage over an adversary” which “works only if you end up inflicting greater injury on your rival.” How does China view the consequences of the trade war, and how has that affected their technology development?
The trade war has been an unmitigated disaster for the United States. If you look at almost every measure, the U.S. has lost. Let’s just take the trade measure.
It is the case that China’s exports to the U.S. have declined this year, but they have declined by less than U.S. exports to China. Win or lose is perhaps too binary a dynamic through which to judge this, but given that this is often the dynamic that people have used to judge it, let’s continue with that.
The Chinese trade surplus has actually increased this year, China’s trade surplus with the world that is. I can’t see that this action has really hurt China very much in totality. The RMB has depreciated but then appreciated again so it is basically stable to where it was at the beginning of this year. There have been considerable Chinese capital outflows, but I’m not sure that it was the Trump administration’s intent to cause that when he launched the trade war, and we don’t really know how large that is because the numbers are so difficult to come by.
When it comes to tech, and in particular I would use the example of Huawei, it seems to have done nothing. Huawei has been on the entity list, however, Huawei’s revenue has been growing extremely strongly. The latest quarter showed a 24% increase in revenue. Huawei’s market share in terms of smartphones globally and in China have increased since the trade war began, particularly in China where they have increased in the third quarter of the year over 60% and market share is close to 40% in China for smartphones.
The trade war hasn’t prevented Huawei from launching 5G or 5G phones, but it has created the impetus for Huawei to swap out some of the American chips that it uses in its phones for Chinese-made chips.
These entity list sanctions don’t seem to have had the effect of slowing down some of China’s big tech companies. If you look at it from the perspective of the U.S., has the U.S. gained anything, for instance, has there been a huge flow of investment in supply-chain or supply-chain manufacturing from China back to the U.S. – a “Make American Great Again” type of thing, there may have been some, but I haven’t been able to find any examples.
I suppose you could make an argument that the one thing that the U.S. has gained from thing is it has sensitized policy makers all over the U.S. towards China and the competitive threat that China poses. There has been an increase in scrutiny over China tech companies and what they’re doing in the U.S. If the aim of the U.S. was to increase suspicion towards Chinese tech companies, then that has definitely succeeded. But in terms of concrete outcomes that help to enrich American people, then I would say, to see the vernacular, a “big fat zero” or a “negative.”
A lot of American-based websites and companies are blocked in China, such as Google, Facebook, etc. Do you see this trend continuing on and the emergence of two different spheres of digital realms in the future?
Now, I’m making a projection, but it seems to me that what we’ve experienced over the last 18 months has partly been a trade war, but within the trade war has been a tech war. I think it’s possible that China and the U.S. will unravel their trade war, so they’ll reduce the tariffs over time. I’m not saying it’ll happen immediately, but the pathway towards that has already begun. But, what will remain is the tech war.
China’s rise in so many different technology realms is so rapid and full of such momentum that it gives China an irresistible chance to supersede the U.S. At the moment, I don’t see any U.S. policies to deal with it. What do people do when they cannot deal with an external threat? They shrink from it. This has been proven time and time again in human history. And when the U.S. does begin to shrink from it, it will try to decouple in various Internet systems and other forms of technology and try to kick out Chinese AI from the U.S.
I don’t think that it will be possible, however, to decouple. This is a word you hear being bantered around, but if you really look at the level of decoupling between the U.S. and China that has happened so far, there’s only been a few examples. There’s been Apple considering relocating aspects of its supply chain. Perhaps Hewlett-Packard and Google are also considering some contingency plans to move some supply-chain manufacturing to Vietnam and other countries, but it doesn’t add up to a huge amount. That could change, but then you have to start considering whether Vietnam has the capacity to accept a huge shift of supply-chain. If not, then where does it move to? Malaysia, Thailand, Indonesia, it’s not an easy thing to do.
How have China’s coercive dealings or theft of intellectual property and data benefited its technological development?
I would say, a lot. China may have stolen intellectual property of U.S. companies equivalent to 540 billion, as an upper-range approximation, in 2017. You do have to wonder how those figures are arrived at, which is estimating the value of something that is stolen. The nature of theft is that you don’t really know what’s been stolen, and then you don’t know the value they’ve been put to, having been stolen, so it’s a very difficult number to calculate.
Obviously, 540 billion is a huge number, it’s bigger than the U.S. trade deficit with China. This has been an endemic problem for years and years. China has put this technology to good use. It’s not always been stolen, in many cases, it’s been handed over by a U.S. company that has been operating in China as the price for market access. The Chinese government has been very skillful at extracting this type of technology from Western companies, not just U.S. companies, as the price for continued market access.
In regards to Chinese theft and how that is viewed in the Western hemisphere of influence, the official message coming out of the United States appears to be accept Chinese infrastructure and you will hurt the security of your country and perhaps your relationship with the United States. Has the United States been successful at promoting caution against Chinese technology or has the allure of technology development and the economic benefit of China been too strong?
In the U.S., the message has been successful in raising this alarm. In Europe, we’re right on the horns of this dilemma at the moment. In the UK and Germany, at the moment, Huawei is allowed into non-core parts of our telecoms network. Whether or not that will continue, it could go either way. Huawei could be stripped out of all aspects of our telecom system which, in the UK, would be extremely difficult because Huawei has been in the UK’s basic telecom system since 2004 and, in the case of Germany, for several years. If the U.S. really leans on U.K. and Germany, it’s possible there could be a decision to strip Huawei out completely. It is also possible that over time, the decision could go the other direction, so that Huawei equipment might be used in the core at some later stage. It's causing enormous soul-searching in Berlin. I’ve been party to some of the deliberations, and I can tell you that British policy-makers are absolutely befuddled by this. They really don’t know what to do, so we’ll just have to see how it goes.
My thought is that if you look around the world, when it comes to Five Eyes, Australia has been clear, they’re not accepting Huawei. New Zealand is accepting Huawei, but they’ve banned it in one small area. The U.K. already has Huawei, and it looks like they are going to accept Huawei in non-core areas.
How is China responding to the tech war? Do you see any inclination like the U.S. has to kick American companies out of the Chinese market?
Not in so many words, and I think this is a very salutary message for policy-makers around the world. They should watch the difference in how the U.S. and China executes their policy. In the U.S., what tends to happen is that there’s a great hue and cry. Trump and several other politicians will start making rhetorical points against Huawei, and some things do happen.
But, in the case of China, what often happens is that no rhetorical points are made. In fact, China goes to great lengths to obscure the policies that they’re taking, but the policies that are being enacted are just as restrictive as those being taken in the U.S. What I’m really pointing to is this “Made in China 2025” plan. The Chinese still officially deny that this plan has, industry by industry, set targets to reduce the market share that foreigners have in China over time so that by 2025 foreign companies are holding on by a toe-hold in these industries. My personal feeling and the feeling of thinktanks I’ve quoted such as MERICS in Berlin are absolutely convinced that this is official policy.
Where do you see this technology war heading? Can there be a clear winner and what will a victory for the U.S. or China look like?
If we continue with our base case scenario, which is the evolution of two fairly distinct technology universes in the world, one U.S.-led and one China-led, a fairly likely scenario 5, 10 years out, which is not necessarily de-coupling but a divorce in technologies that are not yet popular, winning and losing might look like whether the world uses Chinese standards or American standards. It's quite likely that the world, or at least big parts of the world, will use Chinese standards.
Look at what Huawei is already doing around the world in Africa, in Latin America, the developing countries. It may be that the developed countries will toe the American line, believing that there is a security risk or believing that the U.S. says there is a security risk and therefore they don’t want to annoy the U.S., so they’ll go along with U.S. policy. Under that kind of scenario, you get a small number of Western countries that fall into the U.S. tech orbit, and a huge part of the rest of the world, most of the developing world where most of the world’s growth comes, following the Chinese orbit, with the exception of India. I think that India will not fall into the Chinese orbit because India is very concerned about China.
Featured image by Kae