25 November 2018

How China Took Over Your TV


It’s not just about powering growth. It’s also about national security and self-sufficiency.

China wants to build homegrown champions in cutting-edge industries that rival Western giants like Apple and Qualcomm. While China has a long way to go, the Communist Party is bringing the full financial weight of the state and forcing other countries to play defense.

In doing so, China is staking out a new manufacturing model.

Economic textbooks lay out a common trajectory for developing nations. First they make shoes, then steel. Next they move into cars, computers and cellphones. Eventually the most advanced economies tackle semiconductors and automation. As they climb up the manufacturing ladder, they abandon some cheaper goods along the way.

That’s what the United States, Japan and South Korea did. But China is defying the economic odds by trying to do all of them.

Look at the evolution of what China sells to the rest of the world. As it ramped up its manufacturing engine in 2000, China was pretty good at making basic products like toys and umbrellas.

By 2016, China had moved into more expensive goods like cellphones and computers, while making even more of the cheaper stuff.

The next phase, which includes the most valuable products in the world, will be harder. China can’t make chips as small and fast as the United States can. Its cars are mostly sold at home. Its manufacturing prowess is built on the back of engineering and expertise from the West.

Both the Apple iPhone and Huawei Mate 10 are assembled in Chinese factories. Both rely on pieces from outside China.
iPhone 8, 2017

The most intricate and expensive technology in the Huawei phone, the motherboard, has a Chinese processor, but it is primarily composed of chips from American, South Korean and Japanese companies. The 2.8-inch board accounts for 52 percent of the cost of the phone, according to data from TechInsights.


Note: Graphic shows nationality of manufacturers but some components may be produced in Chinese facilities.|Source: TechInsights

Many of these companies are so advanced that they don’t even manufacture the chips. Instead they send their complex designs to foundries in Asia to manufacture. But even in this step of the production, most companies in China are shut out.

Unless China can catch up, it will remain vulnerable. One of China’s largest telecom companies, ZTE, nearly went out of business when it was banned from buying American parts; President Xi Jinping personally asked for a reprieve from President Trump — and got it.

China knows it has a problem. It’s investing heavily in electric cars, semiconductors and mobile technology, part of a major industrial policy.

And the trade war has also hardened China’s resolve. “The initial result of the trade war has made China appear to be weaker,” said Liu Rui, an economics professor at Renmin University in Beijing. “But it is precisely this weaker position that has awakened China, forcing us to change our approach.”

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