As US tech war reshuffles value chains, China seen as having work to do to engineer hi-tech manufacturing edge
- Last year’s Inflation Reduction Act and the Chips and Science Act poured billions of dollars into efforts by Washington to reduce dependence on China
- China is seen to have retained top spot for mid-end manufacturing, but semiconductor and alternative energy products have been moving back to the US
As China and the United States battle for tech supremacy, the Washington-led global subsidy war is casting a long shadow over Beijing’s ambitions to become the leader in hi-tech manufacturing.
But while the policies would deliver desirable outcomes for the Biden administration, according to Hinrich Foundation senior research fellow Stephen Olson, any progress may take years.
Even if a certain amount of production can be shifted to the US, the US will still be dependent on China
“The most immediate challenge the US faces is that it lacks a sufficiently skilled workforce to take up many of the jobs related to chips production,” said Olson, a former trade negotiator with the Office of the US Trade Representative.
“Even if a certain amount of production can be shifted to the US, the US will still be dependent on China for many of the necessary inputs and raw materials.”
And according to a China International Capital Corporation report last week, China has retained the top spot for mid-end manufacturing, including general equipment manufacturing, electrical machinery and equipment manufacturing.
But the likes of semiconductor and alternative energy products have been gradually moving back to the US since late 2022 despite the higher production cost following the measures introduced by the Biden administration, it added.
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“China has industrial advantages in the subsectors of transportation, electrical machinery and equipment manufacturing, computer, communication and other electronic equipment manufacturing industries, but the comparative advantages in the above industries have tended to decline since 2015,” CICC said.
The Inflation Reduction Act could see the US reduce its imports of electric batteries and vehicles from China, French investment bank Natixis said last week.
France has also recently ratcheted up pressure on the European Union (EU) to hit back against what it sees as China’s unfair advantages in export sectors, including electric vehicles.
China is now the world’s largest exporter of electric vehicles, after years of industrial policies that have driven billions of investment in the sector.
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But Tesla’s presence in China is also hugely important in inspiring local manufacturers to improve and invest in upgrading their technology, Natixis added.
“It is unclear, however, how much technological transfer really took place from Tesla to its Chinese competitors, and how much of it was in exchange for local subsidies, available to Chinese producers and other foreign electric vehicles makers fully localised in China,” said the French bank.
“The combination of strong industrial policy protecting China’s electric vehicle domestic ecosystem and the sheer market size attracting top-notch electric vehicle manufacturers from overseas is an ideal combination.”
China’s own subsidy regime is characterised by overcapacity, waste and fraud, starting with Beijing picking winning sectors or policy favourites, according to Rory Green, head of Asia research at GlobalData TS Lombard.
I think China could eventually replace almost all US tech
Lured by massive incentives, businesses enter the market, although only a few national champions would remain when Beijing scales back its support, Green added.
“I think China could eventually replace almost all US tech. However, doing so will take decades of investment and come at a huge financial and efficiency cost,” Green said.
“Absolutely attracting foreign investment is a crucial accelerator for China’s tech innovation – Tesla is a good example from recent years.
“This will indeed prove more difficult in the coming years following domestic and global geopolitical shifts.”
According to a research by the US-based Centre for Strategic and International Studies think tank, China’s total industrial policy expenditure was at least 1.73 per cent of its gross domestic product in 2019, higher than its defence spending in the same year.
But with some US allies also introducing subsidies, including the EU’s Green Deal Industrial Plan to ensure it is a leading producer of clean technologies, it could be harder for China to emulate its past success in upgrading its industries through foreign investment, analysts said.
“To the extent US and EU subsidy policies actually prove to be effective in accomplishing their goals, this would only heighten the competitive environment Chinese companies face,” said Olson.
“On the other hand, if the US and EU policies prove to be ineffective and only serve to create inefficiencies and waste money, that would damage US and EU competitiveness, which could rebound to China’s benefit in global markets.”
I think there’s reshuffling in the value chains
US dollar-denominated foreign direct investment into China fell by 9.8 per cent in the first seven months of 2023, year on year, according to the Ministry of Commerce.
“I don’t think it’s just a blip in the data,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis. “I think there’s reshuffling in the value chains.”
Garcia-Herrero cited pressure from the US and European governments, and China’s new legislation on data, espionage and national security, as being among the main reasons driving the trend for de-risking among foreign companies.
CICC also warned that US-led efforts in attracting manufacturing in strategic sectors could have a medium- to long-term impact on China.
Investors will not ignore China, but Beijing is going to have to work much harder
“First, investment in key industries may be affected. Second, if the US guides the restructuring of the industrial chain, it may also affect some China’s export demand and even lead to some overcapacity,” CICC said.
It added that China needs to consider diversifying risks by increasing investment overseas in the production of mid-end products, while also making use of its large market size and industrial policy to boost high-end manufacturing.
Green, meanwhile, said that China remains a large market, with highly efficient and cheap manufacturing, although its appeal as an export-oriented production hub is likely to diminish as a result of the growing risk of investing in Chinese tech firms.
“Investors will not ignore China, but Beijing is going to have to work much harder to attract foreign capital and technology than it did in the past,” Green said.
