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China Builds Self-Reliant Domestic IT Infrastructure Ecosystem

A report titled “China Tech Decoupled” examined how China is building up a self-reliant domestic IT infrastructure ecosystem with detailed analysis. How China’s tech sector evolves and potentially decouples from the global tech system is one of the most important factors shaping the future. The report sheds light on how China’s effort to build up key domestic substitute IT infrastructure is going and how it will impact the world’s tech landscape.

China realised that it depended heavily on foreign technology, particularly in a critical industry: semiconductors. Since then, a renewed national campaign to build up China’s self-reliant supply chains picked up pace significantly. A new industry suddenly became the centre of the spotlight for governments and private businesses. Referred to as Xin Chuang, or Information Technology Application Innovation Industry, this industry aims to build up a comprehensive, self-reliant Chinese domestic information technology industry from chips, operating systems, and applications.

Xin Chuang industry, which is expected to exceed US$ 52 billion in scale in 2023, while the overall market capacity will exceed RMB1 trillion Yuan (US$ 155 billion). The Xin Chuang industry consists of four parts: basic hardware, basic software, application software, and information security. Chips, computing devices, operating systems, databases, and middleware are some of the most important components of the sector.

In many other information technology segments, including servers, enterprise applications, public cloud, and big data platforms, the Chinese market is expected to experience rapid growth going forward. Beijing’s objective is to have Chinese companies grab a significant portion of this future growth and obtain significant domestic market share.

After years of development, leaders in each segment of the Xin Chuang industry have emerged. From operating systems, CPU platforms, databases, cyber security to applications, a wide range of Chinese companies offer domestic replacement options for foreign products in each market segment.

Despite strong policy support and China’s market scale advantage, there are several challenges in China’s efforts to beef up its Xin Chuang market. In semiconductors, for example, government support led to a boom in the industry. In 2020 alone, over 20,000 new semiconductor companies were established in China. There were 73,000 semiconductor companies operating in the country as of the end of 2020. This could lead to vast waste of resources, as previously happened in other sectors such as China’s solar panel market. Around 30% of China’s semiconductor companies were established within a year, and approximately 18.4% of them did not survive beyond one year.

Moreover, China currently does not have a comprehensive plan designed specifically to break the bottleneck areas. Chinese companies also lag global market leaders by two generations or more in manufacturing nodes in semiconductor manufacturing. Such a gap will take decades to close. Xin Chuang products also need to improve quality and build up relevant ecosystems. Regional fragmentation and lack of coordination also present another challenge. Currently, there are many small and regional competitors in the Xin Chuang industry, creating adaptability and interoperability issues.

Despite these challenges, China is likely to make reasonable progress in domestic replacement in the next decade in markets such as Internet-of-Things (IoT) O.S., cyber security, cloud computing, computing devices, and servers. These markets do not have as high technological barriers or long R&D cycles as chip manufacturing. As a greater share of these markets is captured by domestic companies, foreign companies will gradually lose market share and influence over the Chinese market.

As reported by OpenGov Asia, China has dedicated growing resources to basic research and original innovation in recent years. Their efforts aim to cultivate a driving force for economic growth and improve people’s living standards. Chinese researchers, hi-tech enterprises and local governments are together actively striving to strengthen original innovation.

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