China and the Challenges of the Fourth Industrial Revolution: Value Chains, 5G, and Emerging Markets

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Marcin Przychodniak

China and the Challenges of the Fourth Industrial Revolution: Value Chains, 5G, and Emerging Markets

China has identified the ongoing digital revolution as its first opportunity in modern times to compete with other international powers, especially the U.S. The competition serves as the driving force for enhancing innovation and finding new sources of growth for the Chinese economy. The advantage of technological development is that it will allow China to become a “major cyber power,” introduce its own technological standards worldwide, raise its position in global value chains, and influence the world economy. But the process is seriously challenged by the change in China’s relations with the U.S., concerns in the EU about Chinese investments as well as domestic centralisation of power.

The end of the Cold War happened in parallel to the period of China’s continuous growth, expanding trade and investment relations, and—as a result—finally (in the 2000s) rising to the status of the principal competitor of the United States. As long as cooperation with the U.S. served China’s interests, the People’s Republic of China (PRC) refrained from open rivalry with the U.S. The Chinese authorities tried to popularise ideas like a “new type of great power relations[1]” (xin xing da guo guanxi) to describe bilateral contacts arguing that China and the U.S. are two big global powers. China’s policy changed when Xi Jinping became the PRC chairman in 2013. Since then, he has centralised his power, promoted ideas of changing the global order, and announced the Belt and Road Initiative (BRI). His policy has been aimed to compete with U.S.-led ideas and initiatives. All of his tactics are also used in a domestic narrative aimed at strengthening nationalistic pride, symbolised by the slogan the “great rejuvenation of the Chinese nation” (zhonghua minzu weida fuxing).[2] This change in foreign policy was based on clear Communist Party of China (CPC) analysis that if China continued its conservative approach and tried to adjust to the status quo, the country would not be able to develop its resources and, in the long term, compete as an equal with the U.S. Since the usual drivers of growth in China (export growth, low-cost labour, and investment) were also running low, and with the financial crisis in the West proving the limits of external demand, the need for economic reforms became crucial.

The “fourth industrial revolution,[3]” as it is dubbed, seems to be a perfect opportunity for China to create for itself innovation-led development and growth in high-tech sectors. China has always held the U.S. in esteem as the inventor of the internet, achieved during the “third industrial revolution,” and U.S. superiority in business, regulatory institutions, and technologies. China decided to create its own spheres to dominate and technological advantages. Introduced in May 2015, the “Made in China 2025” strategy (together with “Internet +”)[4] was a clear example of this mindset. The U.S. resignation from formal control (though never used) of the Internet Assigned Numbers Authority (IANA)[5] was the first opportunity for China to strengthen its position in the digital industry and internet management.

The New Technological Revolution: China and the Internet

For Chinese leadership, now is the first chance in modern times to reverse what it views as a historical “process of humiliation” to speed up development, projected to end in 2049 (the 100th anniversary of the founding of the PRC), and to become “a leader among the world’s manufacturing powers.” The goal is to regain the status of a standard-setter, which China asserted centuries ago as the probable inventor of printing, paper, gunpowder, and numerous other inventions and technology.

The phrase, a “new round of technological revolution” (xin yi lun jishu geming; a term associated with Rifkin’s “third industrial revolution,”[6] Schwab’s “fourth industrial revolution” but first and foremost based on Toffler’s ideas of different types of societies[7]) is the period presented by Chinese experts as a remarkable chance for China to acquire superpower status without a military conflict. A state-driven policy (applied in conventional sectors for the last 40 years), with government procurement, subsidies, and the involvement of large, state-owned enterprises,[8] seems to be the most successful mechanism for this. The Chinese authorities define artificial intelligence (AI), the “Internet of things” (IoT), and telecommunications as the main elements of its own technological revolution. These tools should help China secure “uninhabited areas” (wurenqu), that is, technological domains not dominated by the U.S. so far, and ensure China’s superiority as a “major cyber power” (wangluo qiangguo).[9]

According to Xi, the main aspects of this technological revolution are to defend the interests of the people (renmin liyi) and the country’s security (guojia anquan). In his official speeches, he has often instructed the CPC and state administration that AI is the core of China’s technological development.[10] He argues that AI facilitates growth and economic reform, and has an important impact on the society. Xi also underscores that AI will influence the CPC’s methods of governance, such as facilitating the achievement of goals in education, healthcare, transportation, and housing. Finally, AI will enable government to better assess the exact needs of society and use its resources more efficiently to reform China’s pension, healthcare, and education systems. AI though—and these are not Xi’s words—will also provide the CPC with better control over society by giving it access to data on people’s priorities, behaviour, and opinions, in one case all combined into a digitalised scoring and evaluation system already in development.

The internet in general is a key instrument in the fourth industrial revolution. Zhuang Rongwen, president of the Cyberspace Administration of China (CAC), recently described the country’s strategy towards the internet in party magazine Qiushi.[11] Since the internet is an important “ingredient” in the technological revolution, it should be placed under strict ideological and political control. Zhuang admits that “whoever masters the internet holds the initiative of the era and whoever does not take the internet seriously will be cast aside by the times.”[12] Although such a metaphor implies a serious rivalry between China and the United States, CAC’s president—in parallel with Xi’s recent messages on the need to cooperate with the U.S. on technology—leaves some space for other partners under “collaborative cyberspace.”

The significance of China’s involvement in the “new round of the technological revolution” makes it crucial for the CPC to keep control over the state’s development process. Xi’s leadership and his efforts to maintain party integrity are fundamental for his policy in the second term. So, it is mainly the CPC, not tech leaders, private enterprises, or research institutions, that is the driving force behind China’s success in the “new round of the technological revolution.”

Challenges[13]

China’s ambitious plans (with AI, IoT, and 5G[14]) within the fourth industrial revolution are currently seriously challenged in both the external and internal dimensions. First and foremost is the negative change in U.S. policy towards China. It is visible not only in the trade disputes[15] but also in new export regulations on vital components[16] and restrictions on investment in the IT sector (the screening mechanism and reform of the Committee on Foreign Investment in the United States), as well as in restrictions in access of Chinese students and researchers to U.S. universities (due to visa limits). The U.S. is constantly repeating its stance that China needs to change its economic policy, especially in terms of state subsidies for Chinese companies, access to its market, and cybersecurity. The U.S. is also in the avant-garde of the opposition to the involvement of Chinese companies in 5G infrastructure development, not only asking foreign partners to stop cooperation with Chinese high-tech global enterprises like Huawei but also enacting its own restrictions.[17] The Chinese interest in 5G to date had already raised security concerns among several U.S. partners. Their main concern is that Chinese companies may gain the ability to control critical infrastructure responsible for the functioning of transport, education, healthcare, and energy. Access to sensitive data and the possibility of technical control might be used in the interests of the Chinese state. The so-called “five eyes”[18] countries (New Zealand, U.S., Australia, UK, and Canada) have decided to exclude Huawei from 5G.[19] Japan recently decided to ban Huawei and ZTE from public procurement and discouraged operators from 5G cooperation with Chinese partners. Softbank, a Japanese holding company that includes a mobile carrier, withdrew Huawei equipment from its 4G network and placed orders for 5G equipment from Nokia and Ericsson.

To rid itself of its perception as a “technological colony” (jishu zhimin), China tries to speed up its technological advances in designing and producing Chinese-made microchips and a computer operating system. The state programmes devoted to microchip production have succeeded in the development of devices used, for example, in the civil-aviation sector.[20] But the level of China-made technological solutions is still very low, which renders China vulnerable to U.S. competition.[21]

Next in importance is the external challenge of the change in EU policy towards China symbolised by speeding up work on the investment-screening mechanism.[22] Although the policies of individual EU Member States towards cooperation with China differ (several countries including Spain, Portugal, Greece, and Hungary pursue a positive approach towards working with China), the general European trend—due to the importance of the size of the EU market and the European Commission’s competences in trade and investment—is worrying for China. The most important partners from the perspective of the “technological revolution” and EU institutions—France, Germany, and the UK—are no longer as positive towards China, especially in mergers and acquisitions of companies in the IT, robotics, and high-tech sectors.

The external challenges are just one part of the picture. Equally important is the range of internal factors that influence policymaking on economic reforms. China’s economic policy is orchestrated directly by Xi Jinping, who took on unprecedented control especially by chairing leading central commissions (for financial and economic affairs and for comprehensively deepening reform). New development guidelines were introduced in Xi’s speech at the 19th CPC National Congress in 2017. This was in response to the needs of the Chinese “middle class” and aimed at environmental protection, increasing innovation, and improving healthcare (“people-centred philosophy of development”).[23] China’s level of GDP growth seems not that important anymore. Cities and provinces are supposed to follow sophisticated policy supporting the development based on high-tech and innovation. Such a change from “high speed” to “high quality” growth has created confusion among local governments. New goals come from the central level and the local authorities are obliged to abide by them even though they sometimes are opposite their needs. At the same time, they also can be held accountable if they do not respond to the needs of their local populations.

The numerous inspections from different institutions, ministries, and the National Supervisory Commission constrain the decision-making of the local authorities, who constantly try to figure out the will of the central leadership and avoid a negative evaluation by the party. But then the circle closes: officials avoid decisions, but that lack of action makes them vulnerable to actual persecution.

The centralisation of power by Xi has not only reduced the efficiency of the local governments but also enhanced the subordination of private businesses to the CPC.[24] The most prominent cases of Chinese private and global investment companies forced to follow party regulations in their investment policies include CEFC, the Wanda Group, and HNA.[25]

Party-controlled state capitalism enforced by the CPC also has a negative impact on research and development (R&D), which can succeed only through the close cooperation of businesses and research institutions.[26] Independent think-tanks are harassed (e.g., Unirule, a pro-market and constitutional democracy-oriented think-tank, was evicted without notice from its Beijing offices in 2018) and the ability to freely conduct academic research is limited. Academics are increasingly afraid of freely discussing issues and sometimes their passports are held by the institutions where they work.[27] Although China for many years has claimed to have the most new patents, it has not succeeded in implementing them.[28]

Countermeasures[29]

In order to deal with the challenges, the Chinese authorities decided to focus on specific aspects of the development plans in areas in which the country is already leading or has the potential to be number one. There are three significant areas. The first is cooperation with technologically less-developed markets in regions such as the Middle East, Africa, Southeast Asia, Central Europe, the Balkans, and Latin America. The aim is to focus on introducing into those markets Chinese brands and standards, as well as extend political influence. The second is telecommunications, especially 5G-technology development. The third is to advance Chinese standards and its companies in IT value chains, with specialisation in certain sectors.

On less-developed markets, the idea is to create interdependencies and use capital to foster cooperation. China is about to utilise its established market champions in selected niches[30] such as drones or surveillance equipment. The “Digital Silk Road” was established as a dedicated part of the BRI. To support it, numerous instruments are in use. China has delivered hardware and equipment to developing countries (about 35 states[31]) and although that has created strong economic links it is also questionable from the partner’s security perspective. Along with this kind of cooperation goes attempts to transfer values compatible with the Chinese concept of the freedom of information. A Freedom House report identified how Chinese officials have held sessions on these issues with 36 of 65 countries assessed.[32]

5G is currently perceived by the Chinese as a “mark of quality” and convenient tool to gain an advantage in terms of technology competition and market share.[33] The development of 5G infrastructure is considered by the Chinese authorities to be similar to the invention of the internet by the U.S. in the 1980s. China already dominates 4G services globally in terms of the number of users and technologies. It feels it has a natural opportunity to become a major competitor and supplier of 5G technology with higher speeds, reduced latency, and energy savings. The main Chinese company responsible for 5G development is Huawei (see Table 1) which established B2B partnerships in Europe, Asia, and other world regions (around 25 5G MoUs with operators[34]). China wants to provide the technology and keep its influence on the future development and maintenance of critical infrastructure connected with 5G. The International Telecommunication Union, a specialised UN agency headed by Chinese official Zhao Houlin (re-elected in November 2018), is at the same time the main global agency overseeing the worldwide development of 5G and may be an important part of the Chinese plans. Huawei has the most 5G intellectual property rights among the Chinese entities[35] (but still fewer than U.S. companies).

In order to minimise the costs of access to the U.S. or European technologies, China is trying to take control of whole production chains in certain sectors and products. In the e-mobility sector, especially electric vehicle batteries, it already dominates the international market. China declares it is opening up its market to foreign partners but is doing so in exchange for including made-in-China products in the production processes of world-known brands. Such a modus operandi was applied, for example, to a deal concerning a BMW factory in Shenyang. The German automaker was allowed to operate on the Chinese market without a joint venture with a Chinese company, required under previous rules. In exchange, China expects its own products to be included in the production process to gain recognition of them as used by BMW. Another example is Google’s Dragonfly project, characterised as a “compromise” for access to the Chinese market. It was to be a censored search engine set up in a joint venture with an unnamed Chinese company.[36] Ordinary access to Google’s products has been blocked in China since 2012. 

China’s already difficult relations with the U.S. and increasingly troublesome ties with some EU Member States (at least from the perspective of technology profits) has made it intensify its relations with other partners, such as Israel, Canada, and Turkey but also to some extent with Japan.[37] The sectors of cooperation range from IT applications to environmental solutions to e-mobility vehicles, and in each China tries to grab every opportunity to strengthen its dominant position. It also tries to influence the policies of its partners’ AI strategies, which, in the Israel case favours government support for industry and civil-military collaboration. It is also one of the solutions to—at least partially—replace the delivery channels of, for example, microchips from U.S. and European companies.[38]

The internal challenges are much harder to overcome. The CPC is aware of its economy’s stagnation and the negative effects of the centralisation of power on technology development. The main problem is impossible to resolve: the CPC has to keep its supervision to maintain the current political order. So, the Chinese authorities are now trying to balance the problems without touching the issue directly. They have managed to decrease and regulate the number of central inspections on local governments: the approval of the State Council to carry out an inspection is now required. The appraisal for state-owned enterprises is combined with messages of support for private enterprises.

Conclusions for Poland and the EU

Poland has recently experienced a period of rich political exchange with China, culminating in the signing of a comprehensive strategic agreement during Xi’s state visit to Poland in 2016. There are also signals of China’s interest in high-tech cooperation with Poland. A good example is the noticeable presence of Chinese companies from the IT sector, such as Lenovo, ZTE, and Xiaomi on the Polish market. But the difference in the level of innovation and investment possibilities between Poland and other European countries, such as Germany or the UK, makes Poland less attractive to China in terms of technological cooperation. Nevertheless, certain aspects, such as 5G infrastructure, are definitely worth noticing from China’s perspective. Huawei is also aware that Samsung, Ericsson, and Nokia have already established R&D centres in Poland and the Chinese company does not want to remain behind its competitors. During the Shanghai International Expo in November, the Polish secretary of state attached to the office of the prime minister, Marek Suski, also announced the near certainty that Huawei would open an R&D centre near Warsaw.

Huawei is already trying to use this opportunity. During its 14 years on the Polish market, it has become a leader in terms of retail sales of smartphones[39] and an important partner to operators. Huawei’s office in Poland is also the company’s CEE and Nordic headquarters. In December 2018, it opened its first flagship store in one of Warsaw’s shopping malls. The company is very much interested in 5G infrastructure, especially cooperation with mobile operators in providing equipment for the network. Although major operator Orange has broken ties with Huawei in France it is conducting 5G trials with the Chinese company in Gliwice, Poland. What is more, TMobile has just started its first 5G trial run in Warsaw and is cooperating closely with Huawei. It is worth mentioning that the Chinese company started a public relations campaign touting its cooperation in Poland. Huawei supported Congress 590,[40] a technology event in Poland, invited Polish journalists to participate in a study visit to its facilities in Italy, and carried out seminars at Poland’s Office of Electronic Communications (the national regulator) on the technological and commercial aspects of implementing 5G technology.

Although China’s development plans may sound like a commercial opportunity based on innovative solutions and competitive prices, they have raised a lot of concerns, especially from the security perspective. The cooperation with Huawei and other Chinese high-tech companies is problematic due to their legal and personal subordination to the CPC’s political interests. An interesting recent example is an espionage case in Poland.[41] Also, there have been reports recently of Chinese technical devices being used for secondary purposes, such as chips that were gathering data from Apple and Amazon devices, and the hardware at African Union headquarters,[42] as well as hacking in the Czech Republic,[43] and China Telecom’s use of point-of-presence.[44] Access to infrastructure (in both 4G and 5G systems) gives the operator and equipment provider the ability to acquire data and information on users, institutions, and enterprises. Poland needs to finally develop an official, clear, and restrained position towards cooperation with Chinese IT and telecommunication enterprises, especially in the context of 5G and critical infrastructure. The engagement of Chinese enterprises needs to be transparent and Polish state institutions’ full control over access to databases and data flow must be ensured. Lacking that, these companies may be excluded from cooperation on critical infrastructure. This is especially important since the development of 5G infrastructure in Poland is worth about $7 billion (plus the cost of frequencies at auction).[45] Potential contractors are already counting on government financial involvement due to a lack of capital and the high costs of building the 5G network. The decision about the development model is, however, still being considered by the Polish government, with even the establishment of a national operator possible.[46] The attitude towards Chinese telecoms and IT companies will also have an important influence on Poland’s relations with the U.S. administration, which under Trump has recently emphasised its message to partners to keep their cooperation with Huawei at arms’ length, with a special emphasis on countries that already host American military bases.[47] In that regard, cooperation with Chinese enterprises may hinder Poland’s goal of winning a U.S. military base. In a recent speech, the U.S. assistant secretary of state openly confirmed the importance of the evaluation of U.S. relations with its partners through the level of their cooperation with China.[48] The arrest of a Huawei executive in Poland might be considered (and already is by Chinese authorities) as Poland’s participation in the U.S.’s campaign against Chinese IT enterprises. But one should remember that Poland and the U.S. share the same concerns and are justified in addressing them according to the situation. The debate on 5G, Huawei, and cooperation with Chinese IT and telecom companies is also needed on the EU level. This need was noted by EU Commission Vice President Andrus Ansip in his remarks on the security risks posed by telecom giant Huawei.[49] There is also a need for strong transparency mechanisms involving the Chinese companies and their possible involvement in critical infrastructure. In order to evaluate the factual level of the Chinese engagement, the EU will try to map the cooperation of Chinese companies with the Member States. With upcoming 5G frequency auctions in several Member States, there also is a need to coordinate on the European level efforts to prevent a single Chinese contractor from being involved in most of the winning bids. Whether the European Commission will be responsible for this coordination and how it should be organised without the use of protectionist measures or violating EU economic freedoms remains in question. There might also be a need to use certain financial initiatives (such as Germany’s €1 billion fund to counter Chinese investment bids) and incentives on the EU level that might help operators in individual states should they decline a lower offer from a company such as Huawei. Differences exist in Member State policies regarding Huawei, but there is a growing sense of the need for action on the European level concerning the Chinese investments (e.g., screening mechanism) to decrease the security risks, including in the telecommunications sector. Recent discussions in the EU have steadily influenced less-positive positions in countries such as Germany and the UK on cooperation with China. Portugal[50] or Hungary remain examples of a rather positive attitude in this regard.