China's rise in tech brings global tension

Summary:Countries reliant on China for growth in tricky position as latter's rise in IT arena may result in these countries' losing talent, economic opportunities and innovative edge, analysts say.

China's rising stature in the technology arena poses economic concerns for many developed countries, especially those in the West, as the Asian powerhouse could pull jobs and business opportunities away from these markets while gaining an edge in innovation as a result, market watchers note.

Tim Bajarin, president of Creative Strategies, said China had become a key market for many U.S. firms and startups, for example. "They are partnering more and more with Chinese companies to help expand into the Chinese market that they see as becoming healthier and where they see demand growing for tech products of all types," he noted.

China's rise is due to a combination of factors, according to Benjamin Cavender, senior analyst at China Market Research (CMR).

"Chinese companies have realized that competing purely on price is no longer a viable long-term strategy, and many have also realized that they will have to innovate or move quickly into emerging spaces in order to be successful," he said.

"Many of these companies are cash-rich and using money to invest in development or in mergers and acquisitions (M&A) to acquire technology, assets, management, and knowhow. The Chinese government also understands that support for high-tech industries will be key for job creation and has given a lot of support to Chinese companies."

Growing pains
However, the rising influence of Chinese companies in the global IT marketplace has played its part in escalating tensions among other economies, most notably the United States, the CMR analyst pointed out.

One example of this was when Chinese telecoms vendors Huawei Technology and ZTE sold their products to Iran and were later accused by the U.S. of selling spy equipment and helping the Gulf state circumvent U.S. trade sanctions.

Another example of bilateral trade tensions is China's drive to grow its green technology sector, most notably its solar industry. It has been accused of providing unfair subsidies to many of its domestic solar panel makers, allowing them to price their U.S. counterparts out of business, according to a report by U.K. news daily The Guardian.

These challenges were also pointed out by Laura Tyson, then member of U.S. President Barack Obama's Economic Recovery Advisory Board, in a 2009 blog post. She noted then that foreign companies moving into the Chinese market may be hurting their home countries in the long run. This is because emerging markets such as China wanting to build their own high-tech economies pressure American companies to outsource their operational activities.

"They do this in two ways: by enticing them with generous subsidies or by requiring them to comply with local-content and technology-transfer policies in order to gain access to their markets," she noted. The size of China's market gave it "considerable bargaining power with American companies who want to sell there", she added.

"When some capabilities no longer exist in the commons, then you may lose the ability to innovate or move into new areas that utilize those capabilities."
-- Willy Shih
Prof. of Management Practice
Harvard Business School

Tyson went on to say: "Moving production or research to China in response to a condition or subsidy by the Chinese government may be wise business decisions in the short run for individual companies. But such actions collectively can undermine the industrial commons and innovative capacity of the U.S. economy over time."

According to Cavender, the major problem a resurgent China within the tech space poses for the U.S. and other Western countries "is that long-term economic growth and viability are going to require availability of high-tech jobs and R&D".

"As Chinese companies continue to develop and increase investment in innovation, the balance of job creation is going to shift towards China," he explained.

Willy Shih, professor of management practice at Harvard Business School, added that the threat to U.S.-based jobs is not a recent one, and has been mainly driven by the outsourcing of manufacturing. "When some capabilities no longer exist in the commons, then you may lose the ability to innovate or move into new areas that utilize those capabilities."

He gave the example of how the lack of capability by U.S. manufacturers to produce Amazon's Kindle e-reader reflected a larger problem for the American economy.

"Amazon designed the Kindle in California and one of its key components--its 'ink', or the tiny microcapsule beads used in its electrophoretic display--was designed and manufactured by a company based in Cambridge, Massachusetts. But the majority of the value added manufacturing for the unit is captured in Asia," noted Shih.

As the complementary capabilities for making displays were no longer local, it handicapped the company's ability to commercialize, the professor said.

Riding on China's success
China's rise in IT is not all bad news, though. Bajarin noted that the outsourced manufacturing capabilities would spur the rise of innovation among Chinese engineers, which he said would contribute to the overall growth of the tech industry.

"That would have solid impact and benefits for the region. And we see Chinese companies partnering with more tech companies in the U.S. and Europe as well," he added.

Cavender agreed, saying the Asia region, specifically, would enjoy spillover benefits from China's rise. "This could absolutely be good for Asia as a whole," he stated. "Many of these Chinese companies do not want to be [merely] Chinese companies, they want to be global companies. This means increased jobs and opportunities for employees in nearby countries as these companies move abroad."

Topics: China

About

Loves caption contests, leisurely strolls along supermarket aisles and watching How It's Made. Ryan has covered finance, politics, tech and sports for TV, radio and print. He is also co-author of best seller "Profit from the Panic". Ryan is an editor at ZDNet's Asia/Singapore office.

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