The U.S. government took an unusual and strong step recently when it banned Chinese telecom equipment giant ZTE from purchases of American technology. That has been a wake-up call for China that, despite its progress in innovation, it remains reliant on the U.S. for core technologies.
The decision also underscores China’s dependence on U.S. and non-Chinese semiconductors, especially the microprocessors that are at the core of all modern microelectronics. The ban blocks ZTE from purchasing chips for seven years from U.S. market leaders Qualcomm and Intel. Some analysts believe that alone could send ZTE into bankruptcy.
China knows that other electronics companies could be similarly vulnerable, and is scrambling to respond. The country had already begun urgent efforts to increase investment in the development and manufacture of semiconductors. China is pouring as much as $32 billion of investment into boosting chip development as part of a broad national strategy to become a leader in core technologies. But it might not be enough for the fast-moving chip industry.
Could the ban lead the country to turn toward Taiwan? After all, Taiwan, which the People’s Republic considers a breakaway province, is the semiconductor production leader of the world. Its dominant and cutting-edge chip makers TSMC and UMC lead the world in what’s known as contract manufacturing of chips. These companies typically build highly-sophisticated chips based on the designs of their customers. A collaboration between Taiwan and China around chips might even help reduce the possibility of a military action in cross-straits relations, a fear often voiced.
Relations between Taiwan and Mainland China have been deadlocked since Taiwan’s Tsai lng-wen became president in May 2016, although a thaw could happen in the common interest of advancing technological progress.
But there’s already indications that mainland China is determined to go it alone in high tech development rather than turn to troubled relations with Taiwan in what could be a faster solution for getting to the next stage in chip development.  For instance, Alibaba recently acquired Hangzhou-based chipmaker C-Sky Microsystems, a startup that is advancing in high-tech chip design.
China is currently the largest chip market in the world, but it manufactures only 16 percent of its own semiconductors. The market leaders by country for manufacturing are the U.S., Taiwan, Japan and Korea, in that order.  (The European Union is slightly ahead of Taiwan.) Catching up in chip design is an ambitious goal, and ultimately may not be realized, given that chip design is continuously evolving with design innovations. China has made strides with lower-end chips, for example from Shanghai-based chip designer Spreadtrum Communications. But efforts like this now, which Intel invested in, will never be the answer for the fast-moving advanced market.
Many China tech experts point to the billions of venture investment–some $37 billion in 2017–that has backed startups in softer areas, such as bicycle sharing, livestreaming platforms, and co-working spaces. What’s needed, they contend, is more money and talent going into breakthrough research that will bring China to a higher plateau.
Some progress can be seen toward core tech development. R&D spending in China has reached $409 billion, nearing the $497 billion in the U.S, with China’s growth of 18 percent annually now surpassing the U.S.’s 4 percent. The U.S. National Science Board has predicted that China will overtake the U.S. in R&D investment by 2019, if current trends continue.
China has climbed to second place globally in world’s patent applications – the U.S. is first – with 20 percent . Just a decade ago, China was ranked 7th worldwide on the patent scales. A third indicator is China’s deep talent pool. Chinese engineering graduates surpass the U.S. in numbers, and the country cones close to the US. in doctoral degrees.
A tech race between China and the U.S. is underway, and tensions are mounting over which country will ultimately lead. Currently, the odds are that the U.S. will continue to be the superpower in tech. But given China’s scale, capital and renewed grit to get ahead–and even a possible turn to Taiwan’s tech edge in chips – that lead may not last another decade.
Rebecca Fannin is founder and editor of Silicon Dragon, a news, events and research firm covering innovation and investment hubs in Asia.  She will be participating in a dialog on China with Dean Merit Janow of Columbia’s School of International and Public Affairs at Techonomy NYC on May 8 in midtown Manhattan.