Chinese regulation on replacement of foreign technology equipment for domestic alternatives

6. April 2020

A Chinese government has ordered all government offices and public institutions to withdraw software and hardware equipment coming from foreign suppliers within next three years. Replacement that involves approximately 20 to 30 million pieces of equipment and systems will be carried out according to a 3-5-2 key, i.e. 30% of the equipment will be replaced in 2020, 50% thereof the following year and the remaining 20% will be replaced in 2022. The main objectives of this decision are to get rid of dependence of the Chinese government and public institutions on the use of foreign technology products and to strengthen the national cyber protection of the military and institutions. Foreign technologies should be replaced solely with Chinese technologies from companies such as ZTE or Huawei. A private company dealing with cybersecurity and having clients directly from the Chinese government confirmed that fact to Financial Times news portal, adding that the decision was already made early in 2019[1]. Currently, the regulation does not apply to Chinese private companies whose voluntary adoption of the regulation is not expected due to high financial costs[2].

Technology security

A Chinese Cybersecurity Act from 2017 refers to the use of “secure and controllable technologies”. The government appears to have become aware of the vulnerability of its systems and technologies dependent on supplies from foreign companies, especially US companies. The Chinese government authorities use in a large extent Chinese computers Lenovo that have processors from an American company Intel, hard drives from Samsung, and run on operating system Windows from Microsoft[3]. Although the Chinese government tried to come up with a replacement for Windows in 2013, only its detailed imitation called NeoKylin appeared on the market. In 2019, Huawei introduced its own operating system called HarmonyOS, but its use for government purposes is not clear yet.

In May 2019, the military magazine Kanwa Asian Defense published a report about establishing the Internet Security Information Leadership Group by Chinese government authorities. The task of this group is to create a replacement for Windows operating system for devices used by the Chinese military because of concerns about attacks of the US hackers. The group is not included in any military section, but reports directly to the Government Communist Committee. The military and industrial facilities currently rely mainly on so called UNIX servers or German-developed controllers, but a new operating system should be solely under auspices of the Chinese military[4].

Given the ongoing trade conflict with the USA, the Chinese technology companies have ended up under considerable pressure from the United States, and many of them have been blacklisted, i.e. the US companies and institutions have been banned from doing business with them or buying their products. The US President Donald Trump by his executive order in mid-2019 imposed a ban on trade and use of technologies in the field of communication, information transfer, or provision of such services by companies of foreign competitors that could pose a threat to national security. Among these companies Huawei was also blacklisted, that resulted in the termination of updates of Android software from Google for their mobile phones[5]. Regarding the sensitivity and the range of options that the world-wide deployment of 5G networks may provide in the future, further restrictions and bans on the use of foreign technologies on both sides are likely to be expected. At the same time Bloomberg portal makes predictions in its analysis that China is gradually overtaking the USA in the technological war in terms of money invested in technology, recent technical graduates and position on the market in 5G technologies[6].

Use of home technologies

As Chinese technologies continue to be deployed in key sectors such as finance, energy or communications, so called probational periods for testing domestic products are being introduced nowadays, and this can take several years. For example, banks plan to switch from using the products of the US companies IBM and Oracle to a more diversified x86 architecture and then, ideally, to using products that are fully manufactured in China. The Chinese government has also decided to use ARM architecture[7]. On the other hand, through espionage China obtains a lot of information on foreign technologies and often take over many procedures thereof[8].

The fact is that this is not the first Chinese government initiative to replace foreign technologies with own alternatives. Already in 2014, Bloomberg portal reported on China’s plan to get rid of foreign technologies in banks, military sector, state-controlled companies and key government institutions, and the plan should be completed in 2020. NeoKylin should have become the key software used in the facilities, but its poor applicability and dependence on the use of the Linux-based platform eventually became a stumbling block, and thus this initiative was not successful[9]. Similarly, another initiative called Made in China 2025 has been largely dropped. Throughout the whole spectrum of the Chinese industry, the level of development and production of Chinese technologies was to be increased, making gradually the country a global industrial leader in the production of state-of-the-art products. At the same time, key products and materials should have contained up to 70% of elements originating from the domestic industry. However, in order to avoid the strong criticism and to improve the relations with the US, this initiative was moved to the background and its importance was gradually diminished[10].

Expectations for the future

Regarding the robustness of the Chinese economy and technological capacities, it can be anticipated that the Chinese government’s efforts to completely replace facilities within the state administration will succeed, however, with such ambitious time frame there is not a high chance to reach the goal within the planned deadlines. Dependence on foreign technologies, especially those used in Lenovo products, is quite significant.

From the long-term perspective, the initiative for China’s technological self-sufficiency can significantly boost domestic companies that will lose foreign competitors within the country and strengthen their innovation and productivity. At the same time, however, there may be a loss of connection with the world at the level of standards and product characteristics, where the Chinese products may not be compatible when used abroad and, and vice versa, foreign products when used in China. A disruption of the digital market between the Chinese, American and European ones may also occur, which may finally result in the creation of so called digital silk road, i.e. China will supply its products to developing countries, and thus will significantly strengthen its influence therein, what may later weaken the global security[11]. The most striking example is Africa, where China provides extensive financial assistance primarily to countries rich in minerals. In the form of direct investments or loans, China binds to local governments with which it maintains extensive trade relations (importing its own industrial products and exporting mineral fuels, iron ore and other raw materials) and ultimately it gains a significant political influence there[12]. With an increase of mutual economic relations, Chinese workers are moving to African states (more than a million in 2018) and military cooperation is strengthened (e.g. the Djibouti military base or the International China-Africa Security Forum[13]). From the long-term perspective, the militarization of China in Africa can thus fundamentally change the security structure of the world in favour of China.