By Yoko Kubota in Beijing and Liza Lin in Singapore
China has introduced a sweeping policy to swap the foreign
technology products the government uses with indigenous ones,
people familiar with the matter said, doubling down on its efforts
to decouple its technology sector from the U.S. amid the trade
war.
Chinese government agencies and critical infrastructure
providers such as telecom operators and power grids must start
allocating a certain ratio of information technology procurement
contracts to domestic suppliers, the people said.
The initiative, introduced last year but not made public, comes
amid trade tensions between Washington and Beijing and the U.S.
blacklisting of Chinese companies such as the giant smartphone
maker Huawei Technologies Co. China's attempts to ease its reliance
on U.S. technology are also driven by a fear of backdoors into its
operations, analysts say.
According to China's directive, 30% of those government
contracts in 2019 have to be signed with indigenous suppliers. In
2020, that ratio would go up to 80%, or an additional 50 percentage
points; and in 2021, up another 20 percentage points to 100%, they
said -- known internally as the 3-5-2 rule.
CSC Financial, a securities firm, has estimated that some 20
million to 30 million units of computers and equipment could be
swapped to domestic products between 2019 and 2022 because of the
policy initiative.
China has long sought to wean itself off of American technology,
including servers, operating systems, and chips made by U.S.
companies such as International Business Machines Corp., Microsoft
Corp. and Intel Corp. Still, this fresh initiative came in 2018, at
a time when the trade friction and technology competition were
escalating between the U.S. and China, and as some Chinese
companies started to face restrictions from Washington to buy goods
from American suppliers.
Last year, U.S. companies were barred from doing business with
Chinese telecom gear maker ZTE Corp. as punishment for violating
terms of an earlier deal to settle allegations that it engaged in
sanctions-busting sales to Iran and North Korea.
The ban nearly brought ZTE's operations to a halt. It served as
a stark reminder to China how its technology sector remains reliant
on foreign companies and technology, including chips, even as it
makes strides in areas such as smartphones and telecom
equipment.
The ZTE restriction has since been lifted, but the U.S. has
continued to blacklist other Chinese companies. They include
telecom equipment and Huawei, chip maker Fujian Jinhua Integrated
Circuit Co., surveillance-system producer Hangzhou Hikvision
Digital Technology Co. and facial-recognition business companies
SenseTime Group Ltd.
The information office of the State Council, China's cabinet,
and the National Reform and Development Commission, China's
planning agency, couldn't be reached for comment late at night.
The Financial Times reported earlier on the policy
initiative.
The direction of the initiative comes as no surprise to many
U.S. businesses. Jacob Parker, senior vice president at the
U.S.-China Business Council, said that such a policy directive
would be in line with the messages that the business lobby has
heard from the Chinese government on its push to diversify away
from U.S. technology.
Decoupling China's technology infrastructure won't be simple or
cheap, said Randy Phillips, Asia Managing Partner for corporate
investigations firm Mintz Group. "Even with China's resources, it
will still cost a sizable sum of money," said Mr. Phillips, who is
also a member of the American Chamber of Commerce's board in
Beijing. "It's not as simple as swapping out the technology.
There's also new training for staff, maintenance, it's a whole
logistical trail that requires funding."
American technology companies in China are all feeling the
pressure from China's intentions to shift away from Western
technology and are seeking ways to stay relevant, he added.
Analysts say China fears data breaches such as the ones
involving Microsoft in 2008 and Edward Snowden's revelations of a
U.S. surveillance scheme using American technology infrastructure
in 2013 only further triggers this insecurity, they said.
U.S. firms have tried various ways to participate in government
tenders as China ramps up purchases of domestic goods, including
forming joint ventures and tailoring it's products to Chinese
authorities' requirements.
In 2015, Hewlett Packard Co. sold a majority stake in its
Chinese server and storage unit H3C Technologies Co. to state-owned
Tsinghua Holdings for $2.3 billion, to allow the company to bid for
Chinese government contracts and boost the operation's prospects.
Microsoft customized a version of its Windows 10 software solely
for the Chinese government's use in 2017.
In recent months, some U.S. companies faced hurdles. In August,
Cisco Systems Inc.'s CEO said that the company, which in the past
has sold products to China's large carriers and state-owned
enterprises, was no longer being asked to participate in bids.
Write to Yoko Kubota at yoko.kubota@wsj.com and Liza Lin at
Liza.Lin@wsj.com
(END) Dow Jones Newswires
December 09, 2019 15:09 ET (20:09 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.