2024-03-07 11:10:49
For U.S. technology companies in China, the ominous signs have emerged and are written in Document 79.
This directive from the Chinese government in 2022 expands the campaign to squeeze American technology out of China, which some people refer to as “elimination of American technology.”
According to people familiar with the matter, Document No. 79 is so sensitive that senior officials and executives only saw the directive but were not allowed to copy it. The document requires state-owned enterprises in finance, energy and other industries to replace foreign software in IT systems by 2027.
U.S. technology giants have long been thriving in China, using computers, operating systems and software to contribute to China’s rapid industrial rise. But as China pushes for self-sufficiency, leaders want to sever the relationship out of concerns regarding long-term national security.
The first targets are hardware manufacturers. Much of the equipment from Dell, International Business Machines (IBM) and Cisco Systems has been gradually replaced by products from Chinese competitors.
Circular 79, named for the number on the document, aims to replace foreign software that provides daily operations, from basic office tools to supply chain management. The sector is one of the last bastions for foreign technology companies to make money in China, with the likes of Microsoft and Oracle gradually losing ground.
This is an area where China strives to become self-sufficient. Under a years-long push by Chinese leader Xi Jinping, China is striving to become self-sufficient in everything from key technologies such as semiconductors and fighter jets to the production of grains and oilseeds. The broad strategy is aimed at making China less dependent on the West for food, raw materials and energy and instead focus on domestic supply chains.
Chinese government departments issued Document No. 79 in September 2022, when the United States was tightening chip export restrictions and sanctions on Chinese technology companies. The document requires state-owned companies to submit quarterly updates on their progress in replacing foreign software with Chinese software in areas such as email, human resources and business management.
The directive was issued by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), which leads and supervises China’s vast state-owned enterprise system, which includes more than 60 of China’s 100 largest listed companies.
The State-owned Assets Supervision and Administration Commission and the State Council did not respond to requests for comment.
In 2022, China’s state-owned sector’s public procurement expenditure will exceed RMB 48 trillion (approximately US$6.6 trillion). The directive uses that purchasing power to support Chinese technology companies, which in turn can improve their products and close the technology gap with their U.S. competitors.
State-owned companies have dutifully stepped up purchases of domestic brands, even if Chinese alternatives are sometimes not as good, according to data and procurement documents reviewed by The Wall Street Journal and people familiar with the matter. Easy to use. Purchasers involve public services such as banks, financial brokerage firms and the postal system.
Back in 2006, “China was awash with gold, and intellectual property was the main challenge,” said a former U.S. Trade Representative official who has participated in previous U.S.-China technology discussions. “Now, it feels like there’s no longer a chance. Businesses are just struggling to hold on.”
This move to promote technology localization is called “Xinchuang”, which roughly means “information technology application innovation” and refers to safe and trustworthy technology. The policy has taken on added urgency amid an escalating tech and trade war with the United States, which has cut off many Chinese entities from access to U.S. technology.
Premier Li Qiang reiterated the move at China’s annual National People’s Congress this week. China’s central government plans to increase spending on science and technology research and development by 10% this year to regarding $51 billion, according to a budget report released on Tuesday, up from last year’s 2% increase.
At some commodity exhibitions and exchanges in various places in China, suppliers tout local technologies as alternatives to foreign brands. In Nanjing, a semiconductor equipment manufacturer’s booth bluntly proposed that it might help buyers “eliminate A” from the supply chain.
Home-grown alternatives are becoming increasingly user-friendly. One local official recalled spending a full day in 2016 opening and closing spreadsheets on a computer running the KylinOS operating system, developed by a company with ties to the Chinese military. of. He believes that the usability of the latest version of Kirin is similar to that of Windows 7 launched by Microsoft in 2009. Although Kirin is not extremely outstanding, it is still reasonable.
Just six years ago, most government tenders sought Western brands of hardware, chips and software. By 2023, many government tenders are seeking Chinese technology products.
When customs authorities in the eastern Chinese city of Ningbo purchased rack-mounted servers in 2018, they indicated a preference for brands such as Dell and Hewlett Packard Enterprise, as well as hardware powered by Intel Xeon central processors. Five years later, the same organization was looking for rack-mounted servers made by Chinese companies and equipped with Huawei chips.
The servers are often assembled by state-owned technology manufacturers such as Beijing-based Tsinghua Tongfang that rarely sell equipment overseas. Tongfang’s controlling shareholder is a state-owned enterprise responsible for China’s civilian and military nuclear projects.
Some government officials in Beijing have replaced foreign-brand personal computers with Tongfang products, and last year officials were told to use domestic brands for work phones instead of Apple’s iPhone.
lost order
Over the past decade, Xi Jinping has repeatedly emphasized technological innovation and the use of trustworthy domestic technology in government departments and manufacturing industries. Edward Snowden, a former National Security Agency contractor, disclosed in 2013 that U.S. authorities had hacked into China’s mobile phone communications, universities and private companies. This has made Xi Jinping more determined to use domestic technology. In recent times, Xi Jinping has told senior officials that China should use its own advantages and markets to break bottlenecks in the development of important software such as operating systems.
IBM’s revenue in China continues to decline amid China’s focus on replacing foreign hardware products. In 2021, IBM reduced its China research operations in Beijing, more than 20 years following the company opened a research center in Beijing.
Cisco once occupied an important position in China’s technology industry, but the company said in 2019 that nationalistic factors in procurement activities caused the company’s orders in China to continue to be taken away by local suppliers. Research firm Canalys said that in the past five years, U.S. personal computer maker Dell’s market share in China has almost halved to 8%.
Estimates from database provider FactSet show that Hewlett Packard Enterprise (HPE), which makes servers, storage and networking solutions, derived 14.1% of its revenue from China in 2018. By 2023, this proportion has dropped to 4%.
In May last year, HPE said it would sell its 49% stake in its Chinese joint venture. An HPE spokesman said the company will continue to sell directly to certain multinational customers in China and sell some products to the overall mainland market through its Chinese partners.
In terms of software, in the past two years, Adobe, Citrix parent company Cloud Software Group and Salesforce have successively withdrawn or reduced their direct business in China.
As the world’s largest software supplier, Microsoft has historically dominated China’s computer operating system market. A Morgan Stanley survey of 135 chief information officers in China found that many respondents expected the share of computers powered by Microsoft’s Windows operating system installed at their companies to decline over the next three years. They expect Linux-based UOS to benefit from this shift. UOS refers to the Unity Operating System, which is jointly developed by a Chinese state-owned enterprise and multiple parties.
In recent years, Microsoft’s top management and co-founder Bill Gates has frequently traveled to Beijing to hold high-profile meetings with top Chinese leaders on topics such as artificial intelligence (AI) cooperation and Sino-U.S. trade relations, but The company has reduced the products it sells in China. Last September, Microsoft President Brad Smith told a U.S. Congressional subcommittee hearing that the Chinese market accounted for only 1.5% of the company’s overall sales. The company had sales of $212 billion in its last fiscal year.
Microsoft declined to comment.
Some state-owned enterprises are delaying orders to replace foreign IT products that are critical to their core businesses, fearing the stability and performance of domestic alternatives, people familiar with corporate procurement said.
However, in addition to becoming increasingly advanced, China’s local technology is also well integrated into the local ecosystem. Domestic business software providers allow interoperability with WeChat, the ubiquitous chat app that Chinese companies generally use to replace email.
The policy of buying domestic products is gradually penetrating into private enterprises. According to a survey of chief information officers by Morgan Stanley, these private enterprises are now more inclined to purchase domestic software.
Transformation of domestic software
Data hosting and management are shifted to cloud servers instead of on-premises servers. This shift also allows Chinese companies to narrow the gap with foreign service providers. In 2010, Oracle, IBM and Microsoft dominated China’s database software market. Since then, Chinese companies including Alibaba and Huawei have launched their own database management products to replace American technology.
According to data from research firm Gartner, in 2022, Chinese manufacturers will account for more than half of the US$6.3 billion Chinese database market for the first time, and their share continues to grow. Tender documents studied by The Wall Street Journal also show that more government-related entities and companies have chosen Huawei’s databases in recent years.
Yang Bing, CEO of Chinese database company OceanBase, said at a conference in Beijing last November that Chinese banks, brokerage firms and insurance companies had accelerated the pace of purchasing domestic databases. In 2016, Alibaba and its fintech affiliate Ant Group replaced Oracle’s database with a self-developed database called OceanBase.
Western companies will be replaced not only by Chinese national leaders like Huawei, but also by companies in more niche fields. Shanghai-based Yonyou Network Technology, which provides enterprise human resources, inventory and financial management systems, has a market capitalization of $6 billion.
The number of users of UFIDA Network continues to increase, while the number of users of competitors Oracle and SAP (SAP) decreases accordingly. Oracle and SAP together used to account for more than half of the market, according to the Huaon Research Institute, a Chinese research institute. By 2021, UFIDA has become the largest player in the market, with a 40% share.
There are still some opportunities for Western companies in China, particularly in more advanced technology areas where the country still lags behind, and in selling to multinational companies operating in China.
Looking ahead, analysts believe that biased demand from China’s state sector may mean that Western companies will fall further behind in the Chinese market.
Han Lin, head of China for business consulting firm Asia Group, said that software development requires continuous feedback from users, which will be the advantage of domestic suppliers.
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