2013-01-11 by Dr. Xin Song, Leonard Zuga, and Professor Michael Pecht
In early October of 2012, the US House of Representatives Permanent Select Committee on Intelligence published its Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE.
The report caused a brief political flap that included coverage by CBS’s 60 Minutes.
One of the risk factors noted in the report was that Huawei’s corporate history suggests ties to the Chinese military and that Huawei failed to provide detailed answers to questions about those connections. This accusation is neither new nor surprising.
The basic accusation of Huawei’s ties to the People’s Liberation Army dates back more than a decade, as gleaned from open-source documents and repeated over and over again by both government and private contract analysts within the nation’s intelligence community.
Although this latest incident caused a two- or three-day political firestorm, the embers rapidly cooled, and once again the differences and similarities between the dual-use industrial base that has emerged in China and that of the US have not been part of the discussion and remain misunderstood.
The Huawei issue is important but could be the entry point to understand the Chinese overall approach, rather than simply a periodic warning shot. We need a sustained policy response to Chinese policy, not one off flares in the night.
This article, through a discussion of China’s National Computer Quality Supervising Center (NCTC) and its roots, evolution, and intimate ties to China’s dual-use industrial base, will illustrate that China’s government policy–driven infrastructure for IT equipment design and testing fosters an industry capable of developing and fielding highly reliable products, as opposed to simply manufacturing electronic gadgets for some multinational company.
The NCTC is the key to assuring that China captures increasing shares of the global telecommunications and IT equipment markets, such as in the case Huawei, now the largest telecommunications equipment maker in the world, and ZTE, the world’s fourth-largest mobile phone manufacturer.
As the authors noted in their book, China’s Electronics Industry, 2009 Edition, “China has marshaled the political will and resources, and applied government direction to ensure the progress of science and technology as the cornerstone of its economy with a primary objective of supporting the development of a modern ‘well-off’ society and the development of a strong dual-use industrial base.”
Political will is a key phrase.
In the discussion that follows we will illustrate how the NCTC, established in 1987, is ensuring a strong dual-use industrial base.
In its endeavor to develop science and technology in selected fields every 5 years, the Chinese Communist Party (CCP) develops and announces its five-year plan to lay out the blue print for the key fields that China will focus on. Following the development of the plan, funds pour into the identified fields. The plans are relatively easy to implement since they are controlled by China’s central government.
In the long run, designed and developed under government supported and funded programs, innovative Chinese IT products will likely eclipse those of Western companies.
The structure of the General Administration of Quality Supervision, Inspection, and Quarantine (AQSIQ) and the National Computer Quality Supervising Test Center (NCTC) will ensure product competitiveness and increasing market shares.
But unless Western policy makers and business executives understand the evolution, structure, and objectives of these organizations, another future alarmist Congressional report is likely to again result in political controversy without conclusive guidance to purchasers of US government IT equipment based on fact, as opposed to conjecture.
Unless Western governments understand the need for and develop government policies and institutions to compete with the rising Chinese electronics industry, Western companies will also continue to lose market shares to Chinese competitors, thereby ceding the soft economic power to China — market share and prestige — attributable to the critical IT equipment industrial sector, which is now responsible for an estimated three percent of the global GDP.
To understand the role of the NCTC in China’s plans and its ability to field globally competitive consumer and dual-use information technology (IT) products, two key aspects of China’s approach to industrial policy are worth examining.
First, unlike the messy partisan processes of Western democracies, China’s government facilitates the establishment of coordinated national industrial and economic policy. In China’s quest for balanced increases of both hard military power and soft economic power, the Chinese Communist Party is adept at developing and mandating sustained government policies through the development of a robust dual-use industrial base.
As illustrated in China’s Electronics Industry, 2009 Edition, the authors noted “benefitting from government policies and strategic investments and incentives, China’s electronics industry has come to supply more than a third of the world’s consumer electronics components.”
The soft power implications of this fact are certainly not lost on China’s leaders today.
Second, China is consistent in publishing far in advance to the rest of the world what those policies and objectives are and how China intends to achieve those objectives.
As an example of China’s advanced notice of its dual-use industrial policy, in China’s Electronics Industry, 2009 Edition, the authors also noted that guidelines for establishing national medium- and long-term programs for science and technology development (2006–2020) included two early indicators of an emerging government-sponsored dual-use industrial base.
First, the current scientific and technological management system will combine and coordinate the military and civilian research organizations.
Second, China’s military organizations will continue to be encouraged to shoulder the tasks of scientific research for civilian use. At the same time, civilian research institutes and enterprises are also allowed to take part in national defense research projects.
Another example of China’s advance notice of its dual-use policy, published by Second Line of Defense in May of 2011 states that “China, through its five-year plans and a host of other political vehicles, telegraphs its intentions to the world far in advance of their ability to achieve them. What we westerners fail to realize, given our own habit of announcing then failing to achieve, is that China will indeed deliver on its published intentions.”
That article also observed that in 1999, the Cox Report alerted us to China’s increasing need for rare earths for the technologies being fostered under its High-Tech Research and Development Program 863.
Additionally, in 2002, the USGS stated, “In 1999 and 2000, nearly all (more than 90%) of the separated REE [rare earth elements] used in the United States was imported either directly from China or from countries that imported their plant feed materials from China.”
Thus, as a result of long-term planning and industrial policy establishment, in just a few decades China’s electronics industry has gone from being entirely dependent on foreign capital and technologies to becoming a self-sustaining indigenous industrial base.
China’s “authoritarian capitalism” approach to science and technology progress is working quite well.
China has the luxury of having governing bodies willing to stimulate national consumption, to dictate the development of a dual-use industrial base, and to develop and coordinate the necessary institutions in support of its dual-use industrial base.
The success of these policies has resulted in a forecast from the Organization for Economic Cooperation and Development (OECD) that China’s economy will be larger than the combined economies of the Eurozone countries by the end of this year, and will overtake the US by the end of 2016.
In its report, Looking to 2060: Long-term Global Growth Prospects, the OECD has also forecast that China’s economic activity, which represents 17% of the global GDP in 2012, as opposed to the US’s 23%, will grow to 28% of the global GDP by 2030, while the US share of the global GDP will shrink to just 18%.
The key enablers of China’s forecast growth are China’s increasingly better educated and more productive domestic work force.
Given the relationship between economic performance and military spending and with China’s forecasted growth rates and America’s economic mandate to cut defense spending in the coming years, the influential British publication The Economist, in its April 7, 2012, article The dragon’s New Teeth, noted that if both countries remain on their present trends, China’s defense spending could overtake America’s after 2035.
From these and many other examples then, it is clear that in piecing together the puzzle of China’s announced economic and dual-use industrial base policies, along with its often confusing organizational infrastructure, there are strong indications that China will bring the aforementioned forecasts of The Economist and the OECD to fruition.
The following discussion of the history, development, goals, and responsibilities of the NCTC are but one clear piece of that emerging puzzle’s picture.
Piecing together the puzzle also illustrates the close relationships between China’s military, its evolving dual-use industrial base, and the certainty of PLA ties to China’s leading IT companies.
About the Authors:
Dr. Xin Song, the primary Chinese linguist for this research, is a hydrogeologist and environmental engineer. Dr. Song graduated holds a Master degree in Environmental Science from Tsinghua University, Beijing and a PhD in Civil and Environmental Engineering from University of Maryland, College Park.
Leonard Zuga is an analyst of emerging technologies, technology transfer, and industrial base development in the context of the global political economy.
Professor Michael Pecht is the founder and Director of CALCE (Center for Advanced Life Cycle Engineering) at the University of Maryland, which is funded by over 150 of the world’s leading electronics companies at more than US$6M/year. The CALCE Center received the NSF Innovation Award in 2009.
Editor’s Note: The report on the NCTC will be published in four parts and then available in a single downloadable report after publication of the final part.