Chinese President Xi Jinping announced a ‘Made in China 2025’ strategy that broadly outlines the aim of the People’s Republic of China to first attain self-sufficiency in several high-tech areas such as aerospace, industrial robotics, semiconductors etc. with a view to subsequently dominating them. The United States (US), European Union (EU) Japan and Taiwan, all see this program as a threat to not just their extant techno-economic advantages, but also to their overall national security. National security, global influence and technical capability are seldom kept in silos in countries aspiring to global power status, and today China makes no bones of wanting to be ‘up there’. There was a time when Deng Xiaoping famously said in his 24-character strategic thought:
“Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”
While China today continues to maintain that its growth does not threaten other nations, her actions in multiple areas, including the militarization of disputed island chains in the South China Sea, make it abundantly clear that Deng’s strategy has run its course.
India too is witnessing an era of growth and is concomitantly diving headfirst into the digital age, what with a burgeoning youth population that has taken to mobile telephony and internet with full gusto. Liberalization in the early 1990s opened-up India to global markets and one could say a range of consumers benefited considerably from that. However, despite longstanding telecom policies ostensibly created to promote and develop local industry, India basically missed the silicon/semiconductor manufacturing bus. Despite hundreds of millions of electronic devices including mobile phones being sold in the Indian market every year, no real ecosystem to manufacture electronic goods with high indigenous content has been set up even today. Electronics manufacturing is growing slowly in fits and starts at the moment, and is largely restricted to mobile phone manufacturing and assembly with low levels of domestic value-addition. Without a credible domestic ecosystem, India has exposed itself to vulnerabilities brought upon by dependence on a digital future built using foreign products.
How bad is it?
An investigative report tabled with the ‘Permanent Select Committee on Intelligence’ of the US House of Representatives in 2012 on Huawei and ZTE says:
“Huawei, the Chinese electronics giant was founded by former People’s Liberation Army engineer Ren Zhengfei a director of the People’s Liberation Army (PLA) Information Engineering Academy, an organization that is believed to be associated with 3PLA, China’s signals intelligence division, and that his connections to the military continue. In his official biography, Mr. Ren admits that he was asked to be a member of the 12th National Congress of the Communist Party of China in 1982.”
It further adds:
“Mr. Ren proudly admits that he was invited to that Congress, but he will not describe his duties. Shortly after being given such a prestigious role, Mr. Ren successfully founded Huawei. Further, many analysts suggest that the Chinese government and military proclaim that Huawei is a “national champion” and provide Huawei market distorting financial support. At the hearing on September 13, 2012, Huawei admits that its shareholder agreement gives veto power to Ren Zhengfei, the founder and president of the company.”
This same Huawei has long had a presence in India and its first overseas R&D center is actually located in Bangalore, which opened back in 1999. Of late, the company has reported greater enterprise business growth than service business growth from its India operations and expects the former to double its revenue in the near term. While Huawei believes that the Indian banking, financial services and insurance sector promise excellent prospects for growth, it has also targeted government programs such as the ‘Smart Cities’ initiative for expansion. In fact, New Delhi’s ‘Digital India’ program alone will require massive datacenters and enterprise solutions to become a reality, and unsurprisingly Huawei already has a strategy in place to tap this potential. For the Smart Cities push, Huawei is hawking smart electricity meters to Indian utilities along with solutions for reducing aggregate technical and commercial losses.
Interestingly, Huawei has also petitioned the government for being conferred “Domestic Manufacturer” status in India so that it can participate in bidding for Smart City projects with a status that is at par with Indian companies. Preferential Market Access (PMA) allows for the government to restrict bids to domestic manufacturers alone in areas that it so desires. Huawei and fellow Chinese company ZTE were both denied domestic market status in January 2013 despite intense lobbying by industry lobbies. Security concerns raised due to the opaque nature of government control of Chinese companies appeared to be the reason for such denial.
The new ‘Sharp Eyes’ of the Chinese State
Back in China, Huawei recently agreed to join an “intelligent security industry” innovation lab in Urumqi, capital of Xinjiang Uyghur Autonomous Region in northwest China. Urumqi was the scene of major anti-Han riots in 2009 by native Uighurs leading to a massive crackdown against the local populace. Detention and re-education camps abound with the Uighur population living in fear of the government. The ongoing government crackdown involves massive technology use that ranges from facial recognition techniques facilitated by giant network of surveillance cameras to even laser engraving of knives with QR codes of buyer’s details (since knives were used in large numbers during the Urumqi riots). This is part of the Chinese government’s surveillance program upgrade called Xue Liang (Sharp Eyes) led by China Electronics Technology Group, a State-owned company which makes facial scanning technology. The US, Britain and Japan have similar technology in use today. However, many industry watchers opine that Chinese facial recognition technology companies have access to a much wider database given the unrestricted nature of data collection in China and other countries they operate in. Huawei claims its Safe Cities tech has reduced crime in Kenya. Guangzhou based Cloud Talk Technology, a Chinese startup incubated from Chongqing institute of Green and Intelligent Technology under the Chinese Academy of Sciences is rolling out a facial recognition database for Zimbabwe to ostensibly support public transportation, security, education and finance. Many Chinese companies have also signed deals to provide internet infrastructure.
China is establishing a security surveillance state beyond the wildest dreams of Nazi Germany and their technology companies are at the forefront of making it a reality, either willfully or under President Jinping’s pressure. President Jinping has repeatedly called for the use of modern technology to establish public security and safety. From Intrusive checks including installation of a monitoring app called Jingwang (“Clean Internet”) on phones, to scanning for media that might be classified as “dangerous”, no stone is being left unturned as part the new security push in Xinjiang. Scanners that can scan mobile phones and laptops are also in use currently in Xinjiang and across other regions in China to identify “dangerous” media. Given the crackdown on naming children, confiscating religious material and restricting religious practice, “dangerous” in the Chinese context is somewhat self-explanatory. At a recent Beijing security fair, scanners that could crack smartphone security as well other surveillance devices were on display. Reuters learned that several firms were able to crack earlier versions of electronics major Apple’s iOS operating system and were working to break the current version. China already has massively penetrated homegrown social media, after shutting out foreign alternatives. Given the influence exerted by the Chinese government over tech companies within the country, it is difficult to not assume that they will also be utilized for such purposes overseas with a view to advancing Chinese interests.
Critical Information Infrastructure protection and the need to indigenize network hardware in India
In today’s digital world, banking, finance, power, rail, internet, oil and gas etc. are all critical infrastructure for any country and therefore important targets for foreign espionage. In India, even with the armed forces rolling out their own designated networks and other digital infrastructure, they will need to piggyback on domestic civil infrastructure in areas where gaps are present. Economic and physical infrastructure by themselves need to be hardened against external attacks like malware and from trojans embedded-like in foreign hardware and solutions. In 2012, BSNL awarded a major part of network expansion to Huawei among other telecom companies and was allegedly hacked by Huawei in 2014 according to the government.
While the Indian government has been wary of Chinese mobile phones and apps, network hardware and components continue to be foreign-owned with inadequate local security checks. Also, it opens up the possibility of espionage via Chinese phones utilized by government staff in key posts. In 2016, Uber was widely panned for tracking location data from users even with location turned off on mobile phones. Eavesdropping using suspect phones used by government staff in key positions and important individuals would be a security nightmare for India. Wikileaks exposed how the CIA was able to interdict the Apple iPhone supply chain to introduce persistent surveillance malware. While it detailed older attempts, it wouldn’t be beyond the realm of possibility that better means are in place today. Australia banned Huawei from taking part in its National Broadband Network over security concerns. Chinese espionage efforts are no secret and given the deep inter-locking cooperation between their technology companies and their intelligence services, serious threats to India’s economic and national security come into fous.
The investigative report tabled with the US House of Representatives Intelligence Committee mentioned above also says:
“Opportunities to tamper with telecommunications components and systems are present throughout product development, and vertically integrated industry giants like Huawei and ZTE provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems. China may seek cooperation from the leadership of a company like Huawei or ZTE for these reasons. Even if the company’s leadership refused such a request, Chinese intelligence services need only recruit working-level technicians or managers in these companies. Further, it appears that under Chinese law, ZTE and Huawei would be obligated to cooperate with any request by the Chinese government to use their systems or access them for malicious purposes under the guise of state Security.
A sophisticated nation-state actor like China has the motivation to tamper with the global telecommunications supply chain, with the United States being a significant priority. The ability to deny service or disrupt global systems allows a foreign entity the opportunity to exert pressure or control over critical infrastructure on which the country is dependent. The capacity to maliciously modify or steal information from government and corporate entities provides China access to expensive and time-consuming research and development that advances China’s economic place in the world. Access to U.S. telecommunications infrastructure also allows China to engage in undetected espionage against the United States government and private sector interests. China’s military and intelligence services, recognizing the technological superiority of the U.S. military, are actively searching for asymmetrical advantages that could be exploited in any future conflict with the United States. Inserting malicious hardware or software implants into Chinese-manufactured telecommunications components and systems headed for U.S. customers could allow Beijing to shut down or degrade critical national security systems in a time of crisis or war. Malicious implants in the components of critical infrastructure, such as power grids or financial networks, would also be a tremendous weapon in China’s arsenal. ”
These observations apply as much to India as they do to the US. Local manufacture nay assembly from imported components, as Huawei has started in India recently, does not reduce such threats. The report also goes onto comment on the opaque nature of the Chinese Company’s ownership:
“This is a concern because such individuals are key decision-makers of the company and those whose potential connections to the government are of high concern. According to Huawei officials, the previous Board nominates the individuals for the current Board. But it is not clear how the original Board was established and Huawei refuses to describe how the first Board of Directors and first Supervisory Board were chosen.” Obviously, it is difficult to take things at face value given all of the above.
Now India has tried setting up testing facilities since at least 2010 to ensure that imported equipment are secure. Drip funding, lack of oversight, lackadaisical attitude all have contributed to no facility being setup till date. Given this situation, telecom companies and manufacturing companies now resent the government making such checks mandatory citing lack of testing facilities. The government also plans to introduce tests for power sector equipment.
Hardware does matter
As part of Made in China 2025, Xi has set a target of 70 percent of basic core semiconductor components to be manufactured locally. China’s major import component currently is semiconductor products, even more than oil. India’s electronics import bill is rising and will touch $400 billion by 2020. India imported in excess of $14.3 billion worth of phones and related equipment in 2016-17. In light of this fact, drip-feeding funding for setting up semiconductor production units or fabs in India should be done away with. Relying on foreign manufactured digital infrastructure is akin to leaving the front door open. Not having indigenous IP and manufacturing ability would leave India beholden to other countries that will naturally attempt to exploit such weaknesses to their advantage. Talk of equitable and free trade notwithstanding, India must realize the strategic nature of such a disadvantage, given that China has made it its policy to be able to make most of its semiconductor components in-country.
Given China’s history of wiping out competition in any field with their government backed companies offering products at lower costs than market rates, they might succeed in muscling out current competitors in Japan, South Korea and Taiwan. By making chips in-country, they would also make a significant dent in their import bill. An important lesson for India considering the fact that our import bill is expected to skew more towards semiconductor imports than even oil. The importance of manufacturing components was reiterated by Chinese Internet and technology giant, Tencent’s Pony Ma when he said:
“The recent ZTE incident made everyone more clearly realize that however advanced one may be in mobile payment, without the mobile, the chips and the operating system, you still cannot compete,”
Today, Global NAND and DRAM manufacturing is in the hands of a small set of companies namely Samsung, SK Hynix, Intel, Micron, Western Digital and Toshiba. China currently lags in the technology needed to make cutting edge chips in both. To bridge the gap and leap forward, China is massively funding IC design, logic and packaging. In 2014, China launched a 138 billion Yuan ($21.9 billion) National Integrated Circuit Industry Investment fund, also known as Big Fund as seed capital. The second phase for this fund is expected to gather 150 billion Yuan.
China’s Tsinghua Unigroup, an investment group that had taken over China’s largest chip maker XMC and created Yangtse River Storage Technology, plans to build 9 fabs for memory at a cost of $84 billion focusing on 3D NAND, where it is sampling a 32-layer device while a 64-layer device technology is currently in the R&D phase. Tsinghua’s earlier attempts to obtain tech by buying out Micron and Western Digital were blocked by the US government. Another attempt to acquire Oregon-based Lattice Semiconductor was similarly blocked. Undeterred, these companies have now resorted to poaching thousands of engineers from rival companies with promises of compensation of up to 5 times their current pay. To boost its local SoC/CPU design industry, Tsinghua Unigroup acquired Spreadtrum and RDA in 2013 (which have a license to build mobile SoCs based on select Intel’s x86 cores), then signed an agreement with Intel to co-develop semi-custom server solutions. Meanwhile, Tianjin Haiguang Advanced Technology Investment Co., Ltd (THATIC) formed an x86 joint venture with AMD in 2016. In December 2016, YRST unveiled a $24 billion 3D NAND memory project in Wuhan, the capital of the Hubei province in central China to build three fabs, which will each produce 100,000 wpm. Tsinghua Unigroup announced a $30 billion memory project in Nanjing, the capital of China’s eastern Jiangsu province to make DRAMs first and then 3D NAND.
In January 2018, the group announced another 3D NAND project in Chengdu, the capital of southwestern China’s Sichuan province. The goal is to build three fabs for a total investment of over $30 billion over the next 10 years. Fujian Jin Hua Integrated Circuit Co Ltd is gearing up for volume production of DRAM this year from its 300 mm fab. The company partnered with Taiwan based UMC for 22 nm DRAM technology. It has reportedly received approximately $8 billion in funding in phases. Leading global semiconductor manufacturers TSMC, UMC and Global Foundries already have fabs in China. Intel and Samsung produce 3D NAND chips in China. While China’s current domestic production and projected production numbers are a fraction of international demand, China’s capability to match a significant fraction in the future seems likely. Be that as it may, even the projected numbers could result in a significant enough drop in prices of memory when their fabs come online from 2019 and that could seriously dent the profitability of established market players.
To put this in perspective, Samsung and HK Synix together generated $85 billion in chip sales in 2017. South Korea considers DRAM, 3D NAND and organic light emitting diode (OLED) displays as core national technologies. Chinese manufacturer Visionox has begun production of flexible AMOLED displays at its Heibei fab setup with an investment of $ 4.5 billion. Within the last 25 years, Taiwan, South Korea and other countries’ capabilities in these domains has skyrocketed. Given consistent funding and current R&D into next generation memory designs, it wouldn’t be surprising if they achieve their goals. Given the opaque nature of China’s state-run electronics companies, it wouldn’t be a stretch to predict a directive from Beijing to mobile and network manufacturers to start using Chinese made memory and components as they come online. It is pertinent to note that DRAM prices shot through the roof in 2017 and Chinese memory supply at lower rates could enable them to make easy market gains given tight supply conditions.
5G?
While India is still rolling out 4G mobile network technology throughout the country, technology majors are already working out standards for 5G. With an ability to provide up to 50 to 100 times faster connectivity than current 4G networks, next year’s 5G network rollout is eagerly awaited the worldover. Huawei is at the forefront of developing standards for such networks along with established companies like Qualcomm, Samsung, Alcatel and Ericsson. China Mobile, the world’s largest telecom operator is bringing in a thousand 5G base stations by the end of 2018. Huawei is leading the Chinese charge to corner a large share of the 5G telephony market. In India, telecom companies have already run trials in collaboration with Huawei for 5G operations.
The Chinese, are certainly making a concerted push to garner a greater share of the 5G space. This was evident from the dramatic backlash that Lenovo founder Liu Chuanzi faced when Lenovo voted for Qualcomm during a voting at a 5G standards setting meeting in 2016. Not voting for Huawei but for a US firm led to Liu tendering a public apology to explain his stance. In his statement Liu said:
“In order to verify this conclusion, I specifically talked to Huawei’s Mr. Ren Zhengfei. Ren always told me that Lenovo had no problems with the 5G standard voting process and thanked Lenovo for its support for Huawei. We all agree that Chinese companies should be united and cannot be provoked by outsiders.”
US President Donald Trump’s recent ban on ZTE and its national security heads asking for a complete ban on Huawei and other Chinese company products has heightened concerns in China. Being shut out of a major 5G market would be detrimental to their prospects. Huawei is already working on making routers, modems and system-on-chip (SOC) solutions for 5G. HiSilicon, Huawei’s fabless subsidiary exclusively designs SoCs and processors based on the ARM architecture for Huawei. Designing its own chips for the smartphone business has meant Qualcomm has been steadily losing out on a major client for its products, primarily its Snapdragon processors, with HiSilicon targeting Qualcomm, another fabless design company, as its prime competitor.
Qualcomm’s success in the earlier generation of industry standards arose partly due to the multitude of patents it held. Chinese investors have entered into a joint-venture with Arm Holdings to obtain a direct route to source fundamental Arm IP that was earlier routed through Arm’s American team. Huawei is now an equal competitor in this field for 5G standards and will vie for a share of the licensing fees arising from companies using its IP for 5G products. HiSilicon’s latest Kirin chip has a separate Neural Processing Unit, machine learning specific hardware to cater to camera, image and audio processing functionality. This is but an example of China’s relentless pursuit in the emerging fields of artificial intelligence and machine learning. Dramatically increasing access speeds via 5G is expected to facilitate growth in areas such as Internet of Things, 4K and higher definition video streaming, Virtual & Augmented reality, automated cars and so on providing a plethora of avenues for product development and research.
China has quadrupled its research and development expenditure as a percentage of its GDP while India’s expenditure has not improved. Backed by a determined government, Chinese companies are making full use of this backing and delivering results. While the prospect of being banned from entering 5G markets in the US and Australia might be dark clouds on the horizon for Huawei and ZTE, they are nevertheless hoping to lock-in the Indian market for succour.
India would be wise to both learn from China’s digital path as well as be wary of the implications it has for its own national security. It is high time that India massively increased funding for indigenization of digital infrastructure. We cannot perennially depend on horses from Arabia.
Sriram Thiagarajan is Delhi Defence Review’s Photo Editor. He has a Masters in Mixed Signal Circuit Design from Arizona State University.
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