China will phase out foreign technology by 2023
The Chinese government mandated that all government offices and public institutions must replace foreign-supplied hardware and software by 2023, according to Financial Times. The government will gradually phase out affected foreign technology under its 3-5-2 policy — 30% of hardware will be replaced in 2020, 50% in 2021, and 20% in 2022, Business Insider writes in the article China will phase out foreign technology from government and public institutions by 2023.
The Chinese government's move to shut out foreign tech firms, while remarkable, is unlikely to significantly impact any one international tech company. The Chinese government is estimated to replace between 20 million and 30 million pieces of hardware and their accompanying operating systems over the next three years.
While this could affect sales for companies like HP, Dell, and Microsoft, these companies have likely been preparing for the possibility of losing any contracts they may have with the public sector, given similar governmental efforts in recent years.
The move to use exclusively domestic-made tech is part of a larger desire of the Chinese government, which has wanted to remove foreign tech from key parts of the government since at least 2014. And with tensions mounting between the US and China from an ongoing trade war — which recently saw the US ban Chinese tech giant Huawei from selling equipment to US governmental agencies and contractors — this latest escalation shouldn't come as a surprise.
The real risk for foreign tech companies will come if China's ban on foreign tech expands into the private sector. The decision to rely solely on domestic technology could spill over into the private sector — especially companies that work with the Chinese government — as they look to future-proof their businesses in a time of geopolitical uncertainty.
We have seen this happen in the US as telecoms have chosen new network equipment suppliers to steer clear of future regulatory issues. And with the Chinese government already pushing agendas that would see foreign companies losing local market share — China aims to produce 40% of the semiconductors it uses by 2020 and 70% by 2025, per CNBC — foreign companies will need to start implementing policies that can help them hold on to this lucrative market. In 2019, Chinese businesses are expected to spend 1.7 trillion yuan ($256.6 billion) on technology, and are projected to spend 1.8 trillion yuan ($272.8 billion) in 2020.
While it's unclear if or when the tech ban will escalate further, there are some strategies foreign tech firms could implement now to potentially safeguard their business interests. Foreign firms can establish local technology centers to educate partners and assuage concerns.
These centers can provide a secure venue for regulators and corporate partners to look at their source code and technology. This strategy has already been undertaken by Chinese tech company ZTE, which is facing tighter regulations due to cybersecurity fears in Europe and the US.
While more complicated, firms could also look to license their technology to a Chinese firm to ensure they can still garner revenue from the massive market. This is a tactic Chinese tech company Huawei pursued following its ban in the US and continued regulatory issues in Europe — Huawei has reportedly been in contact with Western firms, including US-based manufacturers, to license its 5G networking technology.