EU needs to wake up to China's tech boom

Since the announcement of its 2014 ‘Mass Innovation and Mass Entrepreneurship’ campaign, China has experienced a technological boom. With the help of government-supported initiatives, the country has become one of the frontrunners in digitalisation, 5G, artificial intelligence (AI) and blockchain.

The EU has long overlooked the challenge posed by China’s growing technological prowess. The concerns that surround Huawei’s proposed 5G telecommunication infrastructure and the escalating Sino-American tensions have served as a loud wake-up call for the EU.

The Joint Communication ‘EU-China – A Strategic Outlook’ from March 2019 labelled China a “leading technological power”. Further, it identified China as the EU’s “economic competitor in the pursuit of technological leadership” and “a systemic rival promoting alternative models of governance”.

This wake-up call should serve as a ‘Sputnik moment’ for Europe, as China’s technological superiority will have a profound impact on the Fourth Industrial Revolution. It will inevitably alter EU-China relations.

China’s ambitions in the technology sector have consistently been at the core of some of its recent major policies. Launching campaigns such as ‘Made in China 2025’, a 13th Five-Year Plan (2016-2020) – which outlines “an innovation-driven development strategy” as its top objective – and declaring its intent to become a global leader in AI by 2030 are examples of the Beijing mobilising its domestic resources to capitalise on the next industrial revolution. Concurrently, projects like the Digital Silk Road – part of the wider Belt and Road Initiative – help disseminate Chinese technology and its standards abroad.

On multiple fronts of the technology arena, China has already challenged American and European position.

China’s innovation hubs are already creating new valuable companies faster than their Western counterparts. In 2018, China surpassed the US in the number of unrealised ‘unicorn’ start-ups. That year, the Chinese could boast of 202 technology companies with a valuation of at least $1bn that had not yet held an initial public offering. Moreover, Beijing and its Zhongguancun Science and Technology Park (Z-Park) became the city with the highest number of ‘unicorns’, second only to Silicon Valley.

In comparison to these other technological superpowers, the EU is currently home to only around 50 unrealised ‘unicorns’. European start-ups struggle to scale in a fragmented market with harder access to capital. This disparity continues to grow, as in Q1 2019 alone as China welcomed 21 new unicorns while the EU only saw 4 comparable companies by mid-March 2019.

Moreover, given the under-investment in Europe’s start-up ecosystem, Chinese capital is able to enter the European market through this sector more easily. Perhaps one of the most visible cases of this was the acquisition of Data Artisans, a Berlin-based data streaming services start-up, by Alibaba earlier this year. Agreements between start-ups and Chinese investors are hard to monitor and increase the risk of the transfer of innovative solutions.

China is also actively promoting its technology standards to shape the reality of the Fourth Industrial Revolution in as areas like AI, cloud-computing, the Internet of Things and big data. This has been carried out domestically, through its ‘China Standard 2035’ campaign and abroad, through its Digital Silk Road. China also encourages its companies to register a flurry of patents. Those efforts will likely further increase barriers for European companies to operate in China and undermine the EU’s own attempts to play the role of a standard-setter.

As Chinese tech companies excel in sensitive sectors, the EU and its member states have to decide how to approach them. The Huawei affair is a harbinger of more to come and has shown the complexity of these issues. In the AI arena, China has developed a strong position and is on a trajectory to further strengthen it. The combination of robust government support, an extremely competitive entrepreneurial culture focused on rapid implementation and the availability of vast databases may give China a considerable edge.

The EU cannot afford to ignore the challenge that China’s increasing technological prowess rise poses and needs to develop a new, united response to tackle it.

First, the EU needs to improve its understanding of China’s capabilities. the Commission’s ‘China: Challenges and Prospects from an Industrial and Innovation Powerhouse’ report released this past May was a step in the right direction. However, the report draws from data collected in 2017 – or even 2015 – which is already outdated given the rapid pace of China’s development. The new Commission should create a special task force focused on giving policy-makers a less obsolete view of this competition.

Second, the EU needs to be more united if it is serious about competing in the Fourth Industrial Revolution and responding to China. Attempts to create a Single Digital Market and a €100bn Horizon Europe research fund are moves in the right direction. It would also be advised to analyse the instruments deployed by China to stimulate its innovation capabilities and see if some of those solutions may be applicable in some form for the EU.

Third, the EU needs to develop mechanisms for better coordination of responses to technological issues – such as 5G – given the particular position of China as an ‘economic competitor’ and ‘systemic rival’ whose technology companies are increasingly penetrating European markets. Fortunately, there have already been signs that the German presidency of the EU Council in second half of 2020 will work intensively on these concerns.

Finally, a new paradigm for EU-China relations is needed. China’s rising influence in tech is changing the power dynamic and will make basing European calls for reciprocity insufficient. As China is likely to gain the upper hand in tech, the EU needs a more assertive, united and clearly defined China strategy that adheres to a principle of open minds, but not always of open doors.