In a calm workspace above the bustling Huaqiangbei electronics market in Shenzhen, China, engineer Xiong Chang reaches for a metal part sitting on the desk behind him.
It might not look special but it’s a powerful example of why his UK-based tech start-up has chosen “China’s Silicon Valley”.
“A quote for that [part] in a factory in the US would be several thousands of dollars and they’d probably quote you a lead time of maybe two, three weeks,” Chang says.
“This same piece, we can get it back in three days from a factory here and for less than a hundred dollars.”
Chang’s company is building a prototype agricultural robot that kills weeds by spraying hot oil on them, potentially solving the problem of herbicide-resistant weeds plaguing the world’s farms.
It’s one of a growing number of tech start-ups basing themselves in Shenzhen, just over the border from Hong Kong.
Until the 1980s, Shenzhen was a sleepy fishing village with fewer than 100,000 inhabitants.
Today, it’s a sprawling metropolis of high-rise towers and home to 12.5 million residents as well as many of China’s tech titans, including Huawei, which has its headquarters here.
Huaqiangbei, the world’s largest electronics market, is a “Mecca of hardware”, says Chang, where you can find the parts to build any type of electronic gadget, all in one place and at scale.
While the US has long had the edge in tech, China is catching up fast, investing heavily in AI, robotics, 5G and 6G, microchips and surveillance technology.
US President Joe Biden is planning a $330 billion package to rev up the US’s investment in R&D, having noted its strategic competition with China is nothing less than a battle to “win the 21st century”.
The so-called “tech cold war” is rapidly becoming the decisive battleground in the US-China superpower rivalry.
The US has sought to contain China’s rise as a tech power, banning Huawei’s 5G network in the US and placing a virtual prohibition on US companies supplying software and components to Chinese tech companies.
Last year the Trump administration also moved to ban TikTok in the US, fearing the app could be stealing users’ personal data on behalf of the Communist regime in Beijing.
But analysts warn these skirmishes are only worsening a “digital iron curtain” falling between China and the West.
They say the world is being split into two competing and mutually exclusive tech ecosystems, each with its own internet, hardware, communications and financial platforms.
“The tech war is a world where you have two sets of countries with two rival standards,” Apjit Walia, Deutsche Bank’s global head of tech strategy, says.
“Whether it’s how you compute with PCs, how you communicate with handsets and everything that goes around electronically, you start to have two standards.”
The two internets
Back in 2019, Facebook chief executive Mark Zuckerberg stood in front of a Georgetown University audience and sounded a warning.
China, he said, was developing an online world unfamiliar to those in the West, with its own values and platforms.
“China is building its own internet focused on different values, and is now exporting their vision of the internet to other countries,” Zuckerberg said.
Chinese social media platform WeChat, the Alibaba online marketplace and Baidu search engine have created a cyberspace distinct from the one dominated by US tech titans such as Facebook, Amazon and Google.
James Green, a former minister for trade affairs at the US embassy in China, says China’s internet divergence has been underway for a decade.
“The Chinese side decided that, for domestic stability reasons, the Chinese internet had to be separate from the global internet,” Green says.
“I think the Chinese leadership realised, hey, there are some technologies that we don’t want to let foreigners in on, so we’re just going to start to squeeze them out.”
Platforms like Facebook and Google were banned as the Communist government created a “protected market” for Chinese tech firms that would willingly submit to Beijing’s political demands.
“And then I think the response of the Trump administration on what they’ve done on Huawei and in semi-conductors is in some ways a natural one.”
China’s building up of its own technological ecosystem has only continued, expanding beyond internet platforms to operating systems, CPU architectures, satellite communications networks and payment systems, with little interoperability with Western equivalents.
Trump administration sanctions may have hurt Huawei’s smartphone business by cutting off the Chinese phone maker’s access to the Google Android mobile operating system (OS), but according to the company’s consumer business group CEO Richard Yu, it’s forced Huawei to focus on developing its own Harmony OS.
The company has already started building phones without US microchips.
Chinese President Xi Jinping is pushing the nation to achieve technological self-sufficiency in areas like microchip manufacturing to wean itself off its dependence on the US.
According to Deutsche Bank’s Apjit Walia, the growing digital divide could soon force individuals, companies and even nations to choose a system — or bear the cost of straddling two tech regimes.
“Companies and institutions … will have to find a way to either have two architectures and two sets of gadgets,” Walia says.
“The same would go towards handsets. Will users have to have two different phones? One which uses WeChat and one which uses Gmail?
“That’s a freak scenario which can actually be realistic at some point.”
A tech war has casualties on both sides and it is going to cost the world dearly. A Deutsche Bank report estimates the cost of the tech war at more than $3.5 trillion over the next five years.
A rival financial system
The global financial system is emerging as a new and disruptive front in the tech war.
One key way the US exerts control over the financial system is through the Swift International payment network. Every day $5 trillion is transferred around the world using this system.
If the Biden administration chooses, it could sanction or cut off Chinese banks and corporations from international financial markets, causing immense damage to the Chinese economy.
“The control of this infrastructure gives the US immense power to trace financial flows around the globe, as well as to cut entities off from using this infrastructure,” Aditi Kumar, from the Harvard Kennedy School, says.
The Swift system enabled America to arrest and charge Huawei’s chief financial officer Meng Wanzhou with violating US sanctions against Iran.
She remains under house arrest in Canada and the case has outraged the Chinese leadership, which took retaliatory actions by arresting Canadian citizens in China.
China is already responding to this new financial threat by making its national currency, the yuan, digital. In 2020, China became the first major economy to test a digital currency in four of its cities.
The aim is to internationalise this new system as quickly as possible to undercut the world’s reliance on the US dollar and the Swift system.
“It boosts trade, our influence will, you know, go bigger and bigger,” says Qu Qiang from China’s International Monetary Institute.
“Now with digital currency, our friends in Myanmar, Vietnam, Laos can download an app and they can then put their money into the authorised exchange post and be issued the Chinese digital currency, and they can use it for trade immediately,” Qu Qiang says.
Aditi Kumar says this move from Beijing has Washington worried.
“[Beijing] would be capable of avoiding US oversight and US sanctions. With the digital infrastructure developed by China, the US could lose the ability to monitor or sanction.”
Copycats no more
In Shenzhen, the trade war appears to be having little impact on the pace of Chinese innovation.
“From an engineering or technical standpoint, it’s almost like the centre of everything that’s made in the physical world,” says American entrepreneur Garrett Winther, who now has a portfolio of 200 start-ups in the hi-tech hub.
Two years ago, China reached a significant milestone, surpassing the United States for the number of global patents it filed for the first time.
China registered nearly 60,000 patents — 1,000 more than the US — and most of them came from Shenzhen.
“In reality, there’s a lot of expertise, knowledge, understanding.
“There’s always going to be economic ups and downs, but the underlying drive that’s happening in the culture of China right now is going to continue to advance new opportunities and new growth that I think we’re just not even seeing coming yet.”
America believes it can prevail and maintain its technological edge.
But China is spending big on hi-tech research, announcing a five-year plan worth $1.8 trillion dollars to dominate AI, robotics, 6G and all other technologies by 2035.
James Green, former minister for trade affairs at the US embassy in China, says the tech war expanded under Trump is not going to be resolved any time soon.
“Some of the issues, particularly around technology and technology ecosystems, are ones that will be with us for years to come,” he says.
Watch Foreign Correspondent’s ‘Clash of the Titans – Part 2’ tonight at 8:00pm on ABC TV and iview.