In a bid to support local PC makers and software developers and reduce the impact of any potential future sanctions from western governments, China's government this week reiterated its order to replace foreign-branded PCs and programs used by government agencies and state-backed companies with local technology within two years.
While replacing a Dell running Windows with a Lenovo running Linux sounds tempting for Chinese companies, it looks like the country has been failing to do so up to this point, but the renewed initiative appears to have more teeth.
Replace All Foreign PCs by Mid-2024
Chinese central government authorities this week ordered government agencies and state-owned and state-backed firms to stop using foreign-branded computers and software within two years and replace them with locally developed hardware and software, reports Bloomberg. Eventually, the mandatory program will be extended to provincial governments and give them a two-year switch period. The aggressive plan requires the replacement of at least 50 million PCs used by central government agencies alone, notes the report.
There are several reasons why the Chinese government wants the country to switch to local technologies. Firstly, it wants to keep Chinese money in China and not see it headed to foreign companies. Secondly, after learning from the Huawei crackdown lesson, it wants to ensure that it does not rely on technology developed and built elsewhere. Specifically, technology that could be barred from being imported to China. Thirdly, it wants to strengthen the security of its agencies and commercial entities.
The vast majority of PCs sold globally are assembled in China, but they carry brands of American or European origin. The Chinese government and state-owned corporations also use China-made Dell and HP-badged computers. Still, it looks like Beijing only wants to see local brands — Lenovo, Inspur, Founder, Tsinghua Tongfang — in state offices and state company offices.
Being the world's largest PC maker, Lenovo can certainly produce enough computers to satisfy the demands of central and eventually local governments and state-owned and state-backed firms. Companies like Founder, Tsinghua Tongfang, and Hasee can certainly increase their output, too. Local electronic manufacturing services (EMS) providers like Foxconn Technology will certainly be glad to help (and offset dropping orders for China-bound PCs from brands like Dell and HP).
In fact, shares of Chinese PC makers climbed on many stock exchanges, no doubt buoyed by impending massive orders from government agencies and state companies in the next couple of years. It remains to be seen whether Chinese PC brands will start to more actively use locally developed CPUs (the new order does not require them to do it). Still, keeping in mind that these chips can barely compete against hardware designed by AMD and Intel, it is not really likely. Perhaps, U.S.-based CPU developers will lose some low-end processor orders from Chinese PC makers to companies like Zhaoxin. Still, given the increasing demand for higher-end client and server CPUs in general, this will hardly affect them materially.
The Biggest Challenge
In general, building PCs with Chinese brands on them is not a problem for Chinese manufacturers. The biggest challenge — and one of the main reasons why China still relies on foreign technology — is replacing American and European software with Chinese alternatives.
There are a number of Linux distributions developed in China, such as Red Flag Linux designed by Red Flag Software and Kylin developed by the National University of Defense Technology, that could potentially replace Windows and/or foreign Linux distributions for some users. There are also alternatives to Microsoft's Office and some other generally used applications, such as Adobe's Photoshop. While alternatives are not as comfortable to use as originals and their capabilities in many cases fall behind those offered by originals, they can still do the job (albeit not in all cases).
The problem is that there are many professional software applications developed for decades that have no alternatives with similar capabilities and features. Programs used for content creation, computer aided design (CAD), electronic design automation, professional visualization (ProViz), video editing, video post-production, and many other applications are virtually irreplaceable. This is why media and security companies have been getting special permits to buy foreign equipment.
Meanwhile, the Chinese government not only wants its own employees to switch to Chinese programs but also demands both state-owned and state-backed companies cease using software from the U.S. and Europe.
State-backed companies, which are formally independent yet receive direct or indirect support from central and local authorities, include entities like Semiconductor Manufacturing International Co. (SMIC) and Tsinghua Unigroup, the owner of YMTC, a 3D NAND maker. These companies not only use software from companies like Microsoft and Synopsys in their offices but also programs from American and European companies in their fabs. For companies like SMIC and YMTC, replacing foreign software with something developed in China will inevitably affect not only their competitive capabilities but actual abilities to operate. In fact, even blacklisted entities that cannot formally buy from U.S.-based companies still use software developed in America.
China has been trying , unsuccessfully, to cut its reliance on foreign technologies for a couple of decades now. But, according to the Financial Times, China's Communist Party issued an order for all government offices and public institutions to dump foreign PCs and programs within three years back in late 2019.
It looks like the government agencies are not on track to meet this requirement by late 2022, which is why the central government is now issuing another order that essentially prolongs the switching period to mid-2024. Even though even government agencies still use foreign technology, the government now extends the requirement to switch to local PCs and programs to state-owned and state-backed companies and provincial governments.
Hardware and software technologies developed in the U.S. and Europe have largely enabled China's dramatic economic growth in recent decades. So switching to PCs with a Chinese label is hardly a big deal, but switching to mediocre software developed in Tianxia will inevitably impact the competitive abilities of Chinese state-owned and state-backed companies, which will affect economic growth. To that end, it is likely that most Chinese state-owned and state-backed companies will get permits to keep buying foreign technology and sustain their growth.