6 September 2023

How China’s ‘little giants’ could dominate strategic technologies

By Allan Nixon

An army of ‘Little Giants’ – thousands of high-tech, state-backed SMEs – are marching out of China onto the world stage. That’s the message from a recent report by the Germany-based Mercator Institute for China Studies, outlining one of the most important shifts in China’s strategy to dominate world tech in years. No longer narrowly focused on building a small number of ‘national champions’, China is now cultivating a cadre of innovative smaller firms focused on strategic technologies. The ultimate aim is to have scores of companies that dominate niche areas of leading-edge technological know-how and shore up China’s supply vulnerabilities.

This shift reveals China’s perception of its vulnerability. It has established an impenetrable position in many vital tech areas, such as telecoms infrastructure, electric car batteries, and cellular modules. But it has dependencies on other key areas that are being exploited – most obviously with high-end chips, where the US, Japan and the Netherlands have severed China’s access. By building its army of high-tech SMEs, China seeks to spread deeper into and further across the global network of intermeshed technologies, dominate more areas, and reduce its reliance on others. 

What does this mean for the UK? It underlines the threat that unless the UK systematically carves out its own areas of strength in the global tech race, it will find itself increasingly dependent on others to prop up its economy and having little influence to wield internationally. Without a concerted effort to stay ahead, we will fall behind China, the US and the many others who are embarking on a systematic campaign to build ever-stronger technological advantages.

To his credit, Rishi Sunak has made a bold play to seize the science and tech agenda. He’s created a new department and a raft of plans and projects to build ‘strategic advantage’ in five priority technologies: AI, quantum, engineering biology, semiconductors and future telecoms. This is the right plan. It is far more than a defensive geostrategic gambit. With innovation in emerging technologies increasingly central to future prosperity, a strong position in key areas in the global tech network means a strong economy, where UK plc leverages its niche position to drive growth and prosperity in the years to come.

But the UK’s plans to build strategic advantage in priority technologies are a mixture of inchoate, insufficient or missing entirely. As Onward explained in a recent report, an action plan for engineering biology is yet to be published, the 2021 National AI Strategy is outdated, and semiconductor funding is far lower than for comparable nations. The Wireless Infrastructure Strategy fails to explain why the Government thinks it can lead the world in this technology, having no discernible comparative strengths upon which to build advantage.

The lack of clarity indicates a broader problem within the Government: a squeamishness over industrial strategy. Recent reports of an ‘advanced manufacturing plan’ currently in the works are welcome. But it remains to be seen how these plans (led by the Business Department) will fit in with its grand tech ambitions. The Science Department trying to cultivate world-leading capabilities in compound semiconductor manufacturing while the Business Department focuses on a completely different set of advanced manufacturing goals will ensure neither succeeds. 

What is clear is that without an explicit, coordinated approach to driving innovation via industrial strategy, Britain risks falling behind. We increasingly stand alone, with key industries often receiving little more than warm words and half-baked plans. Other governments meanwhile are shoring up their positions by delivering long-term strategies, like China’s Little Giants plan, the US Inflation Reduction Act, or Germany’s Made in Germany Strategy.

An ambitious industrial strategy focused on building strategic advantage in frontier technologies is needed – but there are several challenges to address. First, we must assure ourselves that the five technologies the Government has identified are the correct ones in which the UK can build advantage. The process by which it landed on these five is concerningly opaque. AI, quantum and our strengths in bioengineering are arguably self-evident, but bigger questions remain over where genuine advantage can be found in semiconductors and future telecoms. And what about others – nuclear fusion, for instance?

Second, we need clarity on what strategic advantage could actually look like. One way is to build technical niches in specific subfields of the technology, such as in compound semiconductors, as the Government has argued. Another is environmental: fostering key traits no one else has is critical — for instance, developing a regulatory regime that attracts the most innovative AI startups to ensure that you attract top AI talent and businesses today and that you remain so.

Third, it needs to pull together the vast and varied levers of the state to deliver on these plans. Moving from narrow science policies towards a more strategic approach to industrial policy is vital. This requires the levers of government to be pulled in a coordinated manner. Also, by elevating these plans beyond being the pet project of one department or minister to being a government-wide endeavour, the plans themselves are more likely to receive the necessary funding, time and effort from across Whitehall needed to deliver on the ambition.

Finally, the UK must stick to its plan for the long term. Onward’s recent report detailed the extent of Britain’s failure to adhere to its science and tech plans over the years. Chopping and changing its game plan is a surefire way to lose out to China and others.

Reports of ‘Little Giants’ attempting to spread across the global tech network is just the latest sign that the competition for tech dominance is barrelling ahead. As others march onward, time is running out for the UK to do the same.  

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Allan Nixon is Head of Science and Technology at Onward.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.