ChinAI #123: The Wave of Localized Substitution — Is it Here?
Imagine this: actual data (not just anecdotes from one industry to generalize for all others) on China's push for tech localization
Greetings from a world where…
we are crawling forward (匍匐前进)
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Feature Translation: The Wave of Localized Substitution — Is it Here?
Context: Surely, by now, you’ve heard about this grand narrative of “DECOUPLING!” between the U.S. and China, right? Two Internets — or better yet, The Splinternet. This grand narrative is usually accompanied by a few cherry-picked anecdotes — or, if you’re lucky, maybe even some statistics that show a time trend— from a few specific industries.
We can do better. This week’s feature article, from long-time ChinAI source Leiphone, analyzes China’s efforts at 国产化替代 (localized substitution, i.e. the replacement of foreign technology with Chinese-developed alternatives). Based on reports from Chinese security companies and interviews with key players.
1) There are some indications that localized substitution is progressing:
In office software, about 90% of State Council organizations, central state-owned enterprises, commercial banks, and provincial governments use WPS Office, an office suite developed by Chinese software developer Kingsoft.
Inspur, China’s leading server provider, says it supplies 56% of central SOEs, 38% of all SOEs, and 31% of China’s top 500 companies.
In customer relationship management (CRM), Chinese companies like Xiaoshouyi are gradually challenging leading int’l companies like Salesforce and Sieble.
Other companies mentioned include: Seeyon (Beijing-based IT company), which does a lot of government affairs IT work, Dameng (Wuhan-based company that does database services), Quanshi (videoconferencing company), and KylinOS (an operating system).
2) Not so fast. We are not seeing a wave of localized substitution. If we get to the level of analyzing “China tech” in terms of specific verticals rather than as an abstract monolith, a more complicated picture emerges:
According to data released by Tianfeng Securities, the localization rate of mid-to-high-end ERP (enterprise resource management) in industrial software is 25%; the localization rate of CAD (computer-aided design) is 11%, and the localization rate of MES (Manufacturing Execution System) is 30%. Main Chinese players in these verticals include Kingdee and UFIDA.
Here’s the tough question IT folks grapple with: Is it better to overthrow everything and start over, or to continue patching? Replacing your SAP or Oracle tools for ERP is an ecosystem overhaul — not just a simple substitution of products. Liu Kai, a partner at Chinese VC 5y Cap, states, “In the past two years, there have been more slogans like Xinchuang or localization in China, but in the key ‘chokehold’ areas where technological accumulation is needed, the localization rate of basic software is still very low."
Liu Kai gives another example in database services. China’s domestic database companies (e.g. Dameng, Kingbase, GBase, and Shentong Data) mainly serve the party, government, and army, but there are very few application scenarios. The world is much bigger than these three customers: Oracle can get 3 billion USD from database services to China’s Internet companies, financial sector, SOEs, and top 500 enterprises.
With software, it’s all about employee experience. Chen Xuejun, the CEO of videoconferencing company Quanshi, notes that the impact factor of user/employee experience is more than 90% in deciding what solution is chosen. Liu Kai says, “Most of the decision makers at state-owned central enterprises are making decisions in order to achieve political tasks and hope to achieve autonomy and control. For example, in the semiconductor field, there is an autonomy rate indicator (how many products must be domestically produced) that has been proposed, but this does not matter if employees are unwilling accept it.”
3) Some Extra Tidbits
The tension between open-source and localized substitution. Wei Shaojun, chairman of the IC Design Branch of China Semiconductor Industry Association and professor at Tsinghua University, has argued, “China's semiconductor industry is a bit too hot, a bit unreasonable. We must prevent extremist and closed thinking. Instead of substitution thinking as the main theme of development, the main theme should be openness and cooperation.” Others argue that open source and technological autonomy do not conflict.
The phrase 信创产业 (Xinchuang Industry) is peppered throughout this piece. According to this Leiphone article, the term originated from China’s “Information Technology Application Innovation Committee,” which is an organization initiated and established by 24 units engaged in the research, application and service of key software and hardware technologies. It seems to be a buzzword/slogan that covers four verticals that we’ve discussed in this issue: 1) IT foundations (e.g. chips, servers, storage, cloud); 2) basic software (OS, database, middleware); 3) Application software (ERP, office software, etc.); 4) Information security. If anyone has a good way to translate 信创, let me know!
Piece also includes a very interesting table of domestic and foreign ecosystem alliances in chips + operating systems:
*Any enterprising ChinAI reader want to help out with translating this table? Reply first to this email and commit to doing it before next week’s issue.
FULL TRANSLATION: The Wave of Localized Substitution — Is it Here?
ChinAI Links (Four to Forward)
Must-read: Huawei / Megvii Uyghur Alarms
The IPVM team found a Huawei "interoperability report" that show Huawei and Megvii worked together to test and validate software that could Uyghur minorities and alert police — one of the functions of Megvii’s facial recognition system that was reviewed by Huawei. I’m linking the WashPost coverage because the IPVM link wasn’t working for me.
Should-watch: Lisa Simon on The Future of Work and How the Workforce Adapts to Change
A recent Stanford HAI seminar on how individuals adapt to automation. She explores how AI is fundamentally changing how work gets done and by whom, investigating how individuals transition between different career pathways and how they react when faced with negative shocks.
Should-read: Chip Huyen’s Twitter Thread on MLOps in China
My default is that Chinese companies are not way ahead in this area, but I couldn’t find any good Chinese-language analysis on MLOps/AIOps. There’s one paywalled Gartner report that might be relevant.
Should-read: 500,000 Kids, 30 Million Hours: Trump’s Vast Expansion of Child Detention
From The Marshall Project: “When U.S. Customs and Border Protection holds migrant children in custody, the child’s detention is supposed to be safe and short. That’s true whether the child is with a parent or without one.
But new data shows that over the last four years, detention times lengthened as the number of children held at the border soared to almost half a million. The detentions, which include both unaccompanied children and children with their families, peaked last year at over 300,000, with 40 percent held longer than the 72-hour limit set by a patchwork of legislation and a court settlement.”
Thank you for reading and engaging.
These are Jeff Ding's (sometimes) weekly translations of Chinese-language musings on AI and related topics. Jeff is a PhD candidate in International Relations at the University of Oxford and a Predoctoral Fellow at Stanford’s Center for International Security and Cooperation, sponsored by Stanford’s Institute for Human-Centered Artificial Intelligence.
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Thank you so much for doing this newsletter!
In your comments on Chip Huyen's thread, I imagine you wanted to link to Gartner's "Market Guide for AIOps, China" (https://www.gartner.com/document/3978916) rather than the more generic albeit more recent "Hype Cycle for ICT in China, 2020" (https://www.gartner.com/document/3987781).