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Raising the Standard: China’s Rush to Develop Technology Standards (Part I)

The First Major Test

Four years ago, a group of technocrats in the robust Chinese bureaucracy decided that they could best help the country’s nascent high-tech industry by promoting China’s own encryption standard for software. The State Encryption Management Commission (SEMC) effectively enacted a standard that would have made all global businesses register with the government any products containing encryption technology. In a very short time, and with little warning, China nearly enacted sweeping restrictions on the use of technology, wreaking havoc on growing sales of foreign software, mobile phones, e-mail and other communications applications in the country.

Among many others, this new regulation was aimed directly at Microsoft, who was at the time hoping to make a handsome profit in the China market with the sale of Windows 2000. Under the regulations, anyone using Microsoft’s Internet Explorer (IE) to surf the Net would need to register with the government. The easy solution for Chinese users: Use Chinese software and browsers. Essentially, one of the world’s biggest non-tariff barriers was enacted virtually overnight.

In the end, after a year-long struggle, a powerful multinational business and government lobby including leading business associations and high level commercial officials within US, European and Asian governments, forced China to back down. Beijing agreed to enforce registration on “only hardware or software for which encryption is a core function,” so that items such as international mobile phone handsets and browser software, where encryption is an ancillary function, would not be restricted.* Market analysts the world over breathed a collective sigh of relief. Western politicians believed this showed that China would capitulate if pushed to the brink. Technology sales once again surged. The matter may have been forgotten elsewhere, but not in China.

Prepared for Battle

Fast-forward to Beijing 2004, and the issue has resurfaced – although this time China is more prepared. There are at least two main government administrations tied to several ministries and agencies, along with hundreds of technical committees and industry associations that are all directly or indirectly working to develop Chinese standards, before the world’s standards are forced on China.

Over the past few years, a dizzying array of standards advisory groups has been formed in various Chinese ministries and departments to create basic application rules for emerging technologies in any number of industries. The Chinese government bodies include the powerful Administration for Quality Supervision Inspection & Quarantine (AQSIQ), which was established in 2001 to help China meet WTO obligations. Under AQSIQ is the Standards Administration of China (SAC), which establishes and oversees all of China’s standards and sets the annual national standards agenda. After assessing conformity to standards, the China National Certification and Accreditation Commission (CNCA) coordinates issuing accreditation. All powerful ministries such as the Ministry of Information Industry (MII) or the State Administration of Radio, Film and Television (SARFT) guide their thousands of affiliated engineers and employees to develop standards in their own image for the good of China. Hundreds of technical committees (TCs) also provide users, producers and other experts a role in standards development processes, while several Chinese industry associations, closely tied to the government, are usually involved as advisors. Each of these groups seems to be redoubling its efforts to seek ways in which China can set the standard for what the Chinese Central Government sees as the future battleground of international trade – high technology.

Why all the concentration on standards now? China’s leaders realize that if China is ever to transform from being a “developing” manufacturing base for the world’s low-end products to taking its place among the world’s developed economies, it will be crucial to control new technology development. According to Ms. Zhang Qi, the director general of the Department of Electronics and IT in China’s MII, “Owning independent IPR and winning the initiatives in setting industrial standards should be top priorities for domestic manufacturers.” Putting China’s money where its mouth is, Ms. Zhang said the MII would help form various industrial alliances among domestic manufacturers to gain the upper hand against foreigners in setting industry standards.**

The Standard Plan

Fueling the push from the Chinese government is the need to move away from its former bulky socialist scientific research system, which has been draining Beijing’s already debt-ridden budget books. China’s 10th five-year plan has stated a focus on bringing research closer to industry. As China’s economy reforms, most of its 240 national labs, ministry-affiliated research institutes and university-based research centers are required to become financially independent. As a result, dozens of new companies have been formed by government-supported labs. These companies have commercial pressures to announce results, sometimes too early and with dubious scientific support. With government backing and an attempt to avoid international scrutiny, it may be easier to first create a standard that supports China, regardless of consensus on the technology benefits, and then make global companies conform.

This scenario is playing out in a number of recent disputes that have made global trade headlines. These include China’s development of its own EVD video disc standard, its own mobile 3G standard – TD-SCDMA, one of only three world standards that rivals QUALCOMM and European standards – and the new Chinese standard that has lips curling in Washington this election year – encryption. This time, the encryption battle surrounds China’s creation of its own wireless LAN standards called Wired Authentication and Privacy Infrastructure, or WAPI. The government has said that any foreign company using this technology in China must work with one of 11 domestic companies and register with the government. No doubt, you will be hearing the acronym WAPI for quite some time to come.

Besides these, many other China-centric standards will soon be announced, including everything from China’s own digital television standard (DTV) to environmental and biotechnology standards for non-organic agriculture production.

Raising the Standard: China’s Rush to Develop Technology Standards (Part II)

The Next Battleground: RFID

Apart from the politically charged issues mentioned in Part I, one of the most important looming China standards that will have significant impact on world economic and trade flows is China’s planned involvement in creating radio frequency identification (RFID) standards.

RFID is a technology that uses radio waves to automatically identify serial numbers or many other types of information stored on a microchip that is attached to an antenna, all of which is embedded into a small card or label. This information on the label can be accessed by a nearby scanner. You are already probably used to using RFID in toll-collection, public transportation and building security, but you may not have heard about its potential to revolutionize everything from global logistics to grocery shopping. The key is RFID’s ability to store, transmit, read and even write information, all through thin air, without the need for batteries. Because of the low cost and high efficiencies that this technology brings, with tags getting as cheap to produce now as 5 cents each, RFID has several industries salivating.

Apart from engineers who are dreaming in radio waves of all the possible future applications for RFID, the technology has captured media attention as some big names are already using it on a mass scale. The day when shoppers can just push carts through a door and have items tagged and charged is upon us. So too is sped-up global supply chain management whereby products are loaded, shipped and tracked all in real time with no stopping for any reason but to slap a label on a pallet. Several industry pundits predict savings in the billions of U.S. dollars.* In addition to the U.S. Department of Defense, which has required all its food rations suppliers comply with RFID standards this year, retailers such as Wal-Mart, Target and The Gap have already started demanding that suppliers label gross pallets and cartons with RFID tags in order to track everything more efficiently. IDC expects RFID spending for the U.S. retail supply chain to grow from US$91.5 million in 2003 to nearly US$1.3 billion in 2008.**

The implication for China is tremendous. Wal-Mart alone, which recently demanded its 100 largest suppliers equip all pallets with RFID, accounts for around 10 percent of U.S. imports from China – a huge number.*** When it comes to software companies like SAP and Oracle or Chinese competitors like Kingdee that are interested in tracking everything RFID, the stakes are high. That is why, as of February, the Standards Administration of China quickly created a “Working Group” with the sole purpose of creating Chinese standards for tags and other RFID technology. Fearing that China will fall behind Western governments that are driving RFID implementation, (such as the UK, which provided 9 million euros to support corporate field trials using RFID), **** the working group will surely be pressured by China’s central leadership to quickly produce a standard that can be controlled from Beijing.

As with all of these standards, foreign companies operating in China are once again wincing at the thought of having to invest in altered or new RFID products, designed specifically to comply with rules laid down by a few folks in the Chinese government, and often with little use or application anywhere else in the world.

Conclusions: The China Standard Dilemma

China’s standards are being taken more seriously this time around because, unlike the past, the world believes it can’t afford to forgo China or allow competitors to gain the upper hand here. China now knows it has the market strength to force global companies to comply, or at least find a way to deal with China’s standards. It’s all in the numbers:


China is the second-largest personal computer market in the world after the United States.*****
More than 300 million Chinese use mobile phones, making China the world’s largest subscriber base.*****
An estimated 90 million Chinese surf the Web, second only to the United States, with Chinese approaching English in eventually becoming the primary Internet language.*****
China has the largest number of television viewers worldwide, with TV sets in over 300 million households.******
Semiconductor demand in China will jump 41 percent in 2004, driven by chips used in mobile phones, personal computers, DVD players and other electronics.
Demand for semiconductors will rise to $27 billion this year from $19.2 billion in 2003, and more than double again to reach $61.9 billion by 2008.*******

China has been making great strides in the area of standards in terms of the bureaucratic process of certification, type approval and other related items. However, the standards development process continues to be unclear and lacks transparency, planning and open channels for international input. There is an unmistakable tendency on the part of the Chinese government to use locally developed standards to achieve protectionist purposes. Whether they have been playing the China game for years, or are relative newcomers, all foreign companies are being targeted, and often caught off-guard when a new standard appears. Their role in this process is usually limited to observer, and only if they are among the lucky few. As technologies like RFID and wireless communications evolve into the lifeblood of global capital flows, the world has no choice in the future but to communicate more effectively with China.