Although China is ahead of the pack in AI implementation and has invested widely in applications, it does not produce many of the core technologies that power AI, such as operating systems, chips and software. This can be explained by China’s relatively late entry into the development of such technology, as a result of a long-standing focus on entry-level manufacturing. In recognition of the value of domestic production, the country is now shifting its attention to creating its own software.

Trade tensions between the US and China highlight the latter’s institutional weakness in developing the core technologies and semiconductors that power AI. The experience of Chinese telecom giant ZTE is revealing. The company’s business ground to a halt when the US government prevented it from buying American-made chips in early 2018. The US later offered a concession, but at no small cost to ZTE, which was compelled to restructure its management team and pay a US$1bn fine. A computer scientist at Tsinghua University put ZTE’s woes down to 'inadequate ‘core technology’ and weak innovation'. [59]

Chips are at the heart of this issue. China accounts for more than 50% of global demand for chips but produces only 8% of those that it uses, according to a Chinese newspaper, Yicai. In 2016 the country imported US$227 billion worth of semiconductors – almost double the amount spent on crude oil shipments. [60] China’s weakness in developing chips stems primarily from its late start in semiconductor manufacturing. This is compounded by the low profit margins for chip businesses and the country’s poor previous investment in R&D, especially compared with Japan and South Korea.

Crucially, the labour force is also lacking in terms of both skills and scale. In 2017 fewer than 300,000 people worked in the domestic chipmaking industry in China, and reaching the government’s goal of increasing the industry’s size fivefold by 2030 will require an estimated 400,000 additional employees. This gap is linked to limited educational resources and career prospects, as well as poor salaries. [61] Although Chinese engineers tend to be very well trained, developing the core technologies for AI requires a different set of industry skills and deep research knowledge. Additionally, many of China’s engineers who are educated abroad tend to seek employment in the West, and large Chinese companies can lose their best talent to foreign competitors.