Made in China 2027 – Software Edition

China’s Xinchuang Initiative: Self-Sufficiency in Technology

1. Background and History

China’s Xinchuang, or “Information Technology Application Innovation,” is a government-led initiative designed to achieve technological self-reliance by reducing the country’s dependency on foreign technology. This policy aims to replace foreign software, hardware, and other IT systems with domestically produced equivalents. It is part of China’s broader goal to foster self-sufficiency in technology, gaining momentum as trade tensions between the United States and China increased, especially following US export controls and sanctions that restricted China’s access to key technologies.

The origin of the Xinchuang policy dates back to the early 2010s, but it gained significant traction after the U.S.-China trade war and the Huawei bans initiated by the Trump administration. In response, China accelerated its technological self-reliance ambitions, as outlined in the Fourteenth Five-Year Plan and Long-Term Goals for 2035, unveiled in March 2021. These documents highlighted technological self-reliance as a key strategic support for China’s future development.

The Xinchuang initiative focuses on creating an alternative domestic ecosystem that covers hardware, software, cybersecurity, and application software. The strategy aims to eliminate foreign dependence in sensitive sectors to protect national security, ensure data integrity, and reduce exposure to international political risks.

2. Document 79 and “Delete America” Strategy

Document 79, issued in September 2022, is a highly secretive directive mandating that state-owned companies in sectors such as finance, energy, and other critical industries replace foreign software by 2027. The directive, informally known as “Delete America” or “Delete A,” reflects the Chinese government’s determination to eliminate reliance on US technology as part of a broader push for economic and national security. The State-Owned Assets Supervision and Administration Commission (SASAC), which oversees China’s large state-run enterprises, issued the directive to promote greater independence from foreign technologies.
The “Delete America” strategy not only seeks to mitigate risks associated with foreign technology but also aims to promote the growth and adoption of Chinese technology solutions. This strategic shift aligns with Beijing’s broader efforts to counteract US-imposed restrictions on high-tech exports, particularly in semiconductors and advanced computing technologies.

3. Replacement Scope and Timeline

Document 79 outlines the comprehensive requirements for replacing foreign technology with domestic alternatives across various categories. The directive has set a clear target for state-owned enterprises (SOEs) and government agencies to achieve 100% replacement of foreign software by 2027. The scope of the replacement is broad, covering multiple layers of IT infrastructure:

• Core Office Systems: Includes office automation (OA) software, email systems, and document management. Replacement completion is expected by 2025 for OA systems.
• Business Management Software: This includes HR systems, ERP, financial management, CRM, and risk management software, with replacement targeted by 2027.
• Production and Research Systems: Systems involved in production and R&D are also subject to replacement, with a flexible timeline based on domestic capabilities.
• Hardware and Operating Systems: Core hardware components, such as servers and network infrastructure, and domestic operating systems like KylinOS and UOS are also targeted for replacement by 2027.

4. Implementation Phases and Categories for Replacement

The implementation of the Xinchuang initiative occurs in three distinct phases:

• Phase 1 – Government and Party-Sector Adoption: The first step targets government institutions, military bodies, and Communist Party sectors. These institutions are expected to transition to domestic technologies to avoid foreign influences and data risks. The deadline for complete replacement of foreign technology in these sectors was initially set around 2022 and has mostly been met.
• Phase 2 – Expansion to State-Owned Enterprises (SOEs): Following the adoption in government institutions, the focus shifted to state-owned sectors, including energy, telecommunications, healthcare, railways, and aerospace. These sectors are vital for national infrastructure, and replacing foreign technologies is essential to mitigate risks related to international sanctions and supply chain disruptions. The target for adoption across these sectors is around 2025.
• Phase 3 – Broader Market Adoption: The final phase targets the broader consumer market, which includes individual consumers and private businesses. The aim is to push domestic technologies to capture a larger share of the consumer IT market, including devices like computers, smartphones, and cloud platforms.
  The roadmap indicates China’s intention to phase out foreign technology by 2035 and to ensure that 50% of the Chinese computing industry utilizes domestic technology by 2025.

5. Market Size and Growth of Xinchuang Industry

In 2023, the Xinchuang industry’s market size reached an estimated $52 billion, and it is projected to grow to over $155 billion by 2025. It comprises various segments, including basic hardware, software, cybersecurity, and information security, with plans for rapid growth in segments such as servers, big data platforms, and cloud services. Chinese companies such as Huawei, Loongson, Inspur, and Standard Software have emerged as leaders in these segments, providing domestically developed replacements for foreign products.
The growth of Xinchuang is further driven by China’s aim to build a fully self-sufficient technology ecosystem that serves national security interests while reducing exposure to foreign dependencies. However, supply-side challenges and technological gaps remain major obstacles to achieving these ambitions.

6. Impact on Western Technology Companies

China’s Xinchuang policy has significant implications for Western technology companies:

• Large Software Companies with Long-Term Investments in China: Companies like Oracle, IBM, and Microsoft have faced challenges as Xinchuang mandates exclude them from lucrative procurement opportunities. Partnerships and joint ventures with local firms have become necessary but come with compromises, such as sharing IP and increased compliance costs.
• Large Software Companies with Limited Success in China: Firms like ServiceNow, which have struggled to penetrate the Chinese market, face even greater challenges under Xinchuang, given the preference for local technology solutions.
• Startups Targeting the Chinese Market: Startups face high entry barriers, such as partnership requirements and data localization mandates, making it challenging to succeed in China’s critical sectors.

7. Additional Risks for Western Companies

Western companies face significant risks due to the Xinchuang initiative:

• Intellectual Property Risks: IP protection remains a concern, with foreign companies required to share technology with local partners, increasing the risk of IP theft.
• Capital Controls: China has strict capital controls, limiting the ability of foreign companies to repatriate profits, which can impact their financial viability.
• Data Security and Localization: Data localization requirements subject foreign companies to local regulations, reducing control over their data and increasing risks related to privacy and security.

8. Conclusion

China’s Xinchuang initiative is a calculated effort to establish a self-sufficient technology landscape, reducing dependence on foreign technology and mitigating geopolitical risks. Western technology companies face declining market share, increased regulatory burdens, and risks related to intellectual property and capital controls. Companies like Oracle, IBM, and Microsoft struggle to maintain their presence, while newer entrants face insurmountable barriers. Startups are deterred by the regulatory environment, which presents high entry costs and limited operational control.