technology regionalisation

How tech regionalisation could lead to the splinternet

  • China has reportedly asked its public administration to replace all foreign PCs with domestic ones within two years
  • However, this is not the first time that China has ordered the replacement of foreign PCs with domestic equipment, which would create further tech fragmentation
  • We still hold the view that the splinternet, where two or several systems that are completely separate and not interoperable, is unlikely to happen because of the costs involved
  • However, it is worth noting the different stages required where a splinternet could happen

China has reportedly asked its public administration to replace all foreign PCs with domestic ones within two years, according to a report by Bloomberg. Such a move would further fragment the global tech landscape. It is worth remembering that a similar directive was published back in 2019, where all foreign PCs were to be removed by 2022, and the latest order suggests the difficulty of doing so, and raises questions about China’s ability to achieve its aims by 2024. However, achieving that target will lead to more fragmentation in the world of technology. EIU does not expect a full bifurcation or splinternet (where two or several systems are completely separate and not interoperable) to happen because of the high costs it would involve. Nevertheless, we expect the tech sector to become increasingly fragmented and regionalised, as more and more countries see it as a major strategic priority, and governments and regulators increase their scrutiny.

The two main poles in that regionalisation process are the US and China, even though tensions will also involve jurisdictions such as the EU, Russia or India. Fragmentation will continue to happen to different degrees and at different levels, and will not necessarily lead to a splinternet. We nevertheless want to highlight six steps that – if they were all to happen – would bring the world close to a splinternet.

1. Banning software and apps from a specific country

This has already happened. The Great Firewall in China has blocked some of the main US companies (Google, Facebook), while the US under Donald Trump also blocked a series of Chinese apps, including Alipay and WeChat Pay. US policy has since been reversed by the Biden administration, pointing to the ease of blocking and unblocking software in a specific country. This is not only a US/China battle: the US has also blocked Kaspersky, a Russian cybersecurity company, while India has banned TikTok, a Chinese app.

2. Banning hardware from a specific country

Banning hardware is more costly and has longer-term implications than banning software, so marks another step towards the splinternet. The latest step by China falls into that category, but the main example remains Huawei. The Chinese company has been banned in many countries, either officially or unofficially, as operators look to future-proof their networks. The ban has a cost however, as the UK left until 2027 for its operators to rid existing networks of the equipment, which could come at a cost ranging in billions.

3. Banning key technology to a specific country

This has also already happened, and the main example is semiconductors. The US has not only banned US companies from selling their technology to Chinese companies put on the entity list, it has also banned any company using US technology from selling their own products, including to foreign companies if they decide to use that equipment in China. As such, TSMC, from Taiwan, is not providing its latest chips to Chinese companies, and a deal between ASML, a Dutch company, and SK Hynix, from South Korea, only went through when the relevant equipment (machines making extreme ultraviolet lithography) , was moved from China to South Korea.

4. Banning sales of products and services in a specific country

This has already happened, and it usually goes beyond the technology market. This is for instance the case in Iran, as it has faced sanctions, and more recently in Russia, since its invasion of Ukraine in February 2022, which has led many Western, including tech, companies to stop selling their services in the country. It also exists between the US and China, but not at the level where it could have a major impact; the main example remains Chinese companies not being allowed to list on the US stock exchange, such as the Didi delisting.

5. Banning access to components made in a specific country 

This has not happened yet, but will happen when certain components are manufactured in what is considered to be an unfriendly country, while the final manufacturing happens somewhere else. At the time of the first global Huawei bans (from 2018 onwards), there were reports that Ericsson was using components made in China, which could cause security issues. This was not the case, as the vendor only makes equipment in China for the local market. However, this highlights the potential supply chain challenge for global vendors that are dependent on components from multiple countries. 

6. Banning manufacturing in a specific country

The flipside already happens, as Russia mandated, before its invasion of Ukraine, that some 5G equipment be made domestically. However, with China remaining the main global manufacturing hub, any barriers on manufacturing would have major global repercussions, including for some of the largest tech companies, (which still makes most of its products in the country). If governments were to implement such a move, it would be the costliest one so far, as repatriating manufacturing would add on to production costs and increase prices of several consumer electronics products.

We think it unlikely that all six of these steps will be taken simultaneously and consistently by any country, thus ruling out a complete splinternet. However most of the six have happened sporadically over the past few years, with similar actions likely in future. This is leading to regionalisation of global technology markets, albeit with overlaps and blurred boundaries. One result will be added complications for companies trying to sell globally. Another will be a disconnect in global content, skills and knowledge, feeding into political polarisation. Regardless, the utopian ideal of a global internet is fading fast.

More award-winning insights on the global tech landscape can be found in EIU Viewpoint, our new analysis service. EIU Viewpoint provides unmatched forecasts, analysis and data for nearly 200 countries and six key industries, helping organisations identify prospective opportunities and potential risks.