Government policy on connected devices needs modernization

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One of the unheralded but most critical components within mobile device architecture is the module – combining the chip, power source and antenna to form the device’s brain. According to a recent 1NCE analysis of the 30 million connected products on the world’s largest IoT network in the cloud, an estimated 40% of U.S. smart devices use Chinese modules. And this number appears to be trending upwards, confirming the U.S. government’s fears about dominant Chinese players growing their influence in American and western tech.

The module may not be the most hyped part of the tech sector, but it’s a pretty big deal in the $200 billion of American GDP attributable to connected products. Like most other essential technology deemed a potential threat, they are addressed by the U.S. and other nations solely on the supply side, with very little focus on demand. Innovators don’t have any incentive to bypass cheaper Chinese components. In fact, the search for simplicity is often the most powerful driving force in product development and supply chains. Removing Chinese options from the supply chain isn’t a simple matter of swapping one module for another, instead it adds complexity and cost to the innovation process.

And let’s not forget that this all may be a solution in search of an answer — the feared threats from Chinese components remain mostly hypothetical at this time. Nonetheless, it’s perfectly reasonable for the U.S. and Europe to evaluate their options.

Europe may be ahead in many respects of tech regulation, but the U.S. leads the way with China. Unfortunately, each new U.S. government offers a different political approach but the same result: more complexity and challenges for innovators. The Build America Buy America Act in 2021 aimed to boost domestic production in public sector projects but instead created a chilling effect on manufacturers. It created penalties for not meeting a 55% target on American components in products, allowing exceptions only where costs increase by 25%. This year, new trade restrictions with China only add headaches for innovators without providing any incentive to pursue the alternative. 

All politics aside, there’s little argument that the current U.S. administration is intent on supporting innovation in the country, as well as internationally where there’s mutual benefit. But its policies so far have only pushed innovators to tinker with their supply chains — they’re using the same tech, as Chinese companies prove resilient and creative at evading restrictions and getting their products into manufacturers hands. There’s little value in playing whack-a-mole and targeting other countries as supply chains shift.

The impact from efforts on both sides of the political aisle has been minimal in boosting domestic usage of non-Chinese components, so it’s time to shake things up. The U.S. government must stop the punitive fees and import restrictions. Instead, new tax credits are needed for using American modules and other tech components. But no matter how hard the government tries, U.S innovators will always need components from internationally. That’s why the tax credits should also be extended to using foreign component manufacturers, excluding China, but with a smaller credit than afforded to using domestic manufacturers. And to ensure fairness, a sliding scale could be implemented based on company size.

American and European companies shouldn’t be afraid to buy components abroad. Making incentives for American supplies, with smaller incentives for other countries’ suppliers, will reduce Silicon Valley’s dependence on China while still giving options for European and Asian companies that can help manufacturers better compete in every international market.

For the sake of security and future growth, America’s innovators need solutions instead of punishment. If all they do is buy American, their business is going to slow down in just a few years. That only benefits China.

There’s no reason for a zero-sum game between China and the west, but it’s understandable for countries to seek out solutions closer to home. Viable compromises are within reach, however, if we can all just take one step back and embrace the fact that global cooperation always defeats tribalism.