Chinese Industrial Policy and the Digital Silk Road: The Case of Alibaba in Malaysia

Executive summary

This essay demonstrates how China's domestic industrial policies provide important indirect support for the Digital Silk Road, as shown by Alibaba's activities in Malaysia.

Main argument

In recent years, China's domestic industrial policies have expanded dramatically. Three trends are especially important in shaping the impact of domestic policies on the Digital Silk Road. First, recent industrial policies have increasingly focused on technologies centered around artificial intelligence, 5G telecommunications, and smart networks. Second, while policies are still state-led, they rely on close partnerships with private firms such as Alibaba, Baidu, and Tencent. Third, a new wave of regional policies aims to create urban clusters that will be more efficient and less congested than regions dominated by single large cities. Each of these trends can be witnessed in the activities of Alibaba in Malaysia. Already a pioneer of smart city development in China, Alibaba has begun implementing its City Brain program in Kuala Lumpur, Malaysia, complementary to its e-commerce and logistics initiatives in Southeast Asia. While Malaysia is a front runner in these activities, similar dynamics are at work throughout the region. There are powerful complementarities created by dynamic private Chinese businesses, the large Chinese market, and the availability of finance for China-supported infrastructure programs.

Policy implications

• • The U.S. and other nations committed to open standards need to recognize that a few Chinese companies, like Alibaba, have already made substantial inroads into Southeast Asia and are purveying an attractive business model.

• • The U.S. and Japan need to improve the quality of their game in Southeast Asia. It cannot be presumed that a backlash will develop against Chinese government–dominated initiatives or corruption. On the contrary, attractive, concrete, low-cost alternatives must be offered to the countries, businesses, and people of Southeast Asia.

• • The ultimate shape of smart infrastructure is not yet known, and the potential for heightened transparency and more responsive systems is large. Many countries, and specifically those in Southeast Asia, have an interest in open systems that increase their options and do not tie them to a single business partner. The U.S. needs to develop a comprehensive program to strengthen the open global system and provide these countries with secure access to it.

The Belt and Road Initiative (BRI) is, at its core, a program of Chinese state–sponsored infrastructure construction designed to tie China and its neighbors more closely together. As this roundtable stresses, digital infrastructure has become a crucial part of BRI. At the same time, the relationship between the Digital Silk Road (DSR) and China's ambitious domestic industrial policy initiatives has become increasingly close.

As is well known, since 2006, China has steadily expanded a program of domestic industrial policies, crossing an important threshold in 2010 with the formulation of the Strategic Emerging Industries program. Perhaps less appreciated, in the last couple of years—since the DSR was introduced—China's industrial policy initiatives have continued to grow in important ways and have developed three features that are directly relevant to BRI and DSR activities. The first feature, and by far the most important, is the increased focus on the revolutionary new technologies surrounding artificial intelligence (AI). Endorsed at the highest level of government in the 2016 Innovation-Driven Development Strategy, this focus on AI means that China is committed to a new wave of technological change that has substantial disruptive potential. The second feature has been a shift toward reliance on private companies with greater expertise in AI than their publicly owned counterparts. Though Chinese government support is greater than ever before, the state has increasingly focused on financial and technological instruments that might be compatible with private-sector initiatives. The third feature is the heightened focus on rebuilding Chinese cities supported by digital technology. This includes both a macro aspect of creating massive new urban regions and a micro aspect of supporting smart city projects that can serve as test beds for new AI technologies.

Each of these three shifts in...