China Assaults the High-Tech Frontier

I did a fun panel earlier this week on CNBC’s “Closing Bell” with Maria Bartiromo.  She asked a pretty straightforward question:  Is China challenging the United States on the frontiers of high technology, and, if so, what sectors should we watch?

It’s worth reiterating three points I made on the program:

First, Chinese government, industry, and scientific leaders are pushing, across a range of sectors, to move up the value-added chain.  In some sectors, such as high-speed rail, China is already a leader.  And that’s why China is a preferred partner in the sector for, say, Argentina, and possibly even California.  In other sectors, such as solar energy, China is already globally competitive (California has been a big market for Chinese solar panels) although China is still seeking many of the frontier technologies.

Yet in nearly any sector that is strategic, involves high technology, or sits atop the commanding heights of the economy, China is determined to indigenize technology—rather than rely solely on technology transfers—and to compete globally.  Many in China, not least Premier Wen Jiabao, have argued that China came late to both the industrial revolution and the information revolution.  And they are determined, therefore, not to miss out on the energy technology revolution.

Sectors to watch include aircraft, nuclear power, electric vehicles, other clean energy sectors, and electronics.  China may buy Boeing and Airbus now.  But, in time, Chinese manufacturers aim to compete with both companies globally—although whether these Chinese firms succeed is another story altogether.

Second, policy instruments are a big part of this Chinese push.  Much has been made of China’s “indigenous innovation” policies, especially since 2006, and with very good reason.  China favors its own national champions and domestic companies in, for instance, government procurement.  It provides preferential financing.  And, as the U.S. Chamber of Commerce points out, this poses an enormous challenge to American competitiveness, and to all multinational companies operating in China.

That said, indigenous innovation policies aren’t new.  I wrote a book ten years ago that touched on a Mao era variant of indigenous innovation.

Nor is China the first country to pursue “big science” or to leverage industrial policies.  Many of the most famous postwar technological innovations flowed from such “war babies,” including radar, computing, and nuclear engineering technology.  The major powers, in Walter McDougall’s sharp phrase, pursued “the institutionalization of technological change for state purpose.”  And in these early years, even paragons of entrepreneurship, like Silicon Valley and my alma mater in the Valley, Stanford University, benefited greatly from bountiful government money and from Cold War research.

Nor, of course, can industrial policies alone make an economy more innovative or guarantee a steady march to the technological frontier.  Just look at Japan:  Its firms have enormous technological prowess, and Japan was once an iconic practitioner of industrial policy; indeed, Japan’s Ministry of Economy, Trade, and Industry has just promulgated a new “Industrial Structure Vision 2010.”  Yet, for all that, Japan just slipped behind China from the number two to the number three spot in global GDP.  Industrial policies, even if initially successful, can, in some ways, become self-limiting.

Third, even as it assaults the technology frontier, Chinese firms are integrating into global supply and production chains.  Some, such as MIT’s Ed Steinfeld, argue that this could change Chinese corporate behavior.  But, in any case, it certainly leads to unconventional opportunities for partnership.  Few things could be more politically sensitive in China than domestic exploration by foreign companies for oil and gas.  Yet because China lacks relevant technologies, companies like Shell are prospecting for shale gas inside China, albeit in partnership with Chinese firms.  Likewise, China’s private national champion BYD has struck up a partnership with Daimler to develop viable alternative energy vehicles.

At the end of the day, some U.S. or multinational firms may seek to protect intellectual property by investing Chinese partners in the process—for instance through the joint licensing of intellectual property with a Chinese entity.  Other U.S. or multinational firms may simply need to meet the challenge by separating production and basic design from more complex and essential design.  Apple is one such firm.  It manufactures everything from iPods to iPads in China through its partnership with Foxconn.  But Apple retains its essential design process in Cupertino, California.

At the end of the day, many firms will have to meet the challenge in two ways:  (1) by moving up the value chain even faster than a China that is very, very determined to assault it, and (2) by pressing to level the playing field in a China that is actively shaping it to the advantage of its national champions and its own domestic firms.   Some have upped their game and succeeded elsewhere.  Just look at how well Apple competes in Japan.  Japan is a wonderland of indigenously-produced consumer electronics, and yet Apple products sell tremendously well there.