I was wrong about China’s ability to innovate–and the implications are enormous

For years, I have been a skeptic that China could out-innovate the United States. A top-down Communist Party system dependent on state-owned enterprises could not allow a flowering of cutting-edge new ideas. The lone exception was that Chinese private sector organizations could buy failing but still promising technology divisions of Western companies, as Lenovo did with IBM’s personal computer division. I co-wrote a book about that, seen here.

But now I’m seeing mounting evidence that the Chinese could leapfrog and overwhelm at least some American and European technology companies while essentially keeping their own market closed to the likes of Google, Facebook and Uber. The most recent evidence is a report from McKinsey Global Institute entitled Digital China: Powering the Economy to Global Competitiveness. See this discussion of it last night at the Asia Society in New York.

In brief, the Chinese are finding ways to use their huge capital base in very smart ways. Total Venture Capital activity in China is now on par with that of the United States, according to my friend Rebecca Fannin at Silicon Dragon News. Chinese firms are on the move in the United States in the most advanced industries of artificial intelligence, genomics and autonomous driving. They are absorbing these ideas and often taking them home to develop further. There are now 731 million Internet users in China, says McKinsey, and they are rapidly adopting online payment methods.

In other cases, the Chinese are creating companies in China that then go out and buy start-ups around the world. One is ICarbonX, a spinoff from the Beijing Genomics Institute in Shenzhen, which is a leader in collecting personalized DNA information and offering treatment recommendations on that basis. It is buying companies in related fields around the world.

If, in fact, the Chinese have broken out of their mid-market manufacturing position in the world economy, the implications are enormous and virtually none of them were discussed at the Asia Society. Some of the burning questions are:

–Chinese President Xi Jinping is taking China down a much more authoritarian path, cracking down on all forms of dissent and building the Great Firewall that insulates China from the rest of the world into a much more formidable force. American companies like Apple, Cisco, Intel and Microsoft have to comply with Xi’s rules if they wish to continue to do business there. But at what point do they ask themselves: do we really want to support a totalitarian state?

–The Chinese have locked out some technology companies and not necessarily as a result of direct government reaction. Just like the Americans have large digital behemoths called FANG (Facebook, Amazon, Netflix and Google) plus Apple and Microsoft, China had developed its BAT giants–Baidu, Alibaba and TenCent. Two of them came together recently to pool their ride sharing services and knock Uber out of the Chinese market. These BAT companies have explicitly accepted the fact that they have to obey the Chinese government. They have become de facto state-owned enterprises and they may even have Communist Party members on their boards.

–What are the military and societal implications of a China that is going to rapidly develop these technologies? Will our military keep pace? Will Chinese companies show preference to sell to the People’s Liberation Army? Almost certainly. On the social front, the Chinese have implemented a social credit scoring system that gives everyone in the system a rating for their patriotism and overall conduct. They are developing facial recognition technology and using it on a massive scale: the McKinsey report mentions that public toilets at the Temple of Heaven, a major tourist destination, use facial recognition devices to prevent people from taking too much toilet paper. If they have taken their personal allotment, the machine will recognize their face if they try to take more within a specified time and will block them. Is this a vision of the future that we want to embrace. Technology was supposed to set people free, right?

–How can Americans build a cohesive strategy to maintain our technological leadership? We are a loosely organized, short-term-thinking society dealing with an increasingly well-organized long-term player that thinks strategically for the very long term. The Committee on Foreign Investment in the United States (CFIUS) is blocking a number of Chinese takeovers of smaller tech companies. But that is just a piece of a much larger puzzle. In many ways, this is a much larger version of the challenge that emerged from Japan in the 1980s. We need to break out of our smug postures, the likes of which I promoted, and wake up.

In that vein, none of the really important questions were asked at the McKinsey event at the Asia Society. McKinsey wants to promote its expertise in helping Western companies sell in China and in helping Chinese companies go global. It does not want the difficult issues brought to bear and even stacked the audience with McKinsey alumni to make sure the discussion did not become too controversial. The Asia Society, increasingly under the sway of Hong Kong billionaires like Ronnie Chan, also does not want to risk discussions that might anger Beijing. China is consciously trying to project its “soft power” to discourage any negative commentary.

So if our elite institutions are not going to promote a rigorous debate about the real issues, we have been co-opted and defeated. The pursuit of profit in the short term will triumph over the long-term search for solutions.




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