“US & China: Redefining Competition and Cooperation”

The US & China Running Different Playbooks

With less than two weeks after the inauguration of President Biden, his new Administration is defining a different strategy with China. This is critical because as we stand at the brink of the fourth industrial revolution, the US and China are running different playbooks. The US playbook is a free-for-all of distinct corporate partnerships, strategic initiatives, and M&A. China, meanwhile, is running a strategic and highly coordinated playbook that includes the direct and massive government support of national champion technology companies. The corporate partnerships and M&A in the US are between industrial incumbents and high-flying technology firms. The industrial companies with mechanical and customer know-how are partnering with firms that have the capabilities and cultures to operate digitally. Ty Findley, Managing Partner at digital industrial venture capital fund Ironspring Ventures, commentated… “There is no doubt that the global Industry 4.0 race is on. The current pandemic has really put a spotlight on why having a robust, modern and secure US manufacturing base is critical to both national security and economic prosperity. The US launched the “Manufacturing USA” initiative in 2013 and China launched its “Made in China 2025” plan in 2015 – it will be very telling to watch how these differing strategies play out.” Examples of US-based corporate partnerships in one vertical of industrial technology, the internet-of-things, are shown in a chart below.

The US government dedicated [2.95%] of the federal budget in 2019 or ($118.1 billion) to R&D alongside what is clearly a private market-led effort.  China is running a different playbook. Its playbook is dominated by partnerships between key technology companies like Huawei and the central government, which is providing clear direction and massive support for technologies such as AI and 5G. The Chinese playbook also clearly includes a belief in first-mover advantages. Moving first increases the chances that Chinese AI will get smarter faster and that Chinese digital platforms will reap the benefits of scale, big data, and network effects. In the 13th five-year plan, (2016-2020) China declared their intent to invest [3.9%] of their budget in these technologies, or about [元RMB 917.5 billion] or USD 1.3 billion ] per year, dwarfing what is being spent in the US and elsewhere. If current trends continue, after 2030, China will be the largest spender on research & development.

(Data Source: OECD)

The People’s Republic of China’s ultimate objective is to reduce its dependence on foreign technology and promote Chinese high-tech manufacturers and standards in the global marketplace. Semiconductors are an area of particular emphasis, given their centrality to nearly all electronic products. China accounts for about 60 percent of the global demand for semiconductors but only produces some 13 percent of the global supply. China’s Made in 2025 sets specific targets: by 2025, China aims to achieve 70 percent self-sufficiency in high-tech industries, and by 2049—the hundredth anniversary of the People’s Republic of China—it seeks a dominant position in global markets.

The playbooks in motion in the US and China will have ripple effects across the world and through time. They will fundamentally alter the way we, our children and our grandchildren live, work, and relate to each other. As it stands today, this is a competition between the US and China that is threatening to create a bifurcated global system particularly in areas such as 5G.

A Roadmap for Leadership in Manufacturing, Tech & Innovation

Preserving American leadership will require reconstituting a national manufacturing arrangement that is both safe and reliable—particularly in critical high-tech sectors.

There are five key steps that America, led by the new Biden Administration but working closely with the private sector, and non-profit organizations must take to maintain and increase its global lead in industrial technology. The first is to identify the minimum viable industrial capacity needed to deal with national emergencies and to be globally competitive. An obvious area of focus is semiconductors and microchips, which are indispensable to technological progress but made largely in Taiwan, a significant economy and ally of the US which China believes to be a renegade province and has threatened to use military force to reunify with the Mainland. Moreover, active pharmaceutical ingredients (APIs) are another clear example. Approximately 80 percent of the API’s used to procure drugs in America are claimed to come from China and other countries like India. Next, America should procure access to reliable and abundant supplies of natural resources and integrate supply chains in a way that promotes the environment, sustainability, and good governance across the world. China has long been procuring these resources but doing it in a way that in many examples have promoted servitude and leaves little room for real partnerships – the US should take a different approach and use this as an opportunity to rebuild multilateral institutions in Europe, fortify alliances in Asia & The Middle East, re-engage countries in Latin America and reimagine free trade agreements and commercial ties based on equity and respect on the continent of Africa. Third, America must build up a domestic base of the required talent via retraining and education. A study by McKinsey, a consultancy, rated employee training among the top three factors reducing American competitiveness in manufacturing. The skills gap in the US is large and takes many forms – it is unlikely that the problem can be solved by a single institutional actor. The problem is better approached multilaterally to create opportunities like apprenticeships focused on baseline skills, specialized digital training, and technical training. This also requires providing scholarships and modifying immigration policies to enable our world-class universities to attract, train, and harness the power of global talent. Fourth, investments must be made in hotbeds of innovations via public-private partnerships, research grants, and even in the earliest stages of venture capital. This also includes restoring critical federal funding for R&D, there is no substitute for the government to lead by example. Last, de-emphasize weaponizing trade policy as this has both short and long-term implications in limiting market access and raising costs for American MNC’s and US innovation capabilities. 

A starting point for America could be to revive the now-defunct Obama-era organization called the National Network of Manufacturing Innovation, or Manufacturing USA. Manufacturing USA was a joint coordinated effort between DoE, NIST, NSF, and DoD to build specialized innovation sites around the country. The effort failed because it didn’t go far enough to include private sector capital, expertise, and dynamism. Manufacturing USA was meant to more effectively compete with China’s Five Year Plan as it relates to technology and, properly revived, it can fulfill its mission.

The bottom line is: many have juxtaposed the current US and China relationship to the Cold War. This is a misleading and dangerous comparison for the US. The USSR was a three-legged stool with two legs already wobbling. China is a full and sturdy chair, this is not a Grand Father Chair and this is not your grandparent’s cold war. Gary Rieschel Founder and Managing Partner of Qiming Venture Partners notes,  “In any competition, there are moves and countermoves. It has been decades since the U.S. has had an economic competitor that required any significant change in U.S. thinking. Japan was that competitor in the 80s. China has become that competitor in the 21^st century, and on a more comprehensive basis. Our responses to this should not eliminate the opportunity for future cooperation in areas of our mutual best interest.” Moreover, we can equate the current geopolitical rivalry between Beijing and Washington
WRE
as the US playing defense and China playing more offense. If the US government strategically develops partnerships with the private sector to enhance FDI in critical high tech sectors and train and retrain the workforce effectively, this will create an ecosystem in which the United States will see advanced innovation, continue to employ millions of highly skilled and educated workers, and further the competitiveness of our high-tech sector to not just confront China, but to more effectively compete with China. America needs to define a winning strategy, which at its core begins at home. The US needs to focus on its game, knowing that The best defense is a good offense. Failing to do so could risk the US permanently losing its global technological leadership to China.   

About the authors:

Earl Carr has over twenty years of experience working in the private sector and non-profit business organizations. He is an Adjunct Professor at NYU and he is currently a member of the National Committee on US-China Relations.

Special thanks to Matt Harris, The Head of Texas Office Draper Associates who read multiple drafts and contributed research towards this article.  Special acknowledgment to Jee-ho Bae who contributed in providing data info-graphics and Michael Tang and who provided comments.

theOECDResearch and development (R&D) – Gross domestic spending on R&D – OECD Data