A bunch of social media applications displayed on a smartphone (Photographer: Chris Ratcliffe/Bloomberg)

America May Need to Adopt China's Weapons to Win Tech War

(Bloomberg) -- Behind the daily skirmishes over tariffs, the U.S. and China are gearing up for a longer-term battle between two very different systems of innovation. To win, America may need to start using some of its rival’s weapons.

At the heart of the clash is the role of government. Washington isn’t a bystander: For decades it’s provided the tech industry with legal guardrails to foster competition, and risk capital for long-term research. Still, no bureaucrat told Steve Jobs to change the paradigm for mobile computing, or the founders of Uber to disrupt taxi services. Many U.S. entrepreneurs, when they look at federal agencies, mainly see a source of red tape.

In China too, the most successful names had humble beginnings: Alibaba (a combination of eBay, PayPal and Amazon) started out in the Hangzhou apartment of founder Jack Ma. Search giant Baidu and social-media hybrid Tencent also started small. While they benefited from state-imposed barriers blocking entry of their U.S. counterparts, these companies grew up in the private sector, often having to skirt government control to do so.

The next wave of technological innovation is shaping up differently. China’s rulers have identified the industries they want to dominate this century, from robotics to biotechnology and artificial intelligence or AI. Chinese firms with a project in those fields don’t have to sweat through pitches to venture capitalists: government coffers are open. They get protection from foreign competitors, and encouragement to borrow (or steal, depending which side of the Pacific you’re viewing from) their ideas. About one in five U.S. firms in China said in a survey last year that they’ve been asked to transfer technology.

It sounds like a classic state-versus-market standoff -– except something’s changing. American tech companies are starting to urge their government to take a leaf out of the Chinese book, and steer the industry over the long run.

‘Time to Join’

Intel Corp., the biggest maker of computer processors, wants to be a leading player in artificial intelligence. That emerging industry will require “not just the creation of AI technology, but the development of an AI ecosystem,” said David Hoffman, the company’s director of AI policy.

“One approach to that is, the market is just going to take care of that and develop that over time,’’ he said in an interview. “Most other countries are saying, well, even if that is the case, we want to invest and to provide direction.”

His boss Brian Krzanich, Intel’s chief executive officer, notes that it’s not just China taking the second approach: So are the European Union, Japan and India. “It’s time for the U.S. to join,” he wrote on the company’s website on May 10.

Those other countries are U.S. allies. China’s a rival, and on track to overtake America as the world’s biggest economy. Its spending on R&D is catching up too.

America May Need to Adopt China's Weapons to Win Tech War

Still, America has a clear technological edge. Part of what’s involved in retaining it is essentially a kind of police work.

In the thick of negotiations last month, U.S. Trade Representative Robert Lighthizer welcomed Chinese pledges to buy more American exports. But, he said, “far more important issues revolve around forced technology transfers, cyber theft and the protection of our innovation.’’

America’s cops on that beat, which extends far beyond the tech industry, include people like Andrew Love, head of brand security at Specialized Bicycle Components Inc. in Morgan Hill, California. He patrols platforms such as eBay, Facebook and Alibaba for counterfeits – anything from biking apparel to copies of Specialized’s high-end carbon frames, which are typically less safe than the original. Love appreciates the efforts of U.S. trade negotiators, but says “it’s really different to be down in the trenches.’’

In the longer run, China’s goal isn’t to imitate technologies but to master them. And it’s making progress.

‘Hollowed Out’

Chinese companies were granted more than 11,000 patents in the U.S. last year, a 28 percent jump from 2016 and more than 10 times the figure a decade ago, even if many are for incremental processes. China also climbed two places to rank 19th on the Bloomberg Innovation Index, while the U.S. dropped out of the top 10.

The National Development and Reform Commission didn’t respond to faxed request for comment on innovation strategy.

America May Need to Adopt China's Weapons to Win Tech War

For America’s most innovative companies, China “is a giant threat,” said Robert Atkinson, president of the Information Technology and Innovation Foundation in Washington. Without a public-private U.S. strategy, “in 10 to 20 years we will have a much hollowed out advanced industry sector.”

Chinese high-tech is expanding at double-digit paces, even faster than overall manufacturing growth of about 6 percent a year, Moody’s Investors Service said last month. The “Made in China’’ plan to dominate key industries will employ tax breaks and subsidies, and can draw on about 300 billion yuan ($47 billion) held by the China Integrated Circuit Industry Investment Fund, Moody’s estimated.

That’s a state-run venture-capital outfit. It invests in companies like Apex Technology Co., which sparred for years with Lexington, Kentucky-based Lexmark International Inc. over allegations of patent infringement. The courtroom saga was resolved in 2016 –- when Apex was part of a Chinese group that bought Lexmark, IP secrets and all.

‘Sole Advantage’

Such acquisitions are coming under growing scrutiny in Congress, while Chinese tech giants like Huawei Technologies Co. and ZTE Corp. have been investigated or penalized on national security grounds. Other countries feel threatened too, meaning the U.S. will likely have allies. Germany is taking a closer look at Chinese investment in sensitive industries such as clean energy.

China could also run into internal difficulties as it borrows to finance the industrial push. Total debt surged to 256 percent of GDP by mid-2017, from 141 percent in 2008, with most of it on corporate balance sheets. “In the long run, they might be causing a big issue,’’ said Shigeto Nagai, head of Japan research at Oxford Economics. “I’m not sure the Communist Party can really choose the future winners.’’

In China’s favor are scale and speed. A light regulatory regime cuts back on delays. And the relentless pace of economic growth in a nation of 1.4 billion effectively allows its innovators to experiment in a huge lab.

The result has been a shift in the balance of tech power, according to Peter Cowhey, a former chief of the Federal Communication Commission’s international bureau who’s now dean of the University of California, San Diego’s school of global policy and strategy.

“China is now a large enough market that for the first time the U.S. doesn’t have the sole advantage of massive deployment of new technology,” he said.

©2018 Bloomberg L.P.