The Great Rivalry: Scaling The Commanding Heights of Science and Technology

No country in the post-colonial era has thrived without first building its capacity to conduct scientific research.
                                                                                                    ---Seth Berkley


America has the best universities in the world. Not just one or two of them, most of the best universities in the top 100 are from the U.S. Most of the new industries that have come out in the last few decades have also been in the U.S. In every field of research and development, we are either at the top or near the top. This is what enabled the U.S. to rise to the number one country in the world.

The Chinese, like all other nations, are playing catch up. The amount of money spent on research is $475 billion for China, versus $553 billion for the U.S. As seen from the graph below, the Chinese are steadily catching up to the United States on R & D spending. In the coming decades, they will spend significantly more then us. Obviously, having done this work for a very long time, the U.S. is still more productive and able to get more results, but the combination of more money spent and a world wide talent search will eventually bridge the gap and the output from the Chinese research will approach or even overtake ours.

In fact, according to the Nature Index 2019, this is already happening. China is now the number two country in research output. producing half of the research as the United States as of 2019, dwarfing the third place Germany. In 2016, just three years prior, China was producing 37% of the research output of the United States. so the volume and quality of the research is growing at the same trajectory as the research spending of China, but the productivity is a few years behind the spending.

The big spending on research by the U.S. has resulted in many new industries for the U.S. In many cases, other developed nations simply failed to even be followers. Japan did not create their own version of the online giants and smart phones. Looking into the future, we are no longer alone in doing research and development.

top ten nations in research output,
Sourced from Nature.

Change in output by country,
Sourced from nature

While the U.S. is excellent in basic research, it does not always mean that we get to keep the industries that sprung up as a result of the research. From the time the first transistor was created in 1947 by Shockley and company, it took many decades and a lot of work by a lot of companies to bring us to the state of the art semiconductor chips that we produce today. The production of the chips skipped over Mexico, crossed the Pacific Ocean, and landed first in Japan, then in Taiwan and South Korea. The design team and companies stayed in the U.S., but the leadership has changed through many hands. Many of the early pioneers have ceased to exist today. New industries for the coming decades will likely follow the same pattern. While the Chinese may not be as inventive as us, it is at the stages after the initial discovery that they excelled. With access to an equally large market as the U.S. at home, supported by their government, the speed in which new industries (to China) sprung up was mind boggling. It is very likely that no matter who invented the initial technology, in the intervening decades that it will take for the industry to develop into the giant scale like the semiconductor industry is today, leadership will quickly shift to China due to their ability to execute and their manufacturing prowess. This is the tragedy of not having a manufacturing base to capture the inventions. We were fortunate that until this point, no competitor were able to match our inventiveness, scale and entrepreneur zeal. That will no long be the case with the rise of China. When the need arises, the Chinese are capable of doing the research to be at the cutting edge today. Even the U.S. has recognize them as the leaders in hypersonic missile technology. They are the first to produce a quantum satellite and quantum radar. They are the first country in the world to start testing a ship mounted rail gun. On the civilian side, SenseTime was a leader in facial recognition technology. Huawei has now become the undisputed leader in 5G technology.

We see a few patterns over the past few years in terms of Chinese technological advancements. First, the few areas where they reach the cutting edge technology have been relatively recent. Second, these have all been in the areas of emerging technologies where no one had accumulated many years of technology lead. Most are still in the basic research stage. Contrast to other areas, where years of head start by Western firms have created formidable barriers of entry for Chinese firms. Aircraft turbo-fan engine is a prime example. Prior to the Chinese entry, it was controlled by a few firms in the world. All these firms guard their secrets jealously. There is no way for them to ramp up the learning curve quickly. Due to their military needs, the Chinese persisted for many decades. To this day, they still rely mostly on the Russians to provide them with military jet engines, though recently news have come out that their WS-10, an engine of eighties technology, has matured to the level that could be used by their military. Jet engines may well be one of the last areas to be conquered by the Chinese, but their ability to become the best in a few areas mentioned above shows they are quite capable of making progress on their own to blaze new trails. Finally, we see that currently, many of the recent success had military applications. This is no different to how the U.S. did it. DARPA, which was an entirely government funded entity, was originally created due to our need to create better weapons. They had been credited with many innovations which went on to create large civilian industries, including the internet.

Is there a way to stop them from their technological progress? This will be very difficult. Knowledge has a way of crossing boarders which could not be stopped. They are capable enough that they will be able to replicate something by simply knowing that someone else was able to create it. Though it was rumored that they hacked into U.S. networks to steal files for the making of the F-35, their J-20 was quite different then the F-35 in many respects. Their indigenous effort had created something that is competitive against F-35 and F-22. What is more, they did not create a clone. Having fully digested the principles that make a fifth gen fighter, they tailored the design to their own needs, which are different from the needs of the U.S. military. In contrast, the Russians, who had significantly more experience building fighter jets and an equally extensive spy network in the U.S., were unable to come up with something that could match our fifth gen fighters decades after we had come up with them. The approach of the Chinese, at least in the military side, is working to produce a lot of results during the last few years. They characterize the recent explosion of results as "geysers". In the future, it is reasonable to expect this approach to be replicated in the civilian side if this is not done already. Just as the U.S. had reaped a huge military spending dividend in the last few decades, we can expect the Chinese to get something similar. All these factors are completely within the control of the Chinese and we are not in position to change them too much. We reap more benefits to our country if we cooperate with them.


 

The Great Rivalry

           "Even a super power has limits"

                                                                                              ---Ariel Sharon


The Recent trade war with China has put the power rivalry between the United States and China in grand display. For the next decade and beyond, the two countries are destined on a path of power struggle between the number one super power and the ascending rival. This competition will involve multiple fronts and will continue long after the Trump presidency. That the Chinese have come to this juncture so quickly from such humble beginnings during the eighties is quite remarkable. What is the best path going forward for the United States and China?

If you were an Englishman in the twenties, looking across the pond to an ascendant United States, you would feel a similar sense of unease as we are feeling now in the United States regarding China. The United States did overtake Britain as the world's super power. So with the perfect hindsight, what could the British have done to prevent the rise of the United States? The answer is, not much. Short of war, the rise and fall of nations are largely due to factors internal to the country. Outside interference could perhaps slow the trajectory but not alter it. What is more, energy spent and the cost of fighting such a "war" could detract from our ability to solve our own internal problems.

The main areas that the two countries compete in includes economics, science and technology development, military, geopolitical and soft power projection. In the upcoming posts, I will look at each of these. For the remainder of the post, let's examine the economic aspect. In particular, how the economic trajectories of China will impact the power rivalry of the two nations.

Most people, having walked through the aisles of Walmart, have come to the conclusion that the way to stop the rise of China is to cut off their exports. This might have been true in 2006, when Chinese exports counted for a whopping 36% of China's GDP. Today, that number is 19% and dropping. The United States' share of the Chinese export is 19%. of that, a big portion (maybe a third) is export by the companies of the United States and allies, so cutting off this portion of the export will hurt companies like Apple way more then it hurts China. Another part of the export are goods that have no substitutes, or one can only find substitute at a huge mark up. For example, virtually all of the world's rare earth metals, which are crucial for many industries, including defense, came out of China. Even the American mines send their oxide to China to have it processed into metal. The portion of Chinese exports that could be taxed without badly hurting the U.S. defense, our companies or our lower and middle class consumers thus are much smaller portion of the total. In addition, their value added, or what the Chinese get to keep by this export, is a small fraction of the export value itself, since often times, they are the final assembler taking components from supply chain across the world. I remember a study done which said that the worst case scenario of the trade war was about a 1% impact on the Chinese GDP.

America's economic problem has to do with the lost of our industrial base. This actually preceded China's rise. I remember watching TV and saw people smashing Japanese cars in front of news crews in the eighties. Our highly inventive research and development came up with products, but were unable to profitably manufacture them in the United States. The causes are complicated. The biggest issue is the quality of our work force. High end manufacturing today is highly sophisticated, requiring huge amount of capital, know how and a highly intelligent, educated and disciplined work force. As America pushes into the more profitable sectors like tech and financial sectors, these sectors have also captured the lion share of the American intellectual elite. Other industries, which have lower profit margins, have been robbed of the talents needed to compete. The exodus of manufacturing would be slower if there were not a diligent work force on the other side of the pond ready to do the work, but the East Asian countries provided competition which pushed the bar higher. This sped up the decline of American manufacturing. The semiconductor industry is an example, Even as the design team stayed behind in the Bay Area and Austin, the manufacturing part has gone first to Japan, then South Korea and Taiwan and now China. Success in this industry is not about having cheap labor, but the ability to get to high efficiency production first. Otherwise the huge amount of capital will sit unproductive longer, causing the firm to fail. Having a high IQ work force that is willing to work day and night makes all the difference between success and failure. That is the reason why semiconductor manufacturing have gone to only East Asian countries. It has to do with the availability of a highly competent and disciplined work force willing to do what it takes to get the job done fast..

The financial industry also contributed to the decline of American manufacturing in two ways. First, they siphon out part of the profits of the other industries via financial engineering. Since banking and investment industry are well established, we would expect profitability to decline like other industries that are matured and highly competitive. This is, after all, the economic theory coming out of the economic classes in colleges. However, profitability of the financial sector is near the top among all the industries. Since financial sector touches all industries, we have to conclude that some of the profits from the other industries have been transferred to the financial industry through financial manipulation. Without the profit to sustain them, many industries have died off. The second way it contribute to the demise of the American industries is through the short term nature of how Wall Street reward our economic participants. If you are two years from retirement and running the company, You would care a lot more about the stock prices in the next two years versus will the company survive in ten. In that case, you would prioritize short term profitability over the longer term survivability of the company. GE, which used to be the model for the rest of the American companies, is a shadow of its former self due to this shortsightedness. Boeing, which had the recent debacle with their 737 Max, is another example.

So what is to be done about this? So some might say we tax the hell out of these products and bring back the industries. Unfortunately, Fortress America is not a solution to this problem. This is because the Europeans, who enjoy working less than the Americans, have tried the Fortress Europe idea and the result has not been good for the last couple of decades. There is no reason to believe that we will do better if we try the same thing. Others cling on the automation and 3D printing as the key to reversing the de-industrialization, but this is unlikely. More automation and 3D printing requires even more skilled and disciplined labor force, not less. Trump tried to deny ZTE chips from American companies, but eventually back out of that idea. Certainly it would badly hurt ZTE, but companies like Qualcom will also be badly hurt. What is more, this action have spur many Chinese companies to start making their own chips. A powerful Chinese chip industry will appear on the horizon a lot faster than it would be otherwise be.

The rise of the Chinese economic power is due to their ability to learn from the outside world and having a large scale manufacturing work force that is intelligent, disciplined and hard working. They have a large internal market to consume their own products.They trade with the entire world, most of whom will not sanction the trade since China is a large trading partner. Many countries would not be able to produce what China was producing and had to buy from somebody anyways. To them, the Chinese provided inexpensive and high quality products that otherwise would cost them a lot more. The most important of all, the government of China is very capable and able to get things moving along. Today, like America was in the 1920s, the fate of their economic rise is mostly in their own hands. Outsider can slightly slow but not stop their rise. Given that they still have lower per capita GDP and other indicators such as lower value added in their industries, lower robotic density per thousand worker etc, there is every reason to believe that they will in time get to the cutting edge in manufacturing. They will have their own aeronautic industry like Boeing and Air Bus. They will have a very large share of the chip designing and chip making industry. AI will also boost their productivity in the coming decades. There is no way to stop the rise of the Chinese economy. We should focus on improving our own. We can also try to benefit from China's rise.