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US-China Trade War is about Innovation & China’s state-led tech revolution is ready

Success of authoritarian innovation challenges liberal market theories

In 2017, 15 Chinese startups reached unicorn status, which means, 30% of the world’s billion-dollar companies were created in China. Last month, we featured the world’s most valuable startup, ride-sharing company Didi which is the Chinese equivalent of Uber.

When the rest of the world talks about Chinese innovation, the way we understand it by comparing it to something in the west. Inferring that it’s a copy is how we describe their successes. We see the companies as replicas who came to power in China’s walled garden rather than creating innovation and fighting for success in Silicon Valley’s democracy.

However, if you take the time to really understand how they’re different, you’ll begin to understand how future of tech and innovation are forever changed.

Uber came out of one of the planet’s purest forms of capitalism, Silicon Valley is ruthless, and to this day Uber still fights the local legislation. And though Didi is privately owned and had to compete on the open market in China, it did so with the fundamental support of the Chinese state. The government was quick to change laws and did so efficiently without any debate. Say what you will, but the one-party rule does have its advantages.

The future of tech will no longer be built on rounds of VC funding but also by Beijing drafting long-term technological development plans.

China does not seek to export its politics and ideology. We are seeing the ascendance of a superpower through manufacturing prowess and creating technological influence.

Last September, Foreign Policy Magazine published an article about how China Is Using America’s Own Plan to Dominate the Future of Artificial Intelligence.

In late 2016, the Obama administration published three reports that came to the conclusion: advances in machine learning, a technology that allows systems to learn and improve without explicit programming, are enabling a revolution in Artificial Intelligence.

We’re seeing the importance of AI in self-driving cars but it also has the potential to transform economies and national security.

The reports were praised by the government in China and in July 2017, they released the Next Generation Artificial Intelligence Plan, which was based on Obama’s plan. China is focused on the transformative potential of AI to underpin future economic and military power. They’ve taken Obama’s policy suggestions to heart and have an ambitious checklist to exceed all other nations in AI by 2030.

Today, China is investing in AI research and tech, while the Trump administration is cutting federal programs.

The Trump administration’s budget calls for cutting AI research at the National Science Foundation by 10 percent, to $175M. China, meanwhile, isn’t afraid to spend. back 2014, the Chinese government announced a 1 trillion RMB ($150 billion) investment fund to turn the Chinese semiconductor industry into a global powerhouse. By 2017, the government had already made a third of that sum available.

In 2018 we’re already seeing China’s semiconductor ambitions come to fruition. The Huawei P20 Pro is one of the top Smartphones on the market and they’ve proven their Kirin 970 with a Neural Network Processing Unit (NPU) (designed for AI acceleration), can go toe to toe with any other mobile processor on the market.

What Huawei has accomplished not only in terms of hardware, as they’ve designed the processor which supports AI, they’re also designing the smartphone and tuning the software.  The AI capabilities of the P20 Pro are comparable to what we’re seeing on Google’s Pixel 2.

China moves with such agility that we’re often forced to rethink our assumptions.

Democracy has prevailed globally as the most prosperous form of governance. Stephan Heilmann author of Red Swan: How Unorthodox Policy-Making Facilitated China’s Rise, notes on Nikkei that somehow, China has maintained its grip on power while leaving room for policy experimentation at the local level, from market liberalization to administrative modernization and technological innovation. The leadership has allowed bottom-up initiatives to inform central policies, leading to a boost in productivity.

Maintaining this delicate balance seemed possible as long as growth rates kept rising.” Heilmann claims, “But China is reaching the limits of the quantitative growth and poverty-alleviation benefits that can be generated from a manufacturing-based economy. The shift to qualitative growth and a higher-value adding economy requires indigenous innovation.” Stephan Heilmann

With closed borders, a walled internet, and 1.3B people China has decided that it wants to be a high tech superpower that emphasizes hierarchy and discipline.

International markets continue to be less cohesive, contending with daily distractions from Trump or Brexit. Meanwhile, China is laser-focused, using Obama’s playbook to dominate in AI, it’s easy to forget that it has been years since Copy Cat China was a reality.

Liberal democracies are only starting to become aware of just how fundamental the economic, technological and eventually global systemic competition with China is. ZTE & Huawei are only the beginning. Isolating China from global technology will only strengthen their innovation.

It’s come into the news recently that Huawei has been working on its own operating system since 2012, this is a direct result of government funding. 2010-2012 forked versions of Android were all the rage in China because the government was funding an Android alternative initiative. Dell has even shipped laptops with NeoKylin an OS used by the government and companies in the financial sector. The list of local alternatives for American products is extensive.

As everyone focuses on how the Chinese will retaliate against US sanctions it should be clear that this trade war is really about the future of innovation. And if you back China into a corner and force them to rely on their own innovation, don’t be surprised when China’s state-led tech revolution is up to the challenge.