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Industrial Policy: China Gets It, We Don't
Today: High tech, Jordan Schneider interviewing Emily de La Bruyere, China vs. the US vs. Europe, Uber, retail.
The Agenda 👇
A podcast with Emily de La Bruyere
Fred Terman at Stanford
High-tech is a global market
Bottom-up, not top-down
Uber’s global expansion
Validating my retail thesis
There’s a joke that I like (borrowed from Emmanuel Marcovitch, a friend of mine):
The French invented cinema; Americans built Hollywood.
It really sums up what industrial policy is about. Having invented cinema can give one a certain allure, but having built Hollywood made people there rich. And the same is true for every technology.
This is why I’ve been especially interested in this recent conversation between ChinaTalk’s Jordan Schneider and Emily de La Bruyere, author of a recent paper on China’s approach to scientific research:
What matters today is the applications of science and technology––the sort of networks you build with it.
For example, your ability to deploy telecommunications. It’s not that you got the patent; it’s that you’ve got its application internationally.
To do that, what matters is capturing scale and being able to build and deploy. If that’s what you’re going for, it’s okay to have a slight lag in when you get the patent and when you get the really cutting edge, as long as you can apply it to scale to the most people efficiently.
The Chinese orientation appears to be focusing on that rather than on basic R&D, which creates this tremendous asymmetry vis-à-vis the U.S. and really vis-à-vis the entire global system because there’s just a different competition underway.
And that absolutely changes how the U.S. can or should respond to the extent that this is a scientific and technological contest because it’s not a matter of just pouring resources into basic research: it’s about competing for applications.
I wanted to go through three ideas that echo Emily’s key insights.
First, anyone that’s interested in the history of Silicon Valley knows that it wasn’t the basic research that made the difference. Rather it’s what the massive resources allocated to high technology by the US government could become once “hacked” by clever operators that had a clear objective. The most prominent example of that is Fred Terman at Stanford:
Frederick Terman reveals the misalignment between a public policy’s goal and what it actually delivers. Many universities in the US drank from the same well as Terman’s Stanford University. But only Stanford turned into the base for a successful startup community. The reason is that Terman wasn’t encumbered by the goals of the Department of Defense that allocated all that money. He was interested only (mostly) in the money, and he was ready to redesign its entire engineering department to secure a big chunk of it.
Second, it makes even less sense to focus on basic research in an economy that’s globalized. I know that globalization is a relative concept and that we’re going in exactly the opposite direction these days (with governments, including in the UK, making it more difficult for foreign interests to get hold of strategic scientific assets). But the world is still very open, with technological assets and proprietary technologies circulating at a faster pace thanks to crossborder investments, people moving around, and the Internet making it easy to access information.
It still makes sense to invest in basic research if, as I argued in Does Every Country Need Their Own DARPA?, that investment is made in a wide, vibrant network of scientists, and there’s an actual capacity to grab the results of that research (cinema) to translate them into valuable applications (Hollywood).
But if you lack these network effects on the academic side of things, and you lack the public and private organizations willing to use that research to turn it into something valuable (a business or an networked infrastructure), then the best-case scenario is that you sell that research and have someone else use it elsewhere. It still brings in money (someone willing to pay for the rights to use that new thing called the cinématographe), but it doesn’t create nearly as much value locally (because Hollywood is located in the US rather than in France, that’s where most of the long-term rewards go).
Third, it makes more sense to invest in basic research up the stream if you already have large, successful companies operating down the stream:
In China’s case, there’s a high return on invested capital in their efforts in semiconductor research because a direction is provided by the Chinese tech giants down the stream. Investing in research with that clear direction (in this case, serving the strategic interests of Huawei, Tencent, Baidu, and Alibaba in fields such as 5G networks, cloud computing, and artificial intelligence) generates a much higher return on investment than funding research merely for the beauty of it.
In fact, I don’t think you can understand China’s industrial policy if you don’t realize that it’s all pulled forward by the impressive growth of the Chinese tech giants. First, you need the downstream companies discovering new models and new usages and exploring new markets; then you can invest up the stream so as to ensure your nation’s competitive advantage in cutting-edge technology.
This doesn’t necessarily have to be consumer-facing companies. Back in the 1960s in the US, it was the military and the goal was to prevail over the Soviet Union. More recently, in the case of Huawei in China, we’re talking about a company that needs technological assets to deploy telecommunication networks rather than serving consumers. But whatever it is (public or private, consumer or enterprise), you need that direction provided from down the stream.
In fact, that’s exactly what I was writing in a previous essay Does Manufacturing Matter?
China provides us with a good example of how manufacturing changes as a result of consumer behavior. The Chinese are currently catching up in manufacturing computer chips not only because of the “Second Cold War”, but also because they have grown large consumer tech companies that express unprecedented needs for more powerful chips. And now their tech industry is moving up the stream, reinventing the semiconductor industry in the process.
Europe, alas, cannot emulate this approach: we don’t have large tech companies in the consumer space, which means that any effort to upgrade manufacturing is disconnected from domestic demand. At best, we’ll be mere suppliers for foreign customers down the stream. At worst, we’ll be wiped out.
What does it tell us about the different parts of the tech world?
For the US, as explained at length by Emily in her conversation with Jordan, there’s now a disconnect between basic research and applications down the stream, which explains the many attempts (by the likes of Eric Schmidt, for instance, but also Peter Thiel) to make the case for something that resembles an industrial policy aimed at ensuring dominance in high-tech.
The US also has the problem that Marc Andreessen pointed out in his column IT’S TIME TO BUILD: they know how to move fast with bits, less so with atoms. Long gone are the days when the US government was investing in infrastructure to bring electricity (and light) to Lyndon B. Johnson’s legendary Texas Hill Country. Yet if this were done today with 5G, it would translate into establishing the US’s technological advance over China in that particular technological field.
China, on the other hand, is doing everything right in that regard: they have the drive from both a government focused on building and very large downstream tech companies that are racing ahead of the technological frontier. They also have the means to invest in basic research and the Communist Party providing a capacity to coordinate the efforts between the private and public sectors and ensure that the direction is clear for everyone (and that it serves China’s strategic interests relative to the rest of the world).
Europe, as always, is in a difficult position. Like in China, there’s a political will to have some kind of connection between basic research and deploying networks that are partly funded by the state, all with the help of the private sector. What we’re lacking, I think, is the presence of local tech giants able to provide a direction to the whole effort.
If you only have policymakers talking with scientists, you might invent the cinema but you’ll never build Hollywood. On the other hand, bring along major players from the private sector in search of increasing returns, and the whole effort becomes a positive feedback loop bringing together cutting-edge research, value creation, and strategic power.
Uber As Industry ETF
🇰🇷 Uber is expanding in South Korea, not by deploying its application on the ground, but by partnering with local telecommunication company SK Telecom to operate a ride-hailing service as a joint venture. It tells us two things:
The world is indeed fragmenting, and there’s really no such as thing as a global Uber anymore. (We’ve known that since at least 2014, but now it’s become plainly visible.)
The model here is more China and India than the West: you can’t expand on the local market if you don’t find a local partner with whom you can build a joint venture.
Go further: Uber: From World Domination to Industry ETF (Byrne Hobart, The Diff, September 2020).
Who Wins in the Transition
🏬 Also, I was very interested in this article by Gavin Baker of Atreides Management about Why category leading brick and mortar retailers are likely the biggest long term Covid beneficiaries:
Perhaps the simplest way to express what has happened during Covid is to note that Amazon has actually lost share in e-commerce during Covid. The largest e-commerce share gainers in most categories have been category leading physical retailers as well as the DTC businesses of most brands. Amazon is still growing really fast, but this is due to growth in the market for e-commerce. They are factually losing share of e-commerce which is a significant change, albeit one that had been in process for several years.
I wrote about this in A Thesis For Sector-Focused Hedge Funds—and about the specific sector of retail! Read it again 🤗
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From Normandy, France 🇫🇷