Tech and Global Politics: The New Arms-Race
How the US and China are gearing up for a prolonged confrontation in tech, and Europe watching intently.
We all read the headlines. “US Tech Firm’s New $20 Million Stake in Emerging-Market Start-up,” or “Chinese Tech Firm Expands New Offices in Southeast Asia.” Behind the backdrop of these innocuous business expansions is a complex global politics game being played by the two leading high-tech nations on earth: USA and China. And in their shadow is a nervous Europe struggling to cope with what it means when they are left behind in the dust.
China’s Rise
The USA’s dominance in the high-tech world has been common fact for decades, but how did China become the primary challenger to this hegemony in recent years? The full set of reasons is undoubtedly complex, but one nutshell explanation is this: the failure of Western digital firms to grab a foothold in China, whether because of local regulations (i.e. censorship) or genuine business failures, has allowed home-grown counterparts to incubate in one of the largest distinct markets in the world.
Tech giants like Google and Amazon have been unable to dominate their areas of expertise in China like they have in other countries. While the rest of the world has Google, China has Baidu and Sogou. While the rest of the world has Amazon, China has Alibaba and JD.com. While the rest of the world has Uber, China has Didi Chuxing. And so-on and so-forth. Through a mix of heavy-handed government policies and local innovation, Chinese companies have successfully pushed out Western competitors for a distinctly Chinese tech landscape at home. Home-grown Chinese companies and their grip in the domestic market has allowed them to expand into other strategic technologies like cloud-computing, an area where aside from Alibaba and Tencent Cloud, the rest of the global pie is aggressively American. Imagine a parallel universe where Amazon and Google dominates the Chinese cloud-computing marketplace. WeChat would probably be running on AWS or GCP.
(Although regulation also has a hand here, Western cloud providers interestingly all have to partner with local companies to provide services. For example, Microsoft Azure services are all provided through a company called 21Vianet in China).
China’s central planning model also allows their government to pump more than a trillion dollars into so-called strategic technologies like quantum and AI. No doubt massive government funding and support gives a boost to or bails out companies deemed essential to China’s long-term national strategy. Regardless of method, years of growth and nurture has allowed the size of many Chinese companies to rival that of their US counterparts. Flush with cash and an appetite for expansion, they are now headed on a direct collision-course with US ambitions in emerging markets.
China vs the US
It is no secret that the US and China dominate the global high-tech space. 18 out of the top 20 internet companies are in either of these countries. What has resulted from this two power model is an implicit “arms-race” in emerging technologies. Universities compete for research output, and scramble to top rankings for technologies such as supercomputers and next-gen communications infrastructures. In this cold war, the proxy wars are instead fought by the countries’ respective tech giants. US and Chinese firms are ever expanding, and clashing, in important emerging markets like India and Southeast Asia.
However, the strategies that firms from the two countries have taken are fundamentally different. Chinese companies recognize that their business expertise is typically limited to the Chinese market, and therefore take a more passive approach to influence and expansion. They tend to buy major stakes in local companies like e-commerce site Lazada and drive direction from an investor position. This strategy seems to be working. For example, one reason for Uber’s failure in the Southeast Asia market was the inability to compete with local alternatives like Grab and Go-Jek (both companies with significant Chinese funding), which had better understandings of the nuances for their specific region.
On the other hand, US companies are not shy from directly competing in emerging markets, although sometimes with fierce competition and mixed results. In Southeast Asia, Google and Facebook have a sizable presence in search and social media respectively. Sometimes they realize that adaptations to the local markets are needed, like when Google essentially created an Android-lite OS to effectively operate on the popular, low-cost Jio phones in India. Of course, US firms also play the investment game. Go-Jek not only has backing from Tencent and JD.com, but Facebook and PayPal as well.
European Catch-up
While the US and China duke it out on the world-stage, Europe is left in an awkward position. Lagging behind in technologies like AI, cloud, and 5G, their critical tech infrastructure is increasingly built on foreign expertise. Cloud comes from Amazon. Analytics come from Google. Social media is on Facebook and WhatsApp. Leaders are understandably nervous about the state-of-affairs from both economic and political perspectives. On top of legitimate security concerns, these considerations are probably part of the reason why more and more European countries are retreating from Chinese 5G infrastructure. Politically and culturally, Europe aligns more with American firms, so it’s generally hard to outright ban US companies, but that doesn’t mean they aren’t in their crosshairs.
This type of intervention can also be seen in cloud-computing. In a bid to protect local European cloud-providers and challenge the US and Chinese giants, France and Germany worked together to create a European Cloud Ecosystem called Gaia-X that will serve as a platform and marketplace for services to exchange data and increase visibility, all while adhering to European Data Laws. From an optics standpoint, Gaia-X says they will not discriminate against companies like Amazon and Microsoft should they want to join as well, as long as they abide by European standards, but it’s clear this move is an action on the perceived lack of technology powerhouses.
This lag is by no means due to a lack of innovative individuals or talent. Smart start-ups tend to follow the money, and the money is largely in the US. According to a 2017 Preqin report, 68 out of the top 100 largest VC funds by capital raised were in the US. Greater China had 22. Western Europe had a measly 5. While receiving VC money doesn’t necessarily mean a start-up will move operations, it does tend to incentivize them more to eventually pack their bags for Silicon Valley.
Another factor in European lag is the aggressive M&A undertaken by tech giants to acquire promising companies, like DeepMind (UK) by Google in 2014 or Shazam (UK) by Apple in 2018. Many companies are probably acquired before they can achieve their fullest potential as standalone companies. After Skype’s acquisition by Microsoft, Spotify is arguably the only prominent household tech-brand from Europe remaining (and both companies are from Sweden! What an uncanny knack for invention).
Conclusion
In the past, state power was flexed largely through military means. We are lucky that flexing economic power is the modus operandi in today’s world. Therefore, when looking at the economic and investment battles taking place across large firms, we are also witnessing global politics in motion. We are still in a stage where multinational corporations cannot completely escape national interests, and thus companies have to suffer (or profit from) the conflation they have with their respective governments. Apple is a symbol of US innovation. Huawei is a metonym of the PRC’s tech aspirations. The next decade will surely see interesting dynamics ebb and flow between the developments of a global technology industry and larger power politics at play.
