US-China Technology War--what it takes to win!

In recent remarks to the Johns Hopkins School of Advanced International Studies, Secretary Antony J. Blinken has underscored the importance of technology edge in China's ambition to reshape international order (Blinken, 2023). To maintain and sharpen economic and military power, the USA has identified 19 critical technologies (NSTC, 2022). Among the actions being taken by the US government, the Chips and Science Act is notable (CED, 2022).

On the other hand, China has unveiled its ambition of attaining technological superiority through the Made in China 2025 plan (PRC State Council, 2015). Besides, China has unveiled a new strategy to counter the USA's Chips and Science Act (Allen, 2023).

Technology edge sharpening and migration

Such unfolding strategic responses raise a vital question about what it takes to win the war of sharpening technology edge. Does it mean that America should bring back manufacturing and restrict technology exports to make America great again?

Unlike in the past, most of the critical technologies identified by both the USA and China for establishing and maintaining economic and military edge are no longer limited to military-funded facilities of Universities and national laboratories. Instead, they are being sharpened by the profit-making competition in making products better and cheaper. Due to this race, epicenters of innovations have been migrating.

For example, although the semiconductor was invented at USA's Bell labs, its high-end microchip epicenter has migrated to Taiwan (Zaman, 2023). Similarly, although a US national laboratory contributed to extreme ultraviolet (EUV) ray light source, the edge of it in powering EV lithography machines has migrated to The Netherlands. It has happened due to strategic management foresight and passion for perfection to profit from EV's latent potential, giving rise to Dutch ASML monopoly in high-end semiconductor-making machines ( Ironically, this technology core whose edge has migrated from the USA to the Netherlands has become a critical weapon in USA's urge of winning the chip war (Zaman, 2022-2).

The question could be: what is the underlying reason for this migration? Did it happen due to technology transfer or intellectual property infringement? Where is the underlying magic of the rise of late-entrant ASML as a monopoly in EUV lithography machines (Zaman, 2022-1)?

Incremental and sustaining innovation race

Irrespective of greatness, invariably, all innovative products appear in primitive form. As a result, they begin the journey with a small customer base, generating losses. But some of them are highly amenable to progression due to the addition of a flow of ideas, making them increasingly better. In some cases, they also become increasingly less expensive. Hence, profit-making competition in incrementally improving them intensifies. Sometimes, new entrants succeed in showing superior performance in outperforming the inventors.

Consequentially, the innovation epicenter migrates across the boundaries of firms and nations. Due to this, epicenters of a few inventions, like harddisks, migrated from the USA to Japan (Zaman, 2020). China also claims similar success in migrating the edge of the bullet train from Japan. Furthermore, competition also compels them to keep releasing successive better versions, as a burst of incremental advancement, to sustain their innovations in the market. It also causes the migration of the epicenter. For example, Samsung has been in this race with Apple.

Reinvention and creative destruction

All innovations around the current technology core reach the state of saturation, demanding reinvention by changing the technology core. As incumbent players remain busy profiting from matured products, the opportunity is often left to new entrants. Consequently, epicenters of innovations migrate across the boundaries of firms and nations (as shown in Fig. 1).

For example, the epicenter of light bulbs migrated to Japan from the USA due to Nichia's success in reinventing light bulbs with LED technology core (Zaman, 2022-3). Due to this reason, late-entrant ASML has become the monopoly in EUV lithography. Furthermore, the rise of TSMC through migrating the wafer processing innovation epicenter from the USA to Taiwan has been due to superior performance in both incremental and reinvention races.

What it takes to win!

China has been providing massive subsidies for setting up manufacturing facilities, particularly semiconductors. China has also accelerated STEM education and R&D investment, ballooning the number of graduates, publications, and patents. It's also being alleged that China has been condoning infringement of foreign intellectual properties (IPs).

After complaining long against state intervention, the USA has also joined the race to offer subsidies. The USA has also been applying restrictions to prevent the export of high-end technologies to China. But are subsidies, IP infringement, increasing graduates, publications and patents, and technology trade restrictions capable of winning technology superiority and sustaining it?

Embarking on new waves--causing creative destruction

In the early 1980s, the US government applied a number of punitive measures against Japan and offered subsidies to US firms so that the USA could establish superiority in the semiconductor industry. Yes, the USA semiconductor industry gained substantial market share over the next two decades.

But is it due to those regulatory measures and subsidies? If that were the reality, why did American lithography equipment firms lose business to Japanese Nikon and Cannon? Instead, IBM's selection of Intel's Microprocessor for the PC and the rise of the PC wave created the success. However, due to overlooking the rise of the smartphone wave, the USA has lost the edge of wafer processing gained during the PC wave to TSMC-led Taiwan (Zaman, 2023-2).

It seems that embarking on new waves and winning by turning them into creative waves of destruction offer a sustainable edge. Hence, both the USA and China should focus on how to attain technological superiority by winning the reinvention race--causing creative destruction and innovation epicenter migration (Zaman, 2022-4).

Winning incremental and sustaining advancement race

Invention and innovation are not good enough. Often, they appear in primitive form, costing money. The ability to imitate, reverse engineer, and make copies is not good enough either. The success of profitably attaining technology superiority depends on advancing technologies, acquired whether by invention, licensing, or infringement, through incremental innovation for sustaining the diffusion of innovations with the help of market forces.

Focus on consumer preferences in getting jobs done for expanding the scale, scope, and network effect

Irrespective of the potential of having the capability of unleashing radical transformation, every technology appears in primitive form. Often, the invention takes place to develop or improve one product. However, the success of attaining superiority depends on advancing acquired technologies and leveraging through improving a growing number of products, whether by pursuing incremental innovation or reinvention, as shown in Fig. 2. How to manage the R&D and innovation journey in adding momentum layer after layer for turning the humble beginning into a radical innovation success story through the creation of snowball effect is a challenge indeed (Lyu, W. and others, 2023).

Unfortunately, subsidies, trade restrictions, and IP infringement are not good enough. Even publications and patents are not sufficient either. Instead, the focus should be on empathy, passion for perfection, and helping people in getting jobs done better to discover new possibilities of leveraging technology capability--through expanding scale, scope and externality effect.

Driving education and R&D for winning the wealth creation race out of technology possibilities

Although four Americans got the Nobel Prize in semiconductors, the USA fully relies on Taiwan for importing high-end silicon chips because American firms have lost the edge. Similarly, although two Americans got the Nobel Prize for inventing lithium-ion batteries, American upstart Tesla relies on China's CATL for the edge of electric vehicles (Zaman, 2021).

On the other hand, Japan's success in winning the Nobel Prize in Physics and Chemistry has been closely linked to sharpening its technological edge for strengthening its market position in innovation, often causing migration of the innovation epicenters. Starting from consumer electronics, lithium-ion batteries to LED light bulbs, there are many examples (Zaman, 2020-1). Hence, winning the technology war requires publications, patents, trade secrets, etc. gained from R&D and education for gaining a competitive advantage in trading innovation in the globally connected competitive market.

Winning the Technology War through Innovation Epidenter Migration

It appears that invention, subsidies for offsetting costs, trade restrictions, imitation, IP infringement, and reverse engineering are not good enough to attain and sustain technology superiority. Similarly, increasing R&D and education budgets to produce more graduates, publications, and patents is not sufficient either. The focus should be on migrating the innovation epicenters and adding momentum layer after layer for gaining market share through sharpening technology edge.

Hence, winning the technology war demands inward migration of innovation epicenters of major products through superior performance in incremental innovation and reinvention by leveraging technology possibilities and consumer preferences, unleashing creative destruction force to dominant incumbents.

References:

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CED (2022), "CED policy brief The CHIPS and Science Act of 2022", Available at: https://www.ced.org/pdf/CHIPSANDSCIENCEACTPOLICYBRIEF_8.9.22_FINAL.pdf, (accessed: September 15, 2023).

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