Technological progress benefits all of humanity in terms of lifespans and health, the ability to travel and communicate—the whole cornucopia of goods and services that have become increasingly available in the last five hundred years. The rise of the stock market depends on continued technological progress and the rise in productivity it brings.
The US has been the global center for technological progress for the last century. Technological progress has been accelerating since WWII with the US as leader. Two major reasons for this acceleration are globalization and the avoidance of major world wars. The meteoric rise of China and its obsession with science and technology has been incorporated into globalization. What that means is a huge addition of scientists and businesses working on technological progress and working in unison globally. For humanity this has been an incredibly positive thing.
But now the US is trying to slow Chinese technological progress and isolate Chinese tech from the rest of the world. In doing this US is clearly engaged in a war against global technological progress. This effort could be a huge negative not just for China but for American technology and the American people. It will slow Chinese and American technological progress for a time but long run it will be a futile effort.
The attack on Chinese tech will fail. Remember China is a country with hundreds of millions of intelligent young people who are passionate about technology, education and getting rich. I wouldn’t regard its state controlled, top down economic system as optimal. Still, I am reminded of what the commander of British forces is supposed to have said when informed in 1941 that the Japanese had landed on the Malay peninsula. “We shall just have to push the little men into the sea.” We know how that turned out.
Some US/China Technological Hotspots
Semiconductor Equipment– The semiconductor industry is probably the most globally integrated industry in the world and one in which American participation is crucial. China is still way behind and is spending huge sums on semiconductor plants to catch up. To build semiconductor plants equipment is required. The majority of the major semiconductor equipment manufacturers are American including Lam Research (LRCX), Applied Materials (AMAT), and KLA Tencor (KLAC). In early 2019, the US effectively “killed” Fujian Jinhua, a major Chinese memory chip company whose factory was nearing completion. The US simply prohibited US firms from exporting semiconductor equipment to Fujian Jinhua. China had the money but in semis money isn’t everything. The US had the expertise.
Semiconductors – Moving on to semiconductor manufacturing, we see further international integration. Under the so-called fab model, companies design processor chips but they are manufactured somewhere else. Thus Apple (AAPL), Nvidia(NVDA), Qualcomm(QCOM), AMD( AMD) and now Huawei (along with other Chinese manufacturers) design their own chips. But their chips are actually manufactured in Taiwan (some also by Samsung in Korea). The leading Taiwanese company and world leading fab is Taiwan Semiconductor (TSM). Just like their American competitors, the Chinese companies are increasingly reliant on Taiwan Semi and other Taiwanese fabs. Questions: Will the US try to bully the Taiwanese fabs into not offering their services for Chinese companies? Will the US extend further its prohibitions of US exports of semiconductor chips to China as it did in 2018 with ZTE and more recently with the Chinese AI firms? Is China so far behind in semiconductors and semiconductor equipment because of the inefficiencies of its top-down economic system? In the second half of 2019, the stock markets ignored these questions and semis soared. They will keep soaring unless—America spoils the party. Continuous improvements in semiconductors are a prerequisite for further technological progress.
5G – We live in a world where wireless internet has become the principal means of communication, commerce and entertainment. 5G is slated to be a great leap forward in promoting wireless communications. The major global telco and semiconductor companies were working together to develop a single set of standards for 5G. Huawai was the leader in this endeavor with the most patents. But the US has disrupted this process by labeling Huawai a security risk and has initiated a global campaign against the company. The US simply refuses to even consider Huawai’s argument that security procedures can be put in place to prevent Beijing from spying using Huawai equipment. Huawai bought $11 billion in US tech products in 2018. Assuming US embargoes are fully enforced, the US companies will lose this business And thanks to the US, the adaptation of 5G will definitely be slowed in both the US and China. The worst case scenario? There will be two 5G standards, Chinese and American. Consumers and business persons operating globally will need to carry two phones, one for each standard. The whole thing will upset economists and business persons who understand the great productivity gain of having one standard. A company dependent on internet streaming like Netflix (NFLX) will have to hire more engineers.
Drones – Shenzhen based DJI controls more than 70 percent of the global commercial and consumer drone market. Its products have been widely adopted by US safety agencies and have found widespread usage including from rescue operations to insurance appraisals. For example in Fremont, California, the police used a DJI drone to locate an emotionally troubled boy. DJI doesn’t make the huge military drones, like the one that was recently shot down in the Persian Gulf. DJI’s products were originally viewed as toys and US manufacturers either could not compete or were not interested. In recent months, US lawmakers have introduced two dozen or so drone related bills, all aimed at DJI and building up the feeble US industry. DJI was founded in 2006 by Frank Wang, a mainland-born student at Hong Kong University of Science and Technology. A model plane enthusiast, Wang started the company in his dorm room with the clear goal of making a flying toy that wouldn’t crash half the time. Little did he know US Senators one day would be gunning for his flying toys. Until recently, he was viewed, not as a spy, but as a Steve Jobs type success story deserving of admiration. Americans may have to buy the superior DLJ products ASAP before Congress closes the door. And mothers better not let their emotionally troubled boys wander off.
Biotechnology – Biotechnology is one discipline where American and Chinese research has been completely joined at the hip. There is even a James D Watson Genomics Research Institute affiliated with Zheijiang University in Hangzhou. (Nobel prize winning James D Watson is the preeminent American molecular biologist.) Chinese and American scientists have in the past moved freely from US to Chinese laboratories and back. But now there are increasingly troubling stories of Chinese origin scientists being accused of spying in the US, losing their jobs and being excluded from academic seminars. Biotech apparently is one area that is being targeted for Chinese exclusion by the American bureaucracy. This doesn’t make sense. The more scientific brains for example that are being devoted to cancer research (or any other disease) the faster this scourge will be eliminated. Are US national interests being served if more Chinese die of cancer?
GPS vs Beidou – Almost everyone in the world including Google (GOOG), Uber (UBER) and yes even the Chinese military relies on the American GPS system. The GPS system is owned by the US government and operated by the United States Airforce. GPS is a global navigational satellite system that uses 24 satellites to provide location, velocity and time synchronization for air, sea and land travel. It’s one of the most successful projects ever sponsored by the American government. But by the middle of 2020 China will have its own system called Beidou. Beidou will have 35 operational satellites and operate and compete with GPS on a global basis. Beidou being newer is expected to be more technologically advanced than the GPS system. How significant commercially its technological edge will be remains to be seen. No doubt the countries in China’s Belt and Road Initiative (BRI) will be logical customers for Beidou. But BRI doesn’t cover the whole world. Firms (and militaries) not in BRI might want to switch to Beidou. Question: will the hate -China groups in the US try to stop firms from signing up with Beidou? And will Beidou become intertwined with 5G?