Loren Thompson
When it comes to innovation, the U.S. economy is a tale of two cities. The biggest U.S. providers of software and services, such as AmazonAMZN +1.7% and MicrosoftMSFT +1.3%, are world-class innovators. American manufacturers of hardware, on the other hand, are barely holding their own against foreign competitors.
The “steady deindustrialization” of the economy, as a recent Pentagon industrial-base assessment put it, has forced the Department of Defense to get increasingly involved in shoring up domestic producers of critical minerals and components used in military systems.
So many companies have moved manufacturing operations offshore that in much of the military supply chain only one domestic source of vital production inputs remains. For example, Fairbanks Morse Defense is the sole surviving U.S. producer of large diesel engines used in warships. Once there were six.
Some domestic manufacturers are investing heavily in new technology, but the evidence suggests they are losing the race to China. Chinese companies routinely beat their American counterparts to market with new commercial products like drones, or offer their products at prices that U.S. companies can’t match.
This does not bode well for the future of the U.S.-China military competition. The Pentagon has been seeking innovations that will enable it to stay a generation ahead of military rivals, but it looks unlikely that edge can be provided by the nation’s manufacturing sector. China’s share of global manufacturing is now bigger than that of America, Japan and South Korea combined.
The Pentagon thought it had a solution by turning to U.S. producers of software and services to maintain its military edge. The digital revolution has spawned a domestic ecosystem of innovators who leverage clever source code to lead the world in areas like cloud computing and artificial intelligence.
Advanced software won’t give America’s military a multi-decade advantage on the battlefield—software generations are measured in months rather than years—but it has the potential to at least keep the U.S. ahead of China in areas such as AI.
However, Chinese firms have begun challenging U.S. Big Tech companies in core markets. The best-known example of this is the challenge China-based TikTok poses to previously dominant Instagram. TikTok has been the world’s most frequently downloaded app for several years running.
That’s a minor concern for military planners, but other challenges are more worrisome. Alibaba, Huawei and Tencent are now actively challenging Amazon, Google and Microsoft for cloud-computing business in many markets. They already are players in countries such as Australia, Japan and the United Kingdom, and are seeking to dominate in regions like Southeast Asia.
Cloud computing has been the biggest growth area for companies such as Amazon and Microsoft in recent years, so the rising Chinese challenge in that business has the potential to impair the kind of investment in innovation the Pentagon is counting on.
And that is not all. Forbes contributor Nina Xiang reported on December 13 that Huawei is moving to dethrone Android as the dominant operating system for smart phones in China. If it succeeds, it will undoubtedly carry that product into other markets, where Huawei phones often cost much less than the offerings of competing companies like AppleAAPL -0.3%.
So, although American Big Tech firms continue to be the world’s leading innovators, China is moving to do to them what it has already done to much of U.S. manufacturing.
If Big Tech falters, Pentagon plans to remain ahead of China in critical technologies may no longer be attainable. Almost all of the emerging technologies the Department of Defense identifies as top priorities for the future are software-driven, commercial innovations.
Against that backdrop, the continuous harassment of Big Tech firms by U.S. antitrust authorities looks untimely and potentially destructive of U.S. security.
The military is counting on commercial companies to make huge investments in cutting-edge innovations like AI software during this decade, but you need huge companies to make huge investments.
As a report from the Competitive Enterprise Institute noted just this week, assailing Big Tech with a raft of antitrust suits could help China to overtake America in the race to innovate. The Biden administration needs to do a better job of reconciling its security and regulatory goals.
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