Google 2.0 in China? A Look at the Global Competition for Tech Dominance

Hundreds of Google employees recently signed a letter over ethical concerns about the company’s transparency on a secret project intended for the Chinese market. Known internally as Dragonfly, the project is an effort to build a search app that would satisfy the Chinese government’s censorship requirement. Beijing has long built a great fire wall around itself, restricting the free flow of information—the very reason Google pulled out of China eight years ago. The state’s extensive surveillance regime has produced public facial recognition tools, a social credit system, and other privacy-invasive technologies.

But the allure of a consumer market of 1.4 billion is too hard to resist. With the continued mammoth growth of China’s internet industry, which stood at 22.9 percent year-on-year for the first half of 2018, it is no wonder that companies want a piece of the pie.

Google is not the only company that wants to be in China. Early this year, Facebook made yet another unsuccessful bid to open a subsidiary in Zhejiang. In February, Apple announced the migration of its iCloud user data in China to a local server, which is now handled by the state-owned China Telecom. European tech companies, while rarely achieving tech unicorn status (i.e., a privately held startup company valued at over $1 billion), are eager to gain Chinese investors who are motivated to bring their reach into the Chinese market.

Around the world, tech giants from China and the U.S. are wrestling for market share and new technologies that would help them to build an edge in their competition for global tech dominance, often leaving Europe on the sideline.

Around the world, tech giants from China and the U.S. are wrestling for market share and new technologies that would help them to build an edge in their competition for global tech dominance, often leaving Europe on the sideline.

Competition of the Giants

Ethical dilemmas aside, U.S. tech companies face stark local competition in China. The Chinese internet market is highly competitive and favors solutions born in China and locally owned. Government endorsement and incorporation of public services on WeChat, a popular Chinese multi-purpose messaging, social media, and mobile payment app with a userbase of 1.04 billion and growing, leave many Chinese skeptical of a worthy alternative. LinkedIn’s 32 million users in China is much less impressive when compared with Zhaopin’s 135 million; both face strong challenges from popular newcomers like Maimai.

In the years following the exit of Google’s core business from China, local Chinese internet and technology companies flourished with little foreign competition. Nine of the world’s top twenty tech companies are from China. Some, like Alibaba, Baidu, and Tencent, offer extensively integrated platforms of online services and are increasingly leading the industry in areas such as Artificial Intelligence (AI) and mobile payment. A Google 2.0 in China may look like a second Baidu and Mark Zuckerberg’s long-sought China debut of Facebook, a Myspace relaunch.

For the past decade, Chinese companies and venture capital funds poured increasing amounts of money into acquisitions of U.S. tech companies and provided seed capital for early-stage tech businesses. The total value of announced deals reached an all-time high of $62.70 billion in 2016. This year, a concerned U.S. Congress passed legislation that expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) and tightened restrictions on technology transfer.

The ongoing trade disputes between China and the United States add another layer of uncertainty to the prospects of U.S. tech companies in China. The Chinese government has a track record of stoking nationalist flame among its consumers and asserting regulatory pressure on foreign companies. Earlier this year, the South Korean retail giant Lotte Group withdrew from China amid an intense consumer boycott and a myriad of fire safety violation allegations. Last month, Global Times, the main Chinese government press for international affairs, suggested that U.S. companies like Apple can be a bargaining chip for China in the trade row.

Europe on the Sideline

While Chinese and U.S. companies were able to take advantage of their large domestic markets to scale up and generate entire rich ecosystems of startups, suppliers, and complements, Europe has struggled to produce tech unicorns. China has twice as many unicorns as Europe, and the U.S. has four times as many.

Unlike China and the U.S., the European market is nationally fragmented for cultural, linguistic, and regulatory reasons. European companies that have successfully conquered their national markets still struggle to adapt to varying regulations and consumer behaviors in other European countries. Scores of leading-edge European tech companies like Skype and Skyscanner were acquired by American or Chinese companies in recent years.

Lower levels of R&D spending and relatively few patent applications in Europe underline a lack of public and private investment as well as loss of talent to more lucrative markets.

Some fundamental issues hinder tech development in Europe. Lower levels of R&D spending and relatively few patent applications in Europe underline a lack of public and private investment as well as loss of talent to more lucrative markets. Digital infrastructure in many European countries lags behind that in North America and East Asia, preventing the emergence of strong digital economies. Commercial adaptation of new technologies in Europe has also been weak.

China’s Tech Ambitions

In the race to lead the tech industry and command markets in China and beyond, the Chinese government is leading in research and development as well as policymaking. Its “Made in China 2025” plan aims to challenge Western tech giants in cutting-edge technologies ranging from robotics, aerospace, and new materials to new energy vehicles.

China has embraced technology as the centerpiece for its development goals. Despite its repeated clamp down on cryptocurrency, Beijing is investing heavily in the development of blockchain technology in government-sanctioned areas, having pledged $3 billion in funding for emerging blockchain projects and startups. In collaboration with commercial banks, the People’s Bank of China has started the testing phase of its blockchain platform for trade finance aimed at facilitating interbank transactions, expanding access to financing options for small and medium-sized businesses, and improving regulatory oversight through greater levels of transparency. After an announcement last year that China will lead an international research group on the standardization of the internet of things and blockchain technology, the Chinese Communist Party (CCP) published a blockchain guide for party officials to understand and harness the potential of the technology, despite its dislike of decentralization.

While the U.S. still leads global tech innovation, China is fast catching up with a combination of emerging startups and heavy government investment.

While the U.S. still leads global tech innovation, China is fast catching up with a combination of emerging startups and heavy government investment. Despite its excessive bureaucracy and heavy-handed market intervention, the Chinese government is dedicating extensive amounts of resources to early innovative research and drafting policies and strategies that facilitate the incorporation of new technologies in China and beyond.

AI Is the Future

The race for tech dominance is now focused on Artificial intelligence.

A combination of financial power, a favorable regulatory regime, and the world’s largest data pool is spurring China’s AI ambition. Its State Council released its Next Generation AI development plan in July 2017, laying out a three-step road map to AI supremacy which includes building a domestic AI industry worth $150 billion and making the country an innovative center for AI by 2030. Chinese corporate executives are investing aggressively and putting greater focus on business model transformation through AI adaptation to achieve cost reduction and revenue enhancement.

In the U.S., the private sector is leading investment in AI at an increasing pace and enjoys a high degree of freedom with the U.S. government’s hands-off approach. The Obama administration implemented a comprehensive AI Research and Development Strategic Plan, seeking to complement the private sector’s efforts by focusing government resources on less profitable AI research in public sectors. The Trump White House has set up a new task force dedicated to U.S. AI efforts. However, there’s very little detail of how these initiatives would be carried out.

EU regulators seem to get ahead of themselves with upcoming EU ethical guidelines for AI later this year, attempting again to set industry standards without being the industry leader.

Europe wants to play catch up. In April this year, the EU released its own AI strategy, pledging €1.5 billion in the next two years for research and innovation in AI technologies under Horizon 2020, the EU’s biggest research and innovation program. Another €2.5 billion could be made available through the first ever Digital Europe Program. The promised funding is only a fraction of Beijing’s pledge and the top-down approach equally favored in Brussels as in Berlin and Paris often runs into intra-European bureaucratic and political hurdles. Months after the German government’s announcement to set up a joint AI center with France, there was little progress beyond turf bickering. Furthermore, EU regulators seem to get ahead of themselves with upcoming EU ethical guidelines for AI later this year, attempting again to set industry standards without being the industry leader.  The EU’s General Data Protection Regulation (GDPR), which came into effect earlier this year, restricts access to big data, a crucial ingredient in AI development.

No Smooth Sailing for China

Grand strategies and a deep wallet don’t guarantee success. China’s highly centralized policymaking mechanisms are efficient in allocating the resources for Beijing’s tech ambitions. However, an overflow of money could result in low capital efficiency and access risk-taking. Following government priorities, Chinese tech unicorns are willing to overpay for products and have trouble assessing risks.

There are also signs that the Chinese government’s heavy-handed regulatory oversight and excessive bureaucracy have stymied growth of its own tech companies at home. Tencent suffered a sharp decline in market value this year, largely stemming from suspended license approval for online, mobile, and video games as the government steps up its crackdown on what it sees as undesirable social trends.

Contrary to Beijing’s powerful and efficient control over the full spectrum of domestic communications, its overreaching surveillance and censorship demand over its own tech companies is hindering these national champions’ ability to expand overseas. Censorship on communication platforms like WeChat operates well beyond national borders, contradicting the Chinese government’s persistent assertion of cyber sovereignty. China’s efforts to cultivate a strong cyber regime and project influence abroad are saddling its tech companies with mounting privacy and geostrategic concerns in foreign countries, with companies like Huawei shut out from government procurement and barred from major infrastructure projects.

Own Innovation the Right Way

It is clear to all the major players in the global tech race that the future of their societies’ well-being rests upon their ability to own the innovative process and stay ahead of competition. A successful strategy for national tech development and sound industrial policy should embrace technology as the driving force for economic, social, and security advancement. Reducing regulatory and bureaucratic barriers gives the private sector more freedom to experiment, commercialize new technologies, and scale up.

Strong government support is crucial for fundamental research, public sector adaptation of technologies, and adjusting to changing social-economic realities and is an integral part of a healthy development process. AI might be the future and deep learning are increasingly used to guide decision-making processes. But algorithms are not socially and emotionally conscious to solve ethical dilemmas. The state should help to find the right balance.

Just as Google is criticized for its capitulation to Chinese censorship, we need to give the public a bigger voice in shaping the course of our tech development.

That balance, however, should not come from preemptive regulatory guidelines. This should be a public process. Raising public awareness of tech development and educating citizens to harness the power of technologies not only give people the tools to meet the challenges of global competition, but also empower them to collectively tackle the important ethical questions of the digital age. Just as Google is criticized for its capitulation to Chinese censorship, we need to give the public a bigger voice in shaping the course of our tech development. A bit more cultural sensitivity will help to bridge specific regulatory differences, but a truly competitive and innovative global tech strategy should always embrace democratic values.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.

Yixiang Xu

New Research Initiative Fellow

Yixiang Xu is the Fellow for the New Research Initiative at AICGS, working on the Institute’s China-Germany-U.S. triangular relationship initiative. He also researches international economic and trade issues. Previously, he worked at AICGS as a research assistant.

Mr. Xu received his MA in International Political Economy from The Josef Korbel School of International Studies at The University of Denver and his BA in Linguistics and Classics from The University of Pittsburgh.

__

yxu@aicgs.org | 202-770-3262