Innovation Is About to Get Political
American companies are at the vanguard of an innovation megatrend that Washington politicos, weirdly, seem intent on squashing. Meddling is the worst kind of business regulation.
The White House Saturday announced the National Strategy for Critical and Emerging Technologies, a set of regulations for the development of the most important new technologies.
The proposition is a red flag for technology investors. Growth is about to get more difficult.
It wouldn’t be the first time that the United States government has taken a keen interest in new technologies. During the Cold War government regulators routinely intervened in the development of cutting edge technologies that might find their way into the Soviet Union. Privately developed guidance systems got special scrutiny.
After all, many of those technologies relied on the Global Positioning System funded and developed by American taxpayers.
The new national strategy goes a step further. Technology companies are being directed to involve the U.S. government in the initial stages of development by implementing new security protocols. After some risk analysis, regulators will decide if the innovations are transferrable.
In other words, the government is demanding access to the base code, and final say if the new technologies will ever be saleable.
The kicker is the technologies covered under the new national strategy include artificial intelligence, communication, human-machine interfaces, advanced sensors and aero-engine technologies.
These demands are prefaced under the guise of national security.
The Chinese state has become a major investor in innovative technologies. Many of China’s biggest technology firms, such as Huawei, a telecommunications gear giant, get substantial government funding to grow market share globally. U.S. government analysts warn this form of digital colonialism represents a huge security threat.
President Xi, China’s President, in 2017, put national investment in steroids. His plan, Made in China 2025, is dedicated to moving the country up the value chain in 10 key sectors. Xi wants China to be a global leader in technology forward sectors like robotics, biotechnology, self-driving vehicles, semiconductors, aerospace, renewable power generation and agriculture.
And the trajectory accelerated after Xi, in 2018, signaled his government was prepared to commit $161 billion over 10 years to develop homegrown chip companies.
The trade war with China began almost immediately thereafter. At the time, Peter Navarro, director of trade and industrial policy for the White House, told CNN Business, “if we lose our industries of the future, we lose our future”.
The sentiment is noble. China clearly has not played fairly. Officials there, as common practice, have coerced American companies to hand over intellectual property in order to sell goods and services in China, a market of 1.3 billion people.
Unfortunately, the new national strategy does not open the Chinese market to American technology companies. At best, these global innovation leaders are being sacrificed to slow the growth of companies like Huawei.
At worse, the U.S. government is demanding backdoor access to American-developed key technologies of the future.
For the record, since 2018 the White House and its affiliates have imposed existential sanctions on Huawei, claiming that the Chinese cybersecurity law of 2016 gives the state a legal backdoor to all communications on its networks.
The unintended consequence of the strategy is splitting the key technologies of the future into two distinct silos, one American and another Chinese. It is an inherently bad idea. It means smaller markets, less innovation and less growth.
Given that American technology firms are clear global leaders, the lion’s share of harm is going to come their way.
A better national strategy would be to let the key players determine if entering the Chinese market is worth the risk of losing IP advantages. Many firms, like Amazon.com (AMZN), Facebook (FB) and Alphabet ((GOOGL) -Get Report) have chosen not to build substantial businesses in China. Others, such as Apple ((AAPL) -Get Report) and Microsoft ((MSFT) -Get Report) have gone the other route.
And Tesla (TSLA) managers successfully negotiated the construction of a wholly owned factory on mainland China without surrendering any IP. The manufacturing facility puts Tesla in the middle of the largest electric vehicle market in the world.
The National Strategy for for Critical and Emerging Technologies will govern growth for American tech leaders going forward. Barring a change in government, investors should tread carefully.