Craig Allen on the US-China technology competition

Tune in to this special episode hosted by the US Association of Foreign Press Correspondents:

Craig Allen: Thank you, Alan. It's a pleasure to join you and I look forward to our conversation.

Alan Herrera: Excellent. As do I, again. Thank you, and grateful to our partners at the Hinrich Foundation for making this happen. I'd like to start, Craig, by noting that you've mentioned that American views of China oscillate between overestimation and underestimation. So why is it that you think that the United States consistently struggles to assess China's innovation capacity accurately?

Craig Allen: I think that Chinese innovation capacity rubs against our own preconceptions about both ourselves and about a communist country's ability to be creative and to innovate our own conception, both of ourselves and of scientific development, is that it only happens in a free and open society where institutions and individuals are free to follow their passions. But in fact, I think that we need to double click on that and question our own assumptions. Both Russia previously or the Soviet Union previously and China were indeed extremely innovative and creative. And the Chinese are unleashing a new generation of innovative companies so we need to look at squarely and understand from within their context, why is it that Chinese private sector firms are so innovative? Why are they pushing? How are they pushing the frontier of science and technology so systematically across any number of industries and what does that mean for America and Europe and the West's place in the world as we go forward? I don't think that those questions have been adequately or even honestly yet advanced. We have underestimated China because we have overestimated ourselves. At least in my view, the Chinese innovation capacity is not only because they have four, five, six times the number of engineers, but also because of their manufacturing capabilities, their great institutions, and very strong government support. And all of those things challenge us, particularly as we look at the future of technology, the future of high-tech manufacturing and the future of innovation.

Alan Herrera: Well, on the subject of innovation, you've noted that China has redefined innovation to fit its own needs. So how exactly does that redefinition differ from traditional Western models? I find it interesting that you just said that we've overestimated ourselves, so I'd love to hear more about your perspective.

Craig Allen: Sure, yeah. Well, China has combined tremendous innovative capabilities with the world's largest and most integrated industrial base manufacturing base. So today, China has approximately 34% of global manufacturing, but there's a United Nations Industrial Development Organization report suggesting that China might within five years have up to 45% of global manufacturing capacity. And that is a scary prospect, I think unfortunate for the world, and I would argue unfortunate for China as well. But this combination of tremendously flexible innovation and global spanning manufacturing is something that we've never confronted in the past. And I would say that when you go industry by industry, and we could talk about pharma, we could talk about space, we could talk about green energy, we could talk about automotive, talk about any number of industries, and it's driven by the private sector in China. And these are companies that are not well capitalized.

Oftentimes they're not particularly profitable, and indeed, perhaps it's as a result of scarcity and that lack of profitability that they're driven towards further innovation. They're competing against each other in a resource-scarce environment. And it reminds me very much of 1950s Japan, where you had companies like Honda or Toyota or Sony or Panasonic that were very resource-scarce but who were engineer-heavy and dedicated to manufacturing at scale, and they changed the world. They introduced systems like the Kanban system, the quality control Six Sigma, and just in time inventory. And I think that we're seeing the same type of innovation and competitive dynamics coming out of China now, and it's going to teach us a couple things, whether we wish to learn them or not: this is going to change the world, and we are not necessarily as well prepared as we should be.

Alan Herrera: Well, China appears to have significant long-term advantages. You've mentioned in particular these "four rivers" of Chinese innovation. Which of these do you believe gives China the greatest advantage, and why do you think that is the case?

Craig Allen: Well, I think that scale is the advantage that gives them the most important advantage. Silicon Valley was successful because Silicon Valley doesn't really manufacture, it's working at the digital level and software, and thereby they've been very successful. But to the extent that manufacturing is required at global scale, it's almost only in China that that type of rapid flexible manufacturing can be done. And I think that associated with that is just simply the number and the amount and the quality of Chinese engineering talent and STEM (science, technology, engineering, and mathematics) talent in general. And that's something that we underestimate. Chinese engineers and Chinese STEM workers are just as well educated and just as productive as those in the West in America. We were blessed with a good amount of inbound immigration in this field, but even with that, we're producing far fewer STEM, maybe a quarter of the STEM graduates and engineering talent that the Chinese are.

And that's a cumulative and growing disparity, and that has an effect. The other factor here is that because China's market is inherently not particularly profitable for private sector Chinese companies, they're born global. They have to either export or invest overseas. They have no choice. And that creates a different dynamic from American or European companies who are oftentimes quite happy to remain domestic or regional. And so we're facing a very different type of challenge than we've ever faced before, and we need to look at it square-on and figure out how we need to adjust to this challenge. And it's going to be difficult because challenges are fundamental assumptions about ourselves, about the innovation process, about our role in the world, and about how we should conduct our own domestic policies, including education policies, science policies, manufacturing policies, and all of those are going to have to adapt to this challenge or else.

Alan Herrera: There are significant implications here for our competitiveness in all sectors, particularly the tech sector. You mentioned in particular that China is catching up to and may soon surpass the US in spending on research and development in particular.

Craig Allen: Yeah.

Alan Herrera: So what is your message to policymakers in Washington in light of all of that?

Craig Allen: Well, many in the American scientific community are extremely concerned about federal government funding to science and technology. And I would argue that that has been heretofore, say for the last 270 years, our strongest competitive advantage. And if we do not fund our science and technology establishment, at least at the rate of our competitors, then there might be dire consequences in future years. And the further out you go, the more dire those consequences are. And therefore, I would urge the Trump administration to reconsider its funding to American university scientific establishments, NIH (National Institutes of Health) and others, as this isn't indeed the enduring advantage that we have. Now, there's been research done about MIT (Massachusetts Institute of Technology), about Stanford, and other universities that suggest that it is as a result of their innovation prowess that has produced economic returns that are as big as the ninth or the 10th largest country in the world.

And currently the scientists in those and the university administrators of those universities don't feel a lot of love from the US government. They are the prosperity makers within our country. They have been for decades, and I hope that they will be for decades, hence. But I think that currently they are feeling challenged. Of course, the other element to that is America's strength in innovation is due to our diversity. That is a fact. And what I would argue is that immigration and free flow of people and ideas, the issuing of visas to scientists and engineers to come into our institutions, is absolutely vital to the long-term viability of those same institutions. And by restricting visas, we are cutting off our nose to spite our face. So I think that the scientific and academic community, the innovation community, is very much under stress due to self-inflicted actions by our own government. And I hope that they will be reconsidered in the very near term. Thank you.

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