The Tech Cold War & the Great Accelerator
Samaipata is an early stage founders’ fund investing in digital platforms, displaying increasing returns at scale, across Europe.
‘When written in Chinese the word crisis is composed of two characters — one represents danger, the other represents opportunity’ — John F. Kennedy
Acceleration: Covid-19 as a forcing function
Like many people, during the pandemic at Samaipata we’ve been thinking a lot about the impact the Covid-19 will have on our world. Acceleration is the concept that best summarises the combined impact that the C-19 crisis will have on our civilization. When we look back, I don’t think we will see Covid-19 as something that implied a change of course in the way we used to live our lives; rather, as a great accelerator of pre-existing trends, that put humankind in fast-forward. We will see that processes that normally took years or decades to play out unfolded in a matter of weeks and some of them were irreversible.
Coronavirus will be seen as a once-in-a-lifetime event, and as The Black Death, World War I and II, The Great Depression, and other historical global crises that had a dramatic impact on our lives and fostered innovation — but most of it coming in the form of acceleration rather than a change of direction.
Acceleration of the Tech Cold war will be one of those major effects, and it will contribute to change the global start-up ecosystem forever. Throughout this essay, I’ll unfold some of the reasons behind this theory
Acceleration of the Tech Cold War: China’s ‘Ganchao’ and tech infrastructure turbocharge
After c. 100 years of US tech supremacy, in the last couple of decades China has made a formidable catch-up and may finally be surpassing the US. The C19 crisis is going to accelerate this process, provoking a twofold impact on the start-up global ecosystem:
i) Fierce competition between the two global economic superpowers will speed up the development of critical technological infrastructure which is the backbone of the whole start-up economy (5G, Cloud, AI, AV, Quantum, Genetics, etc.).
ii) Tech will increasingly become less US/Silicon Valley-centric: the US will be less of a lighthouse figure for entrepreneurs around the world and they will start looking more and more towards China -and other emerging tech hubs.
The history of economically impactful technological progress is very recent
Homo sapiens have been around for c. 300,000 years, yet 80% of productivity gains have been achieved in the last ~100 years (i.e <1% of the time we’ve been around).
Although modern science was born c. 500 years ago in Europe (The Scientific Revolution) and it is a fundamental part of the history of technological progress, real productivity gains (economically impactful technological progress) only started c. 200 years ago. At that time, in Great Britain, the First Industrial Revolution (IR) began (1760–1840). This period involved the transition from hand production methods to machines and other key processes such as chemical manufacturing or the use of steam power. The First IR was followed by The Second IR (1840–1914), also called the Technological Revolution, that involved rapid industrialization and widespread adoption of technological systems such as the telegraph, railroad, gas and water supply, and allowed for the unprecedented movement of people and ideas. But, even in 1918 after WWI — after 150 years of rapid IR and only a century ago — productivity was only 20% of where we are today.
When you look at history from an economic output standpoint, this is even more remarkable. It looks like nothing happened in 299,900 years, and all of a sudden, around the 19th century, world economic output explodes and >95% of the current world GDP level is achieved in a matter of ~100 years.
Technological progress: the main driver of productivity gains
That is because it is only in the last ~100 years that the vast majority of impactful technological progress has been made, and therefore >80% of the current productivity has been gained. The forcing functions behind these productivity gains have been breakthrough technological advances. When it comes to tech as we know it today, the kick-start was right before WWII, when German Konrad Zuse built the first electro-mechanical binary programmable computer (1936–1938). Other crucial technological advances of this period have been microchips, antibiotics, widespread electricity access, commercial aviation, television, the Mainframe, the Space Race, semiconductors, the PC, the Internet, the smartphone, blockchain, quantum computing, etc.
The US takes the technological (and economic) lead c. 100 years ago after 50 years of rapid technological progress
It is in this period of time — the last ~100 years — that the US has become both the first technological (and economic) power. Up until then, China, India and Europe had been economic leaders largely due to the size of the population linked to more efficient agricultural techniques.
Although US economic and technological leadership started c. 100 years ago, it has its origin c.50 years before that, specifically the second half of the 19th century, a well-known great age of American invention and innovation in consumer and producer goods. By then, American firms started to develop a lead in manufacturing techniques over British and continental European firms. By the end of the 19th century the US already led some industries, such as steel production. They were the most efficient producers, which had a tremendous impact on the construction industry, as Americans pioneered steel skeleton building construction, for example.
It took >20 years for the tech leaders at that time (Europeans) to recognise the technological superiority of the challenger (the US).
By the start of WWI (1914), American productivity and per capita income exceeded that of European powers, and productivity in American manufacturing was higher in most industries than in Europe. American firms were gaining control of technologies that the Europeans had little knowledge of. The Europeans were learning from the Americans, with a lag. Also by then, the US had established the foundation needed for science-based industries to operate efficiently. Among other things, the US had geared itself to provide the trained scientists and engineers needed by American companies in the new science-based industries both through world class universities and brain drain coming from Europe.
Interestingly enough, while dominance of American firms in mass production industries was well recognised, up until WWII (1939–1945) Europeans continued to look down on the Americans regarding industries where scientific and engineering sophistication were key.
During and shortly after WWII, by which time the feasibility of electronic computers had been established, the US vastly outspent other governments in bringing this technology into a form that was usable for military purposes. Several major research universities and companies were involved (MIT, IBM, etc.).
After the Second World War, the US emerged buoyant, with its technological capabilities reinforced by the wartime production experience. Europe, on the contrary, emerged weakened. During the next few decades after the Second World War, the US was the world’s most productive economy and technological leader across pretty much every front. While the US had led mass production industries since the beginning of the 20th century, what was new was the clear dominance of the US in high-technology industries — specifically, a clear dominance in computer and semiconductor technologies.
This dominance was possible due to massive American investments in science and technology, education and R&D after WWI and especially after WWII. At the root of all was the enormous sense of confidence and pride in America’s strength that victory in the war had engendered, and a new strong belief in the role of technology in winning the war and opening horizons in the future. The huge investments made by the US Department of Defense (DoD) and NASA during this period of time, were instrumental. In the 1960s government funds represented half of the corporate R&D as well as brain drain induced by the victorious US Army out of defeated countries.
By the mid 1960s, US high-tech supremacy as the old lead in mass-production industries was widely taken as a fact of life and a source of pride for Americans.
‘Ganchao’: The Chinese version of Soviet’s ‘catch up and surpass the US’
The idea of ‘catch up and surpass’ (in Chinese ‘Ganchao’) has its origin back in 1957, during the Cold War, when Soviet Premier Nikita Khrushchev declared that his goal was to ‘catch up and surpass the United States’. Mao Zedong (leader of Chinese Comunist Party from 1949 to 1976) took the idea and made it his own, putting it at the heart of the CCP’s ambitions. Even then, they announced that ‘politics and technology must be unified’. Industrialisation in China began.
In c. 50 years of extremely fast-paced industrial and technological development, China has grown from an agricultural, underdeveloped economy into a global technological leader going through the equivalent of 3 industrial revolutions (First IR + Second IR + ‘High Tech Revolution’) in c. 50 years. The same process has taken the rest of the developed world more than 200 years.
China is clearly committed to recovering its supremacy and knows that in developed countries, where a high level of capital per worker is available and capital inputs experience diminishing marginal productivity, technological advances are the main source of sustainable economic growth. So the Herculean effort they are putting into technology does not come as a surprise.
Time to surpass
Current Chinese President Xi Jinping is now bringing the game to the next level through next generation technology. He recently described a formidable objective for Chinese tech itself: ‘Ganchao’ (Catch up and surpass).
This has a much more profound implication because — as described above — in the minds of China’s leaders and people in general, technological progress is not only a means to economic progress but also an ideological end in itself, offering final proof of China’s supremacy after decades of struggle.
And it is working. In 2020, for the first time in history, China invested more money in R&D than the US. Quantum computing filings are >2x those of the US.
The Venture Capital version of “Ganchao”
Since the 1990s, fostering the private sector has been crucial in pursuing advanced technology and the creation of national champions such as Huawei. As in the 1960s in the US, the Chinese government is taking an active part in this process and has supported these leaders with billions in loans from state banks, helping them grow. The rapid development of these firms has given them an edge in certain verticals such as 5G, consumer internet, biotech, etc.
The Venture Capital industry in China represents a clear example of the strategy discussed above. It is growing at incredible speed and already catching up or surpassing the US. This is true even with the US having a ~50 year head start. Venture Capital as an industry was born in Silicon Valley as a somewhat organised industry in the late 1950s with the passage of the Small Business Investment Act of 1958 and establishment of the first VC firms, such as Draper and Johnson Investment Company (1962), before exploding in the 1970s with the establishment of legendary firms Sequoia or Kleiner Perkins. China, on the contrary, did not have a real VC industry before the early 2000s, but has also performed its own version of ‘catch-up and surpass’ in the last decade.
VC deployed in China has grown 20 times faster than in the US and has already caught up with the US in terms of the number of deals per year, while the US is losing global market share extremely quickly.
China’s tech supremacy in an increasing number of verticals is becoming apparent
This dramatic shift is becoming apparent in some verticals such as social commerce or gaming.
There are tech behemoths that remain mostly unknown to Westerners but are more successful than any equivalent in the West.
One perfect example of this is the not-so-well-known Pinduoduo, the fastest ever growing company. Founded in 2015, it is now a public company that is doing $150b per year in GMV, still growing at >100%YoY (yes, you’ve read correctly) and is worth $50b after 5 years of existence.
Another good example of this is Bytedance’s Tiktok, the fastest ever growing social app. As a mobile short-form video app, it is growing at 10x the speed of the most successful pre-existing social or communication apps (Instagram, Facebook, Whatsapp, etc.). Bytedance, founded in 2012, has been backed by Sequoia and Softbank and is the most valued (private held) startup in the world, with a valuation of $110b and more than $20b revenue. Bytedance recently hired Disney’s head of streaming, Kevin Mayer, to be its new CEO.
While the level of progress is becoming more and more clear in areas such as consumer Internet, social commerce, gaming, etc., it is true there are areas where China is still far behind, such as advanced processing chips, B2B Software, etc.
Coronavirus crisis results may indicate that China is ahead also in health tech
The role that tech can play during the pandemic is becoming apparent. Both in terms of prevention, containment, and mitigation. China’s apps played a pivotal role in supporting some of the most effective tactics used in fighting Covid-19, including the use of ‘fever clinics’ and the strict quarantining of individuals based on their risk level. Apps offer a wide range of tools to keep people healthy, well-stocked, and at-ease during the crisis.
According to the data available, the US (and most Western countries) seem to fall quite far behind China on technology to fight pandemics, which is one of the most relevant existential threats of our age. The death toll per capita in the US currently is c.100x worse than that of China (US >300 deaths per million vs China 3 deaths per million) and, moreover, the economic impact is much worse (c. 7 p.p worse in terms of GDP growth: China will grow around 0 to 1% in 2020 while US GDP will decrease c. 7% in 2020).
High-tech will become even more crucial for China after the crisis: at the heart of the Comunist Party of China
As with Americans after World War II, the Chinese will emerge from this crisis with a greater sense of confidence and pride in China’s strength and a renewed strong belief in the role of technology in achieving the ‘Ganchao’ (catch-up and surpass the US).
CONCLUSIONS FOR THE TECH STARTUP ECOSYSTEM
i) Fierce competition between the two global superpowers will speed up the development of critical technological infrastructure, which is the backbone and one of the main drivers of the whole start-up economy (5G, Cloud, AI, AV, Quantum, Genetics, etc.)
The very unique characteristics of this crisis, as well as the fundamental role that technology has played both in prevention and contention, will accelerate the already monstrous tech investment around the world ($4T per year, 5% of global GDP), similarly to the periods after WWI, WWII and the Cold War. Back then — 80 years ago — the US was the emerging technological power and the challenger to Europe. Now it is China, running at lightspeed, pursuing its high-tech based version of ‘Ganchao’ (catch-up and surpass). As discussed, the pre-Covid inertia was already massive. The recent trade war-related tensions between China and the US will further amplify this effect, as both superpowers will look for technological independence. In the case of China, this will represent an extra incentive for higher tech R&D investments, as it is the most value-adding parts of the value chain that they are missing (e.g. advanced microprocessors), as opposed to the US, which (in order to gain technological independence) misses the less-advanced part of the tech value chain (e.g. iPhone manufacturing).
ii) Tech will increasingly become less US/Silicon Valley-centric: the US will be less of a lighthouse figure for entrepreneurs around the world and they will start looking more and more towards China -and other tech hubs
The fastest growing and most innovative start-ups are no longer a US/Silicon Valley thing. China (and increasingly Europe — but that’s a different discussion) has earned a seat at the table and is here to stay. The astonishing growth of newborn Chinese companies, such as TikTok, Pinduoduo and other tech companies, make their US equivalents seem small or even antiquated.
This crisis will accelerate the speed at which China is gaining importance in the global start-up scene, increasingly at “la têt de la course” and a source of inspiration for entrepreneurs around the world when it comes to certain tech verticals.
Remote work will also contribute further diluting traditional technological hubs (e.g Silicon Valley) favouring challenger hubs (China and Europe). This began in areas such as consumer Internet but is expanding quickly into other verticals in a high-tech version of the old ‘Ganchao’.
Sources of information and acknowledgments:
- Foreign Affairs: China’s Long March to Technological Supremacy
- Stratechery: China, Leverage, and Values.
- Wordmeter: coronavirus update
- Our World in Data, Wikipedia, IMF, World Bank
- Bank of America equity research
- Jefferies rquity research
- US technological leadership: Where did it come from and where did it go. Richard R. Nelson. 1989
