This week’s Chinese-American diplomatic powwow made it clear that Donald Trump’s cold war on China will not end under Joe Biden. The superpowers all-but locked in a long-term strategic conflict that promises to be nerve-wracking, and of course expensive. Instead of the nuclear silos and missile gaps of the old Soviet cold war, this one will be measured in microchips and infrastructure hacks. The suitably cynical investor will ask, “Ah-hah, so how can I make money on it?”
In that context, it’s worth delving into a document that landed with little fanfare in Washington a few weeks ago: the U.S. National Security Commission on Artificial Intelligence report, chaired by no less a person than long-time Google CEO Eric Schmidt. Despite stretching to 756 pages, the report is short on specifics and long on scary generalizations like: “China possesses the might, talent, and ambition to surpass the United States as the world’s leader in AI in the next decade.”
The subtext for markets is rather different: For an authoritarian power hell-bent on leaping to technological supremacy, China has a funny way of supporting its national champions.
First a few lines of broad reaction: The Commission’s political timing is impeccable, publishing just as Trump’s hawkish China shift meets Biden’s revived love for industrial policy. The $40 billion “down payment on future breakthroughs” it recommends may well be worth it. But Schmidt & Co. also mix their metaphors in self-defeating ways, which probably reflects differing viewpoints within the Commission. While the rhetoric of confrontation dominates, the report’s opening quote goes to Thomas Edison, who once said of electricity, “It is a field of fields… It holds the secrets which will reorganize the life of the world.”
Now, no country actually won the “electricity race.” Edison’s germ of genius blossomed around the world over the following half century, fed by a vigorous interchange of ideas. It sort of reminds you of that terrible, discredited, impossibly naive philosophy of globalization that the Trumpistas chucked.
Now back to China’s champions. A separate paper Schmidt co-wrote last year with Harvard professor Graham Allison (of “Thucydides trap” fame) adds engaging detail on Beijing’s AI ambitions. The Communist leadership’s Sputnik moment apparently came in 2016, when a computer designed by Google/Alphabet subsidiary DeepMind beat the world’s champion in the Chinese board game Go, which Schmidt says is 10,000 times more complex than chess. Xi Jinping and associates realized something big was up.
They picked five corporations, Schmidt’s narrative continues, to captain the great AI leap forward. Four of these happen to be publicly listed, and three will be familiar to most readers here: Baidu (ticker: BIDU), China’s answer to Google in search; Tencent (700. Hong Kong), its answer to Facebook in social media; and Alibaba (BABA), its answer to Amazon in ecommerce. The others are speech recognition pioneer iFlytek (002230.China) and SenseTime Technologies, a visual recognition power that has since gained notoriety for its DeepID facial scans.
Schmidt sees this quintet dominating the future in dangerous ways. His evidence is patchy. He points to fintech, specifically phone-based payment systems, as a Chinese advantage. Tencent’s WeChat Pay has 40 times as many customers as Apple Pay in the U.S. Fine, but that’s not because Tencent’s technology kills Apple’s. It’s because most Americans carry plastic cards and don’t need to “leapfrog” to paying through the phone.
Schmidt segues to a broader argument that China’s sheer size makes it “the Saudi Arabia of the 21st century’s most valuable commodity,” personal data. Alibaba and Tencent will somehow use this resource to rule the world. It ain’t working out that way so far. The Chinese champions are traveling poorly outside China. Facebook rules the global social media waves, while ecommerce is devolving to local or regional players — like South Korea’s Coupang (CPNG), which went public with a splash in New York March 12. Data volumes are hardly destiny.
The principal flaw in Schmidt’s scenario, from investors’ point of view, is that the champion companies have all had their market ups-and-downs, not least because Chinese regulators periodically mess with them. Tencent shares saw an extended 40% slide in 2018 when Beijing called a moratorium on new online games, the company’s cash cow. The stock didn’t reach previous highs until mid-2020.
Lately it’s been Alibaba’s turn. Its stock has crashed by a quarter since November, when founding shareholder Jack Ma insulted state bankers, and authorities canceled the IPO of financial spinoff Ant Group. Baidu shares have been massive duds most of the last five years as search revenue peaked and a next big thing proved elusive. They caught fire for a few months this winter on frenzy over the company’s potential in electric vehicle software, then dipped again as the EV fever cooled.
Writ large, this is all a good thing for China. Not even the richest and most visible corporations have captured the state. They need to thrive in exceptionally fast-moving and competitive markets. But it’s a rotten way to nurture national champions for the epic battle of the century with the United States.
Free societies, with all their visible conflicts and contradictions, tend to underestimate the conflicts and contradictions hidden within authoritarian rivals. That’s a lesson we may be forgetting from the last cold war with the USSR. Left-right bickering certainly hampers national resolve in America. But China has to contend with the still-uneasy, ad hoc relationship between an all-powerful state and the private sector it needs to fulfill its state ambitions. Investments, among other things, can easily get caught in the crossfire.