“The question is how a nation provides an environment in which its firms are able to improve and innovate faster than foreign rivals in a particular industry.  This will also be fundamental in explaining how entire national economies progress, because technological change, in the broad sense of the term, accounts for much of economic growth.

In a static view of competition, a nation’s factors of production are fixed.  Firms deploy them in the industries where they will produce the greatest return.  In actual competition, the essential character is innovation and change. Instead of being limited to passively shifting resources to where the returns are greatest, the real issue is how firms increase the returns available through new products and processes. Instead of simply maximizing within fixed constraints, the question is how firms can gain competitive advantage from changing the constraints.  Instead of only deploying a fixed pool of factors of production, a more important issue is how firms and nations improve the quality of factors, raise the productivity with which they are utilized, and create new ones.  Where factors are mobile and can be tapped through global strategies, moreover, the efficiency and effectiveness with which factors can be used become even more central.”

Chapter 1: The Need for a New Paradigm
The Competitive Advantage of Nations
By Michael E. Porter, 1990

Technology changes constantly.  Whether the new technology of automobiles in the 1910s and 1920s, the rollout of radio in the 1920s, the advent and adoption of the television in the 1940s and 1950s, the commercialization of the jet engine in the 1940s and 1950s, the creation of the computer and transistor radios in the 1950s and 1960s, the explosion of plastics, space technologies, and color TV in the 1960s and 1970s, the invention of the Internet in the 1970s with the rollout in the 1980s and 1990s, the rollout of cellular phones in the 1980s, the mass adoption of personal computers in the 1980s and 1990s, the creation of fiber optic telecom networks in the 1990s, or the introduction of smartphones in the 2000s,    all these technologies transformed both the economy and the way society functioned.  Countries at the leading edge of these new technologies, developed industries that dominated these new areas.  Countries not participating in these developments found themselves left behind.   Not only did new technologies perform a transformative role, but they created winners and losers across the globe, enabling select countries to dominate both the global economy and fight for global strategic position.

Today, there exists a new race to dominate Technology’s Future.  It pits old rivals, such as the US, Europe, Russia, and China, and new entrants, such as Taiwan, India, and Thailand, against each other in a contest to create the winners of the next 20 years.  The losers will find themselves conceding economic growth to the winners as these countries enjoy the growth that new industries experience leaving the losers with older, outdated economies with lower growth.  In addition, the losers will find themselves conceding global strategic position, with other countries dictating to them terms and conditions of their economic participation in the global economy.  Key new technologies include Robotics, 3D Additive Manufacturing, Micro-Chemistry, Performance Materials, Bio-fabrication of Tissues and Organs, Drones, Personalized Medicine, Miniature Satellites, Space Travel, Magnetic Propulsion, Hypersonics, Quantum Computing, and Artificial Intelligence.  These technologies, along with a long list of others, will revolutionize the way the economy and society functions over the next 20 years.  Just as the average consumer cannot imagine being disconnected from the world, due to the smartphone, there exists the potential for the consumer of the future to not imagine being unable to create the food they want to eat at home, as 1960s science fiction technologies become everyday reality.  For the companies that invent and commercialize these technologies, huge markets will open, allowing them unprecedented growth.  For the existing companies that dominate these industries today, huge risks stand ahead as their technologies and business models become outmoded.  So too for the countries involved.  Should a country not participate in these technologies, it stands at huge risk over the next 20 years.

For the United States, which dominated Technology for the past 50 years, the movement of global supply chains to Asia, over the past 20 years, provided other countries an opening to develop their own technology hubs and participate in the technology race.  In fact, the Obama Administration encouraged the movement of advanced technology manufacturing to other countries to foster their development and to catch up with America economically.  For example, Taiwan and other countries in Asia now stand as one of the global semiconductor and optical communications advanced manufacturing hubs, despite only producing trailing edge technology during the 1990s. Unfortunately, while aiding these countries growth in the short term, these policies did not consider the long term consequences to American growth or U.S. competitiveness.  This policy, along with other policy choices, contributed to the subpar U.S. economic growth from 2009 through 2016, as the US economy did not recover from the 2008 – 2009 housing bust in a similar manner to the 1990s post-bust recovery under the Clinton Administration.

Not only have new technology manufacturing hubs emerged, but the consequences of these policies means the US must play catch-up in a number of areas.  For example, China recently tested Hypersonic missiles and leads the U.S. in this technology. If perfected and deployed first, China would possess a significant military edge making US warplanes, submarines, missiles, and naval ships yesterday’s technology.  This would impact the United States strategic position across the globe.  The U.S. Congress just authorized billions of dollars in R&D to enable deployment of a U.S. version by the early 2020s.  China poured billions of dollars into Quantum Computing over the past few years, demonstrating the first quantum encrypted transmission from Asia to Europe this year. In addition, China’s government funded a $10 billion Quantum Computing Center to focus on Quantum Computing research. The U.S. government through DARPA and other departments responded over the past year, joining with IBM, Microsoft, Google, and other companies to fund a U.S. response.  In Artificial Intelligence, including technologies such as facial recognition, China’s government continues to work with its largest companies to create a global edge.  The U.S. finds itself outflanked as only Amazon joined with the American government, while companies such as Google refused to participate in the race to counter China’s attempt to dominate AI.  Even in Semiconductors, the U.S. is struggling to keep up with Asia. Intel continues to have issues in its leading edge manufacturing and appears to be ceding market leadership to Taiwan Semiconductor.  Micron Technology stands behind Korean giant, Samsung Corporation, in memory chips, who continues to extend its market leadership.  Even in other areas, such as space launch which the US dominates, new countries, such as the UK and India, plan to compete to drive their economies. For a country used to leading the globe with the next new thing, the U.S. stands in unfamiliar territory.

In order to meet this existing challenge to America’s global position, the Trump Administration acted over the past year to set the U.S. on the path to compete in the industries of tomorrow.  Unlike the Obama Administration, the Trump Administration understands the critical nature of technology in the economy and the need to dominate leading edge areas in order to support American manufacturing prowess.  In fact, the Trump Administration just issued a report titled: Strategy For American Leadership In Advanced Technologies. (The full report may be found at: https://www.whitehouse.gov/wp-content/uploads/2018/10/Advanced-Manufacturing-Strategic-Plan-2018.pdf.)  As the report states in its opening:

“The United States has long thrived on its ability to manufacture goods and sell them in domestic and global markets.  Manufacturing plays a vital role in almost every sector of the U.S. economy, stretching from aerospace to pharmaceuticals and beyond.  Advanced manufacturing – which includes both new manufacturing methods and production of new products enabled by innovation – is an engine of America’s economic power and a pillar of its national security.  Advances in manufacturing enable the economy to continuously improve as new technologies and innovations increase productivity, enable new products, and create entirely new industries.”

And goes on to state later:

“Although the United States is still the largest producer of products in some sectors, a worrisome development is the sharp decline in production and employment in some strategically important sectors, notably the communications and computer industries.  America’s manufacturing and defense industrial base and supply chain, composed of these and other key sectors, is essential to economic prosperity and must maintain the capacity to rapidly innovate … The manufacturing sector is strongly coupled to infrastructure development, job creation, and growth in the Gross Domestic Product (GDP).  The U.S. standing in the global innovation index recently dropped from 9^thto 11^thas measured by the 2018 Bloomberg Innovation Index. This Index scores countries using several criteria, including R&D intensity, manufacturing value added, productivity, high technology density, researcher concentration, and patent activity.”

The Report makes clear that the U.S. must act across a spectrum of areas, including R&D, Education, and the Manufacturing Supply Chain, to maintain its global leading edge and to compete in the world of tomorrow. Without this focus, the U.S. will become irrelevant as the global economy moves on.

Despite allowing its share of Global Venture Capital to fall from almost 90% in 2000 to just over 50% today, the U.S. did maintain its global prowess in R&D.  It still leads China and Europe, notwithstanding a lost decade of economic growth, as the following chart indicates:

This data finds corroboration in the U.S. R&D to GDP ratio, which stayed at high levels:

For the US, given its continuing research prowess, strategically requiring technologies to find their way to U.S. manufacturing first would help restore its manufacturing competitiveness and leadership, providing the fundamental basis for increased investment and the ensuing growth it would create in the U.S. economy.  And, by restoring the concept of National Security to the debate on the economy coupled with updating existing laws to provide the President more authority to limit the export of leading edge technology to other countries, the Federal Government provided the legal framework for ensuring this occurs.  The result of just talking the talk already produced an acceleration in economic growth. Should the government continue down this path, the country likely would recapture the portion of global economic growth it ceded to the rest of the world over the past 20 years.  This would significantly change the equation for the economic outcome 20 years hence.

With the U.S. now returning to its traditional focus on driving its economy, the global rivalry between countries and regions continues to heat up.  In fact, The Race To Control Technology’s Future, which the US appeared to willingly cede to other countries over the past two decades, returned with a vengeance over the past year.  For countries which benefitted from the U.S. policies since 2000, the rules of the game changed overnight.  And with this change and a return to the economic strategies and national interest policies that drove the U.S. economy from 1945 through 2000, countries now must build an indigenous technology capacity, else find themselves left behind.  Intellectual property stands again as the centerpiece of national manufacturing prowess and economic growth.   For the globe, change continues as a constant. And whether it is Hypersonics, Quantum Computing, or AI, the winners will continue to take a disproportionate share of Global Economic Growth, shaping the world of the future.  (Data from US Census Bureau, Federal Reserve, US National Science & Technology Council, company reports, and public data coupled with Green Drake Advisors analysis.)

 

 

 

Confidential – Do not copy or distribute.  The information herein is being provided in confidence and may not be reproduced or further disseminated without Green Drake Advisors, LLC’s express written permission.  This document is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy securities or investment services. The information presented above is presented in summary form and is therefore subject to numerous qualifications and further explanation.  More complete information regarding the investment products and services described herein may be found in the firm’s Form ADV or by contacting Green Drake Advisors, LLC directly.  The information contained in this document is the most recent available to Green Drake Advisors, LLC.  However, all of the information herein is subject to change without notice.  ©2018 by Green Drake Advisors, LLC.  All Rights Reserved.  This document is the property of Green Drake Advisors, LLC and may not be disclosed, distributed, or reproduced without the express written permission of Green Drake Advisors, LLC.