Digital competition with China starts with competition at home

A view of Zhangbei data center of Alibaba is pictured in Zhangbei county, Zhangjiakou city, north China's Hebei province, 12 September 2016.China's e-commerce giant Alibaba is expanding its cloud facilities vigorously. After announcing a cloud data center in Silicon Valley in the US this March, it has launched a large cloud data center in North China. The Zhangbei cloud data center broke ground in the Miaotan Industrial Park in Zhangbei County, Hebei Province, in April 2015. It is expected to host 80 percent of Alibaba's cloud and big data in North China and to serve as the group's North China settlement center. Currently, cloud only accounts for one percent of Alibaba's total income, but the group has bet its future on cloud. The Zhangbei data center, which covers about 165 acres, will cost 18 billion yuan (US$2.9 billion), according to Haifeng Qu, research fellow in the technical support department of Alibaba.No Use China. No Use France.

Executive summary

Learn more about Global ChinaThe United States and China are engaged in a technology-based conflict to determine 21st-century international economic leadership. China’s approach is to identify and support the research and development efforts of a handful of “national champion” companies. The dominant tech companies of the U.S. are de facto embracing this Chinese policy in their effort to maintain domestic marketplace control. Rather than embracing a China-like consecration of a select few companies, America’s digital competition with China should begin with meaningful competition at home and the all-American reality that competition drives innovation.

America’s dominant tech companies have seized upon the competition with China as a rationale for why their behavior should not be subject to regulatory oversight that would, among other things, promote competition. “China doesn’t regulate its companies” has become a go-to policy response. When coupled with “of course, we support regulation, but it must be responsible regulation,” it throws up a smokescreen that allows the dominant tech companies to make the rules governing their marketplace behavior.

At the heart of digital competition — both at home and abroad — is the capital asset of the 21st century: data. Initiatives such as machine learning and artificial intelligence are data-dependent, requiring a large data input to enable algorithms to reach a conclusion. China’s immense population of almost 1.5 billion gives it an advantage in this regard. By definition, a population that approaches five times the size of the U.S. population produces more data. The previously “backward” nature of the Chinese economy has resulted in another Chinese data advantage: New smartphone-based apps, created in place of the digital integration that China previously lacked, produce a richer collection of data. This bulk and richness of Chinese data creates an inherent digital advantage when compared to the United States.

If the United States will never out-bulk China in the quantity and quality of data, it must out-innovate China. Here, the United States has an advantage, should it choose to take it. The centralized control of the Chinese digital economy is an anti-entrepreneurial force. In contrast, innovation is the hallmark of a free and open market.

But the domestic market must, indeed, be free, open, and competitive.

Currently, the American digital marketplace is not competitive. A handful of companies command the marketplace by hoarding the data asset others need to compete. As innovative as America’s tech giants may be, they represent a bottleneck that starves independent innovators of the mother’s milk of digital competition. If America is to out-innovate China, then American innovators need access to the essential data asset required for that innovation.    

The nation’s response to Chinese competition must not be the adoption of China-like national champions, nor the “China doesn’t regulate its companies that way” smokescreen. American public policy should embrace the all-American concept of competition-driven innovation. This begins with breaking the bottleneck that withholds data from its competitive application. This does not necessarily mean breaking up the dominant companies, but it does mean breaking open their mercenary lock on the assets essential for competition-driven innovation.

This paper looks at how a handful of dominant digital companies have become de facto private governments making the rules for the new economy. It then explores how a national vision for competing with China begins with access at scale to the digital assets necessary for that competition. The paper concludes with a call for a national digital competitiveness plan built around the promotion of competition-driven domestic innovation.