To Compete With China, India Must First Imagine That It Can Compete With China

They say necessity is the mother of invention. They also say that luck favours the prepared mind. In other words, when there is need for innovation, and there is market opportunity, smart entrepreneurs create solutions to meet market needs. This has happened time and time again, most recently with Silicon Valley. But it happened in the 1750s, too, when the loot from Bengal after the Battle of Plassey streamed into Britain, became venture capital, and clever inventors created the First Industrial Revolution.

Now, we have entered the Fourth Industrial Revolution era, and we have to ask ourselves: will India be left behind, yet again? Obviously we missed out on the first, and so did China. That resulted in both getting decimated, plundered, humiliated and devastated by the winners, who possessed much better guns as a result of the same revolution. Today, India appears to be in danger of losing out again, as I have pointed out earlier in these pages (“The Fourth Industrial Revolution is Upon Us, and India May Miss the Boat Again, March 2018).

That is not inevitable. Even though India has messed up on many things (for example, universal education, industrial infrastructure, data policy), there is still a window of opportunity, if only we pull together with vision, foresight, and strategic intent. That last is the most important: a concept introduced by the late C K Prahalad, it is a coherent vision of where we will be in future. It is a stretch goal, a worthwhile objective that can only be attained through hard work focused on continuously enhancing one’s capabilities, attempting to anticipate the future.

In many ways, China has articulated its strategic intent. It’s simple: “Beat America”. Which means China has to win on many fronts: economic, political, technological, military, and so on. They have created a Confucian grand narrative (the counterpoint of America’s Protestant grand narrative that purports to explain America’s rise) that suggests that they have a superior system “with Chinese characteristics”. It is obvious that India needs to build up its own dharmic grand narrative that too is comprehensive and competitive: Rajiv Malhotra has been articulating this need, and so have I.

In the military and geo-political arena, we have seen Chinese salami-slicing tactics that have resulted in their conquest of Tibet and their nibbling on territory all around it (eg Doklam) and, most recently, the South China Sea. In the economic realm, the OBOR (One Belt One Road, derided as ‘One Debt One Road’ J Mohan Malik of the University of Hawaii) is intended to ensnare countries in what geostrategist Brahma Chellaney calls “debt-trap diplomacy”, which is to say the Chinese dump their excess industrial capacity on these host nations. The trap comes when they are unable to pay back the commercial-rate (say 6-8 per cent) loans, and have to mortgage their assets (example, Sri Lanka’s Hambantota Port that had to be leased for 99 years to China).

This has happened in country after country with the connivance of corrupt local leaders; but there is a backlash brewing, as in Sri Lanka, the Maldives and Malaysia. This is inherently an opportunity for less rapacious alternative suppliers such as Japan or India to step in. In technology and industry, the ambitious ‘Made in China 2025’ programme has become a lightning rod for suspicion and concern by other nations, for it declares the clear intent of making China a leader in 10 strategic industries, including AI, 5G, robotics, biomedical devices, high-tech ships, railway equipment, new materials, agricultural machinery, new energy vehicles and aerospace equipment. In a nutshell, it is a plan to become the pre-eminent industrial power in the immediate future.

That’s a laudable goal and a very appropriate strategic intent. However, the competition is not going to just roll over and play dead. That is precisely what the Americans are doing: they are pushing back. As Ruchir Sharma of Morgan Stanley pointed out correctly (“The Coming Tech Battle with China”, NY Times, June 26th), the trade war is really not about the current trade in goods, but about the future of technological competence and dominance. The idea is to ‘contain’ China and prevent it from becoming a technological superpower.

There are allegations that China is doing illegal or at the very least immoral things C stealing intellectual property (IP), spying, providing hidden subsidies, using the ‘great firewall of China’ to erect trade barriers, doing stealth acquisitions of Western companies – in order to achieve this hoped-for breakout from the ranks of mass producers to industry leaders. David Teece of UC Berkeley cautioned in a seminal paper that government policies about outsourced manufacturing must be illuminated by concerns about national competitiveness in design as well, and the Chinese have demonstrated the truth of that.

The sum and substance of all this is that there is a somewhat shambolic, but determined, effort to deny China the space and time it seeks. A chilling story that broke on 4 October adds urgency to this quest. A Bloomberg Businessweek story (“The Big Hack: How China Used a Tiny Computer Chip to Infiltrate American Companies”) pinpointed the fact that a tiny chip had been installed into computer server boards apparently at the instance of the Chinese military, and it could be used to monitor all traffic on the systems. It is alleged that these server boards were widely used at some big US tech firms like Apple and Amazon (who deny it).

I am indebted to readers @kprprah and @chinnusenthil on Twitter who brought this to my attention, and to @auldtimer who I think hit the nail on the head: he wondered if it was a real hack or a CIA (false-flag) operation. As we saw in the Nambi Narayanan ‘Maldivian spy’ operation, it is not unusual for spy agencies to manufacture crises to hurt commercial rivals: in that case, by delaying Indian Space Research Organisation’s (ISRO’s) cryogenic engine by 20 years, a competitor to the West’s space launch business was decimated.

This is probably a combination of two things. One is that it is likely that the Chinese in fact did insert these Trojan Horses (literally) in the server farms. Two is that it is in the interest of the Americans to make a hue-and-cry about this right now. It’s not as though Americans are always innocent, either: it is likely that a joint Israeli-American effort created the Stuxnet virus that crippled Iran’s nuclear centrifuges. There were also the long-rumoured HP printers bought by the Iraqi Air Force, which allegedly had GPS chips surreptitiously installed in them, so the locations of anti-aircraft guns could be tracked.

This Big Hack response is a direct attack on China’s crown jewel in trade: its supply chain for electronics, which is an increasingly important part of its Made in China 2025 plan. The FUD (fear, uncertainty and doubt) about malign spy chips in China’s products may well lead to additional embargos: for instance, Huawei and ZTE, two big Chinese telecom companies, are now being denied access to major contracts in the West on the assumption that they are in effect proxy arms of the Chinese government.

This is a major break for China’s would-be competitors. An exodus of Taiwanese electronics companies has already begun: they are starting to migrate assembly operations from China to other countries partly because of embargo and tariff fears, as well as increasing labour costs. At the moment, the big beneficiaries will be Vietnam, Malaysia, Thailand etc. But this is where India can also appeal to manufacturers: although admittedly, our infrastructure is a little primitive, India is a huge market, as can be seen in smartphones already.

Besides, it is unlikely that products exported from India will attract punitive tariffs, as there have been no allegations of IP theft, and India is nowhere near being in a trade war (despite minor friction). Thus, if we play our cards right, we might convince major Japanese electronics firms which have in effect outsourced operations to China. This is where strategic intent comes into the picture: if India can imagine itself as one of the world’s leading electronics producers, what capabilities and resources do we need to invest in? The just-released draft National Electronics Policy, out for public comment, is a step in the right direction. I have not read it, but I do hope it reflects thinking about strategic intent and capabilities.

One path would be to start a moonshot-type effort (as discussed in the October issue of Swarajya) or a Manhattan Project type of crash programme. I submit that one such moonshot should be in AI. (Another might be in 5G: there is a school of thought that whoever wins 5G will have a huge advantage. See the Wall Street Journal article from 12 September, “Why Being First in 5G Matters”). But AI is an appropriate case study.

We have to admit there are lacunae. The World Bank released its Human Capital Index on 10 October, and India, expected, fares poorly, even in comparison to Nepal and Vietnam. A report in the Financial Times (“Investing in Human Capital”, 11 October) shows the disparities between the leaders such as Singapore and India, detailed in this attached graph (Source: Financial Times). Education and healthcare are key for us to get out of this trap.

AI is a test case of India’s ability to compete. It requires many skills, resources and capabilities: most notably, strong software and algorithmic skills (including solid knowledge of statistics and calculus), a vibrant semiconductor and electronics base, and large amounts of data. America has all three, China has two, and India possibly has none.

The reason for that pessimism is as follows: the vaunted software skills that India has, alas, are low-end production, viz coding skills. Lacking the basic research and development that leads to path-breaking discoveries and inventions we cannot come up with new algorithms either (I never tire of bemoaning the fact that we have not produced a single – I repeat, a single – world-class invention or discovery since Independence. This is also part of the reason we are so low on the human capital index).

There is a new book on AI by Kai-Fu Lee, a Taiwanese-American now running a venture capital fund in Beijing, AI Superpowers: China, Silicon Valley and the New World Order. He is of the opinion that there are four factors in play: brains, capital, regulation and data (see “In the struggle for AI supremacy, China will prevail”, The Economist, 27 September). He further claims that China is ahead in all four of the above in AI, and that therefore it will prevail.

Kai-Fu Lee deserves close attention, because he was a star in Silicon Valley, and also ran China operations for, if I remember right, Microsoft and Google. His claims are plausible at least superficially. It is true that China has come out of nowhere in terms of research papers and patents in AI-related areas, and are now in the lead, mostly written in Chinese. (Fans of English in India must note this: publishing papers in Chinese has not handicapped them at all; they also have a flourishing translation industry quickly translating English papers into Chinese, but not vice versa).

The Chinese are ploughing capital into the field; their regulators have ensured that the great Chinese firewall shelters their local startups. In related manner, China collects large quantities of data from its citizens and its largely electronic financial transactions. And, let’s not forget, from its intrusive and ubiquitous monitoring – Panopticon-like – of citizens, especially dissidents like Uighurs.

Thus, on the face of it, China looks like it will prevail over the US; and that India is nowhere, doomed to be an also-ran. In particular, India’s failure to ensure that citizen data is not misused and is properly regulated is a problem. The recent Supreme Court ruling on Aadhaar was meant to be Solomonic and even-handed. But in reality, it was half-baked in confining Aadhaar use to the government, and it was wanting in not providing sufficient safeguards for individuals to own and manage their own private data. Thus our regulatory framework is a mess, compared to the smooth Chinese system.

There is one ominous factor in the background: culture. There are obvious advantages to the Chinese system: with its regimented style, it is able to, especially under powerful imperial rule, direct its energies towards tremendous feats, for instance, the manufacturing prowess that went into the terra-cotta armies of X’ian. But these imperial times (as Emperor Xi Jinping imagines them to be) are preceded by and followed by times of great chaos. China-boosters hark back to the Qin Dynasty which was a success, but it was preceded by the chaotic Warring States period. Interestingly, for India, that more or less coincided with the Mauryan Empire.

Similarly, the community-oriented and consensus-oriented culture of China may not be able to come up with the innovation that the individualistic Americans have specialised in for a century. The question is, can Indians who are also individualistic, but not pathologically so, provide the middle path we have been talking up for a long time? Can our dharmic grand narrative beat out the Confucian way? I don’t know, but we surely can give it a shot.