MUNICH, Germany – The US-China trade war is all about tech supremacy, particularly in artificial intelligence (AI) and 5G, and we might end up with the world taking sides to divide into US-led and China-led spheres.

That’s the view of US-China private equity firm Canyon Bridge’s co-founder and partner Peter Kuo, speaking at the GSA 2019 European Executive Forum in Munich this week. He said that while there may yet be a face-saving deal that might end the bickering between the two countries over trade matters, the two seem to be heading toward a cold war over not politics but technology. “With the emergence of AI and 5G, it has heightened US sensitivities to China,” he said. He added that one of the reasons US-China tensions may persist is that it is unclear what the US really wants to get out of a trade deal.

He points out that while China remains focused, US goals appear contradictory. For example, the US is looking to lower barriers to inward trade and investment, improve IP protection, balance bilateral trade, repatriate supply chains back to the US, and ultimately stop China’s rapid economic rise.

China meanwhile is very focused on its growth. That is evidenced in the Made in China 2025 program to drive self-sufficiency in technology, as well as move from exports of low-end products to higher value-added products and services. And it wants to reduce vulnerability and reliance on any single country (i.e., the US).

Canyon Bridge

Despite the friction between the two, the economies of China and the US are bound together.

The US is clearly worried about China racing ahead with development of AI and 5G. The American Chamber of Commerce in China, long considered as a solid anchor for ties with China, said recently that while China has promised to open up, US companies in many industries in the country are still not receiving the same treatment that Chinese companies experience in the US.

In Munich, Wally Rhines, CEO Emeritus at Mentor, a Siemens Business, pointed to a host of data indicating growing Chinese dominance in the global semiconductor and AI startup space. He said there has been a huge rise in venture capital investment in fabless semiconductor startups, with most of the money coming from China, especially in early rounds. With huge Chinese government incentives for semiconductor investment, Chinese funding going into fabless companies globally in the early rounds is six times that of US funding.

China early round

China is growing its strategic investments in startup companies. Source: Mentor Graphics.

In particular, the number of new semiconductor startups in China has also grown – where 715 startups formed in 2015, jumped to around 1,300 new starts annually in 2016 and 2017. “Artificial intelligence and machine learning are driving a lot of this, and Chinese fabless companies are also much larger,” Rhines observed.

With regard to what the startups are working on, Rhines said they are all mostly utilizing embedded neural networks as a fundamental building block for AI-related machine learning. Pattern recognition dominates the AI designs, especially facial recognition. In fact, the world’s two most valuable AI startups are SenseTime and Face++, which are the most well-funded AI companies in 2018. Rhines commented, “Over 14 companies in China have market capitalization greater than £1billion that are doing facial recognition of some kind.”

The Race to 5G

It’s not just AI that is worrying the US. The race to 5G is also on the leadership’s mind. Canyon Bridge’s Kuo said, “There’s no question that China will be instrumental in driving 5G. And if companies in China partner in the right way, they will end up in a good leadership position.”

In its response, the US Federal Communications Commission’s chairman Ajit Pai outlined how the US is keen to be a leader in 5G. Speaking at an event at the White House last week, President Trump said, “We cannot allow any other country to out-compete the United States in this powerful industry of the future. We are leading by so much in so many different industries of that type, and we just can’t let that happen. The race to 5G is a race America must win, and it’s a race, frankly, that our great companies are now involved in. We’ve given them the incentive they need. It’s a race that we will win.”

Peter Kuo

Peter Kuo, co-founder, CanyonRidge. Source: Canyon Ridge

To do this, he said he is making a bold move to make wireless spectrum available. “By next year, the United States is on pace to have more 5G spectrum than any other country in the world. That’s a big statement because, as you know, some people got ahead of us. We should have been doing this a long time ago, as advanced as it may be.”

The FCC’s Pai said December 10 would be the start date for the “largest spectrum auction in our nation’s history”, and he also highlighted plans to create a new $20.4 billion rural digital opportunity fund to extend high-speed broadband in rural America.

Clearly the US is worried about China’s tech dominance. Kuo makes reference to Chinese VC Kai-Fu Lee and his recently published book, AI Superpowers: China, Silicon Valley and the New World Order, in which Lee predicts half the world will be powered by Chinese tech in the next five years. The next phase of AI will be much less about invention than implementation, where the Chinese have an edge. The skillful application of AI will be China’s greatest opportunity to catch up with and possibly surpass the US.

Kuo said that while the US and China are increasingly competing on several strategic levels – in terms of ideology, military, economic spheres of influence and technology, there still remains the fact that both countries’ economies remain closely tied together.

Hence, whatever the outcome of any trade deal, these underlying fundamentals will no doubt continue to drive more back-and-forth talks and negotiations for some time to come.

AI Mentor GSA