One of the great paradoxes of recent economic history is how little the information technology sector has contributed to overall productivity.
Somewhat surprisingly, we do not witness, even with a lag, a major pickup in the productivity growth in other industries that are directly and indirectly connected to the IT industry. One would expect that if the IT industry were the engine of the US economy that generates the products, technologies and techniques of the future, then the other industries would eventually experience a jump in productivity rates to levels comparable to those of the IT industry. Thus, one may wonder why aggregate productivity in the US has not grown much more in accordance with the innovations and major productivity gains that have been achieved in the IT industry.
Economist Raicho Bojilov observes, “The annual rates of indigenous innovation in the US and the UK have made only a partial recovery during the IT revolution: while higher than the rates for the period 1970–1990, they are still lower relative to the rates witnessed in the postwar years until the late 1960s.”
Stagnating productivity worries Chinese planners at least as much as it does Western economists. Increasing productivity growth is critical to China’s economic performance, especially as the movement of people from countryside to city tapers off and the workforce ages. To meet its economic goals, China needs its investments in IT — especially mobile broadband and artificial intelligence — to stimulate overall productivity.
Moreover, in China as in the United States, the top tech companies have a gigantic stock market footprint. Alibaba and Tencent, China’s two largest public tech companies, are not members of the Shanghai Composite Index; if they were, their combined $1.3 trillion market capitalization would make up 16 percent of the broad index. In the United States, as of February 2021, 23% of the S&P 500’s value belonged to Apple, Microsoft, Amazon, Tesla, Facebook and Google, an unprecedented level of market concentration.
These are some of the motivations behind the antitrust measures that Beijing announced last year targeting its internet giants. American and Chinese regulators face similar issues, but China seems more serious about taking decisive action than its Western counterparts, and appears to be focusing on the monopoly problem in particular. Chinese regulators warned the country’s internet giants that they could not maintain a monopolistic hold on the mass of personal data that drives their businesses and stifles competition from new market entrants, and proposed new regulations to prevent monopoly control of data. These measures have often been portrayed in Western media as old-fashioned Communist Party crackdowns on free enterprise, but they are in fact efforts to avoid the IT sector concentration problems that continue to plague the United States.
A Cautionary Tale
America’s experience with tech monopolies offers a glaring example of what other countries should not do. The weight of the big tech companies in capital markets is overwhelming. In 2010, the five biggest tech companies accounted for just 11% of the market capitalization of the S&P 500; by September 2020, their share of the index had doubled to 22%. Just ten companies in the S&P 500 hold two-fifths of all the cash balances of index members, and all but one is a tech giant.
Twenty years ago, the risk that investors assigned to the tech-dominated Nasdaq index was double that of the overall S&P 500 index, as measured by the implied volatility of index options. At that time, the tech sector was still innovative because it still took risks, and the options market provides a fair gauge of perceived risk. By the late 2010s, however, the volatility of the Nasdaq and the S&P 500 converged — which is no surprise, given that the big tech companies accounted for most of the growth in S&P 500 market capitalization.
So much capital is concentrated in so few hands that the management decisions of a dozen companies set the tone for the whole economy. Indeed, the United States has lost most of its high-tech manufacturing industry because the tech monopolies decided that their cash was better put to use buying back their own stock than investing in stateside production facilities.
Earlier in 2020, Trump administration officials approached Cisco Systems and suggested that the former top manufacturer of internet routers buy one of Huawei’s competitors like Ericsson or Nokia, in order to outflank the Chinese market leader. They were told that the company “wasn’t interested in buying into low-margin businesses,” the Wall Street Journal reported. Cisco reported a 30% return on equity in 2019, compared to a 2.6% return on equity for Ericsson. America doesn’t produce any telecommunications equipment because its tech companies are reluctant to invest in anything but software (aside from share buybacks). Software profitability and return on equity metrics always outperform hardware manufacturing because the marginal cost of adding a software customer is zero; not so the marginal cost of producing a 5G base station.
Asian countries (including China) subsidize capital-intensive manufacturing, while America does not, so the reluctance of American tech companies to commit capital to manufacturing in the face of Asian competition is understandable. But that does not change the fact that America is behind the curve in the Fourth Industrial Revolution, and in some respects not even on the curve to begin with. It barely has begun to build out its 5G network. As of April 2021, only ten thousand base stations were installed in the United States, versus seven hundred thousand in China.
China Cracks Down on Tech Monopolies
The problems posed by the current shape of the American tech sector have not gone unnoticed in China. Western media portrayed the postponement of Ant Financial’s public offering as a political clash between the Communist Party and entrepreneurial champions of the free market, but this version of events is misleading, even if politics is always involved at some level. In fact, China’s regulators had legitimate cause for concern about excess leverage and abuse of consumer data at Ant Financial, and the issue appears to have been resolved through Ant’s proposed transformation into a regulated bank holding company.
Following the Ant Financial suspension, other measures followed in quick succession. On December 14, 2020, China’s State Administration for Market Regulation announced fines for each of the three largest internet marketing platforms, citing unapproved acquisitions of smaller competitors. Alibaba Group, Tencent and SF Holdings were singled out for what the regulator called “monopolistic corporate behavior,” and the fines were levied “to protect consumer interests.”
On January 14, 2021, Zhang Gong, the head of the State Administration for Market Regulation, said that “enhancing anti-monopoly rules remains a top priority in 2021, and that the regulator “will closely monitor new trends and new issues, blocking companies from using their advantages in data, technology and capital to disrupt fair competition,” Caixin Global reported.
The first major regulatory step that China has taken to limit the power of Big Tech is a new set of regulations proposed by the People’s Bank of China to establish oversight of the aggregation of personal and corporate credit data. If artificial intelligence is the engine of the Fourth Industrial Revolution, data is its fuel. Consumer financial data is one of the most valuable commodities in the emerging world of AI-based fintech, and one of the most vulnerable to abuse.
In January 2021, the PBOC released a draft of the proposed rules based on November 2020 guidance from the State Council. In a January 13, 2021, statement accompanying the draft, the PBOC said, “The credit reporting industry has been growing rapidly and has entered the digital era, with new types of businesses emerging. However, the lack of clear regulations has led to problems such as ambiguous credit reporting boundaries and inadequate measures to protect the rights and interests of those whose data are being collected.”
As the demand for data has grown, cases of illegal data collection and security breaches have also soared. The Chinese Consumers Association (CCA), a quasi-governmental body, attacked the big internet retailers for allegedly bullying consumers through sophisticated algorithms. According to Nikkei Asia, “Among the grievances listed by the CCA are complex sales promotions that obscure the true costs of a product, targeted search results that create information asymmetry, and the practice of hiding negative reviews, which it says leaves consumers ‘squeezed by algorithms and the targets of technological bullying.’” The CCA has been particularly concerned with the practice of “algorithmic price discrimination,” through which the “personal data of an online shopper is used to calculate different prices for different individuals based on what they might be willing to pay.”
China’s Alternative Vision
These policies arise out of China’s fundamentally different vision for its technological future. In contrast to America’s bet on entrenched monopolies with inflated stock prices, China is betting on innovation.
China’s government is already holding competitions for the best 5G applications, inviting entrepreneurs to find ways of harvesting the potential of ultra-fast, low-latency broadband. China views 5G not as a consumer technology but rather as the launching pad for the Fourth Industrial Revolution, as I reported in my 2020 book You Will Be Assimilated: China’s Plan to Sino-Form the World. China’s tech giants, including Alibaba, Huawei and Tencent, will have to do a great deal of the heavy lifting, providing the artificial intelligence (AI) engines and data collection capacity to make this possible.
China plans to wire the whole country for 5G with ten million base stations at a cost of $280 billion. The chief technology officer of Hong Kong’s leading mobile broadband provider PCCW, Paul Berriman, told an Asia Times webinar that the broader benefits of the new technology require the full build-out of the network. That means PCCW will expand the present four million broadband connections to forty million. Most of these will be Internet of Things connections, rather than individual smartphone accounts. This is what will make possible autonomous vehicles, augmented reality classrooms, telemedicine, smart cities, and a host of other applications.
With its enormous national commitment to 5G, China’s government believes that if you build it, they will come — but not if they face a minefield of monopolistic barriers. China’s government also recognizes the importance of managing the risk that China’s internet giants might abuse their control of data to shut new entrants out of the market. China’s 5G network will reach a critical mass of installations by 2022, and its regulators want to ensure that new market entrants have access to the resources they need to turn potential into productivity.
The United States should have done the same thing a decade ago. By allowing its tech companies to turn into monopolistic, unregulated utilities, it has high stock prices — for a handful of stocks — and low productivity. U.S. tech companies still innovate, but only where it suits them. Their monopolies for the most part arise from the logic of the marketplace, rather than nefarious practices, but still do damage, and not only in terms of economics. Facebook and Google capture 70% of all digital advertising revenue, for example, crippling America’s independent media, which can’t compete for ad revenue. This in turn strengthens platforms that are increasingly controlling and limiting political speech.
The Risks of Inaction
The Chinese government has no intention of suppressing the country’s most successful technology companies. The measures it has taken to suppress leverage, retailing monopolies and data abuse are rather intended to prevent companies that were successful in the past from suppressing new market entrants in the present. China has little experience with antitrust regulation, to be sure, and the regulators will have a steep learning curve.
It is nonetheless striking that China has taken action on these problems while the United States has done very little to rein in Big Tech. Big Tech of course has far more political power in the United States than the corresponding companies have in China. Facebook, Amazon, Apple, Google and Microsoft together spent $61 million on lobbying in 2020. That leaves the United States all the more at risk of losing the global technology competition.
Editor’s note: A longer version of this article was originally published in American Affairs Journal. You can read that piece here.
David P. Goldman is deputy editor and columnist at Asia Times and is the author, most recently, of “You Will Be Assimilated: China’s Plan to Sino-Form the World”