Why the West needs more innovators

Longer term, the fact the US has fallen behind China in a number of vital technology areas will emerge as being far more important to sharemarkets than the changing interest rate environment.

Share markets had assumed the US had a big technology lead. The markets were wrong. And China has shown the amounts of capital required in this new phase of computer development is far less than Wall Street was anticipating. Longer term, this will help interest rates.

The word seeping through the computer industry is there are more developments coming from China in the artificial intelligence space, which will lock in its current superiority over the US.

And, underlining the wider significance, yet another Joint Strike Force F-35 crash confirmed the US technology gap with China spreads to key defence areas.

Potentially, the good news is Donald Trump’s closest technology adviser, Elon Musk, has already warned the President the JSF-F35 is a disaster and will now link the reasons for this disaster to deeper US problems.

Tesla CEO Elon Musk speaks during an inauguration event. Picture: Justin Sullivan/Getty Images

Yet, a few weeks ago the American computer industry and sharemarkets were supremely confident US corporations were years ahead of China in the new developments in computer technology, which we loosely tag “artificial intelligence”.

We now realise the American industry and Wall Street were totally wrong.

How on earth did this happen? Some of the underlying reasons for the failure of the US to match China also apply to Australia. Like the US, “Making Australia Great Again” will require big changes.

Clearly, the Americans — at both the government and industry level — did not do anywhere near enough work in looking at the developments taking place in China both in artificial intelligence and defence.

But, the underlying reasons go much deeper, and I trace them back to the 1980s.

During Jack Welch’s two-decade reign (from 1981 to 2001) as General Electric chief, and sharemarket hero, American companies were inspired to mobilise themselves to produce high profits. Sometimes this concentration on short-term profits had adverse long-term implications.

When Welch retired, GE was a mess. GE was a perfect example of what can go wrong.

Meanwhile, the concentration of profits has seen leading technology companies dominate US and global markets. Companies like Apple, Microsoft, Google and others started as small, hotboxes of innovation.

But, when they began dominating the world in their field, they were no longer hotboxes of innovation. The culture which delivers technology breakthroughs is usually incompatible with the culture of large, highly profitable corporations.

The big miners rarely discover large new mineral deposits. It’s the small explorers who achieved the breakthroughs

And, in technology, this is illustrated by Musk who, unlike the current management of the computer giants, worked incredible personal hours in a small operation to develop the technology and low-cost processes which have enabled the US to get clearly ahead of China in space, the reverse of the artificial intelligence and — parts of — the defence sectors.

The highly profitable giants basked in their high share prices and this prosperity contributed to embedded cultural changes which are being duplicated in Australia.

In former times, important appointments were made on the basis of merit. Sadly, it was also true females, people of colour and gays were often overlooked. But, in rectifying this gap in merit-based appointments, board and executive employment pattern went too far the other way, extending quotas to all sorts of different people.

All too often, the last criteria for appointments by technology giants became ability and merit. This luxury will work in a monopoly situation where there is a profit making machine giving out rewards to shareholders.

But, when you are competing in new technology against the likes of China you have to appoint people (of all sorts) on merit, Musk-style.

Liang Wenfeng (R), the founder of Chinese AI start-up DeepSeek.

Those which don’t measure up don’t stay around. And in the US, bad management practices and the lack of understanding of what China was doing extended into submarines, commercial ships and fighter aircraft.

China’s technology in molten salt-cooled thorium is driving its submarines and commercial ships. Musk has repeatedly warned the JSF-F35-style cost-plus, highly profitable contracts used by Lockheed Martin and others stifle innovation. Musk not only criticised the outdated and inefficient design of the JSF-F35 but called the Lockheed Martin program the “worst military value for money in history”.

The Americans have to rediscover that in most areas, big new developments require the pioneering spirit of small entrepreneurs. The role of larger corporations is to collaborate with them. And all organisations must return to merit-based appointments. This lesson also applies to Australia.

As I have described many times, those in Canberra aim to duplicate the public service in private enterprise and to make it as difficult as possible for small operators to survive.

The US will adapt and unless we follow increasingly innovative Australians will go to the US.

At the moment, America is defending its high-cost computer performing software by suggesting the Chinese software will be a security risk because the Chinese will have vast amounts of data secured in its artificial intelligence hubs.

This tactic will work for a time, but the US will need to catch up quickly, and it will require a different approach to management and a closer look at low-cost options.

There is a lot of cost-boosting mystique around artificial intelligence, and it needs to be broken down. In most cases, what we are looking at is greatly enhanced computer power and machine learning.

Trump is right that a new approach is required, but his rush to do everything at once creates the danger of chaos in the US.

If this happens, Trump might lose the support of his biggest technology asset: Musk.