Of course, we all know how that turned out: Japan’s Nikkei stock index is still less than half of what it was some 27 years ago. 

Why were so many informed people so wrong? The conventional wisdom has mostly centred on economic and policy matters – inflated valuations, excessive debt and ‘zombie’ banks, combined with government denial and paralysis. But the simplest explanation has received much less attention. In the 1980s, most experts were convinced that huge Japanese conglomerates such as Sony, Fujitsu, Hitachi, Toshiba, NEC, Mitsubishi, Canon, Matsushita and others would soon dominate the global technology industry. If they had done so, the bubble would never have burst to such an extent. But during the 1990s, the Japanese giants were trounced in the marketplace by specialized upstarts such as Microsoft, Intel, Cisco, Apple, Oracle, Sun, Compaq and Seagate, to an extent that virtually no one foresaw.

This history has been in the front of our minds ever since the LEF’s Simon Wardley began his research into China’s technology industry a year or so ago. There are many obvious parallels, and China’s recent market turmoil has experts talking once again about various financial imbalances and a possible bubble. But while economists worry about growth rates, trade figures, debt and the like, to me, the biggest question is more straightforward: will Chinese companies such as Lenovo, Huawei, Alibaba, Xiaomi, Baidu, Tencent, Aliyun, Didi Kuaidi and others do what Japan could not? It’s an open question, but there are at least four reasons why China’s hi-tech challenge could prove more successful than Japan’s:

• The internet of things (IoT) has triggered a hardware renaissance – robotics, 3D printing, wearables, drones, VR/AR, electric cars, etc. This lends itself to China’s design/manufacturing prowess, especially as none of these products currently has an established global market leader.
• Whereas the Japanese (and Korean) hi-tech industries are led by giant multi-national firms, China (like Taiwan and Hong Kong) has much more of a small business and ecosystem structure that should make it more agile (and harder to track).
• Unlike Japan in the 1980s, China is “skating to where the puck will be”, with ambitious (and state-supported) plans in artificial intelligence, self-driving cars, biotechnology, the IoT markets listed above, and many other areas. Importantly, these efforts seem on track to become globally competitive at roughly the same time that these markets enter their high growth phase.
• Most of the developing world has yet to establish its core digital infrastructure, and aggressive Chinese pricing in these geographies (by firms such as Xiaomi) could be difficult for Western firms to profitably match. When combined with China’s vast domestic market, the potential scale economies are impressive, even if the US and European markets prove difficult to crack.

While these are all important factors, it is still impossible to say whether they will prove decisive, as both China and Silicon Valley have tremendous strengths and weaknesses that are almost mirror images of each other. For example, it’s easy to list the things that might block China’s progress – corruption, censorship, environmental degradation, an aging work force, bloated state enterprises, financial and legal opaqueness, language barriers, authoritarian control and more. Similarly, rattling off Silicon Valley’s strengths – powerful companies, great universities, access to global talent, a unique VC community, the free flow of ideas, the California lifestyle and the English language – is equally easy.

But amidst these counter-balancing forces, one thing seems certain. US/China competition will only intensify over the coming years. As with Japan, we can expect seemingly endless debates about state support, intellectual property rights, tariffs, barriers to entry, joint ventures, currency manipulation and educational advances, in addition to China-specific issues such military competition, regional influence and human rights. The US/China relationship may well become difficult, and even ugly, at times.

But cutting through all of these complexities is a simple question: which companies will be the market leaders of the future? For the last 50 years, the great majority of hi-tech winners have been US firms. Over the next 50, this might well change considerably. Right now, the clash of the titans looks like a pretty equal fight, one that will only accelerate the global pace of technology innovation. Let’s hope the China/US rivalry stays contained within the marketplace, and doesn’t spill over into other, more worrisome, realms.  Global hi-tech competition should be more about companies than countries.