June 2019 Essay: The Changing Structure of Technology Companies
Working through a framing exercise of a series of cross market observations connecting to several historical corollaries to produce the following hypothesis: there will be an acceleration of change with regard to corporate structures, with emphasis on technology companies. The change that will occur will be impactful on a broad scope to include the private-equity association that has become integral to the technology market segment. The resulting reversal of off shoring to on shoring will have significant effects across the technology industry.
The post Second World War global alignment, more commonly referred to as the Cold War, effectively ended on December 25, 1991 when Mikhail Gorbachev said on a nationally televised speech “I hereby discontinue my activities at the post of President of the Union of Soviet Socialist Republics.” The Cold War administratively ended a year earlier with the signing of Charter of Paris for a New Europe in November 1990, paving the way for the European Union to be formed three years later and eventually the Euro to begin trading. For the next twenty-nine years the United States operated in a world effectively without a rival for global power and influence. The Internet was privatized four years after the end of the Cold War. American culture exploded across the world. The financial markets accelerated to new heights a few times. America was renovated a few times. The smart phone was invented. Social media, Netflix, Uber, Amazon and gamers on Twitch thundered across the social landscape.
Within this nearly thirty-year period of time, a new generation of business leaders, entrepreneurs and investors assumed leadership control of leading western companies, many of which are technology based. A torch was passed to a new generation of Americans, born without the experience of the Cold War. They had not been disciplined by the struggle against a global rival, they were not particularly attached to their heritage and they were not always committed to their nation’s needs at home or around the world. This was a generation inspired by the mantra that The World is Flat, and business was about outsourcing, offshoring, supply chains, just in time inventory and the global distribution of corporate resources.
The most envious companies were “platform companies” such as Apple, Amazon, Alphabet, Microsoft and Facebook. Charles Gave, who helped define the term, recently wrote how their research firm had created the idea of a “platform company” stating that “…every business has to do three things: design its product, build its product, and sell its product. These days, value is created by design or marketing. So, with the simultaneous emergence of the internet and globalization, it made sense for a bunch of US companies to get out of the low margin, capital intensive production business, contracting it out to China, and to concentrate on research and development and marketing.”
Barring a reduction in geopolitical tensions and national aspirations, the structure of technology companies will be forced to change from the platform model advocated by Gave. Leadership teams and investment teams that are immersed in this field will require new operating skills, new corporate models, new financial models and overall cultural change. It will be impactful and the early stage events of this trend have been occurring in the first half of 2019. This essay provides a series of data points or frames that step through the coming changes.
Frame 1 – A Place on the World Stage
Margaret Olwen MacMillan wrote a wonderful book in 2013 entitled The War that Ended Peace. In her historical narrative of the years leading up the First World War, she describes Germany’s desire, championed by the Kaiser, to have a place on the world stage that would be respected by the greatest empire of that time, the United Kingdom. Germany yearned for a role on the world stage. They wanted to have an empire and to be respected in the affairs of the world; they were seeking a sense of place in the world order.
Quoting MacMillan, “On the other hand, people who make it their business to think about society or try to portray it often have antennae out which sense undercurrents before they manifest themselves on the surface. In the period before 1914, artists, intellectuals, and scientists increasingly challenged older assumptions about rationality and reality. It was a time of intense experimentation in circles, which were, then avant-garde but whose ideas were to enter the mainstream in succeeding decades. The cubism of Picasso and Braque, the attempts of the Italian constructivists such as Balla to capture movement, the free-flowing dance of Isadora Duncan, the deeply erotic ballets staged by Diaghilev and danced by Nijinsky, or the novels of Marcel Proust, all in their own ways were acts of rebellion.”
A reader would not be wrong to wonder why I would include the above quote in an essay about geopolitics, technology companies and so forth. It is because of the reference to Marcel Proust and the protagonist’s feeling of a lack or lost meaning to the world in his novel In Search of Lost Time. The underpinning of nationalism is the need to fill the gap of lost meaning. The gap that a person feels when they cannot find a sense of place in the world order around them and thus they challenge the conventional order with acts of rebellion.
Frame 2 – Business Will Trump Nationalism
It is considered common sense to believe that nation-states will not disrupt the benefits of business and trade with the loss and misfortune of conflict. This is especially true today with the global scale of business, the connectedness provided by the Internet and the unity of multiculturalism. In practice, we see plenty of examples that the world does not work well together when benefits are perceived to be misaligned and nationalism is at play. The following quote from Margaret Olwen MacMillan, with reference to the EU in a time of Brexit, describes how the growing benefit of trade was trumped by the need to have a sense of place on the world stage.
“Further proof that war was becoming obsolete in the civilized world was the nature of Europe itself. Its countries were now tightly intertwined economically and trade and investment cut across the alliance groupings. Britain’s trade with Germany was increasing year by year before the Great War, between 1890 and 1913 British imports from Germany tripled while its exports to Germany doubled. And France took almost as many imports from Germany as it did from Britain while Germany for its part depended on imports of French iron ore for its steel mills. (Half a century later, after two world wars, France and Germany would form the European Iron and Steel community, which would become the basis of the European Union.). Britain was the world’s financial center and much investment in and out of Europe flowed through London. As a result the experts generally assumed before 1914 that a war between the powers would lead to a collapse of international capital markets and a cessation of trade, which would harm them all and indeed make it impossible for them to carry on a care for longer than a few weeks. Governments would not be able to get credit and their people would become restive as food supplies grew short.”
Even in our modern time we find the same perception about business and war. From Thomas Friedman’s The World is Flat, “The Dell Theory of Conflict Prevention argues that no two countries that are both part of the same global supply chain will ever fight a war as long as they are each part of that supply chain;” the connectedness and sense of place in single defining theory of conflict prevention.
Frame 3 – Five Pillars of Power Projection
In a broad sense, there are five types of power: cultural/social, political, economic, technological and military. Each of these pillars of power is only as strong as a nation-state’s ability to project and sustain the projection of power. Japan had an ability to project military power in December 1941 as far as Hawaii, but they did not have the ability to sustain military power projection in the Hawaiian waters. This is a subject that I wrote about seven years ago.
Can a nation-state conduct economic business in foreign markets? Does the economic chain of commerce exist to support business far from domestic markets? The same is true for cultural and social power. Hollywood has the ability to project content (e.g. movies, games, music) and sustain that content the world over. The same is true of technology companies that organize around content: Google, Facebook, Netflix, Twitter and so forth. Power in any of the five pillars is only as strong as the ability to sustain the projection of that power. In terms of technology and cultural power, the ability to project that power across boarders, is why we see access to that power denied by nation-states. Political power can be negatively affected by outside narratives and controlling, or limiting the projection of that power is important to nation-states wherein power is concentrated in the few rather than the many.
Frame 4 – A Place on the World Stage
Having a role, a position of power and influence within the global community is not an uncommon goal for nation-states. In their book Mao: The Unknown Story, Jung Chang and Jon Halliday, provide a detailed history of Mao’s primary objective to make China into a global power. This goal was so consuming that he prioritized it over the need to provide food and shelter for his people. Mao inverted Maslow’s Pyramid; and the need for Esteem was placed before Physiological needs. From their book, “After Mao accepted an end to the Korean War, in May 1953, Stalin’s successors in the Kremlin agreed to sell China ninety-one large industrial enterprises. With these assured, on top of the fifty projects agreed to by Stalin, Mao was able to launch his blueprint for industrialization on 15 June. This focused exclusively on building up arms industries, to make China a superpower. It was in effect Mao’s Superpower Program. Its utterly military nature was concealed and is little known in China today.” According to Chang and Halliday, during this period of time military and arms-related spending took up 61% of China’s annual budget.
Like the Kaiser, Mao was seeking a place on the world stage for China and it was not just any place. It was the most important place. “Mao had been informed that acquisitions from Russia could enable him to break into the superpower league in five years. He fancied he could fulfill his ambition in one ‘big bang,” declaring that “Our nation is like an atom.” He called the process the “Great Leap Forward,” and launched it in May 1958. While the nation was told, vaguely, that the goal of the Leap was for China to “overtake all capitalists countries in a fairly short time, and become one of he richest, most advanced and powerful countries in the world.”
Frame 5 – The Venona Project Evidence
When the United States embarked on the military-industrial program to build the atomic bomb, there were people who believed that the technology to build the bomb should be openly shared with the allied nations, to include the Soviet Union. This was not to be and when the Soviets did formally start an atomic bomb program, it was under the leadership of Igor Kurchatov, who realized the need to shorten the R&D cycle. To shorten the cycle, the Soviets ran an industrial espionage program using scientists such as Klaus Fuchs, who after serving seven years in prison immigrated to East Germany and died in the GDR in 1988, within two years of the end of the Cold War. The value of the information that Fuchs passed is still debated today, but what is not debated is that technology leadership is power and nation-states seeking a place on the global stage need to be in possession of advanced technology. For the duration of the Cold War, industrial espionage was practiced aggressively by both sides to keep pace with innovation as well as assess the capabilities of technology and weapon systems. A final observation on the spies within the Manhattan Project; a theme that runs through their reasons for spying often muses on fairness, too much power in the hand of one nation-state, but it is curious to wonder if they had known that Stalin was such an evil man, would they have spied for the Soviet Union? For at least one, we know the answer as Kim Philby said “It cannot be so very surprising that I adopted a Communist viewpoint in the 1930s; so many of my contemporaries made the same choice. But many of those who made that choice in those days changed sides when some of the worst features of Stalinism became apparent. I stayed the course.” The prior quote is from Tim Milne’s book Kim Philby, A Story of Friendship and Betrayal.
Frame 6 – Thirty Years of Issue Based Coalitions
From the onset of the Cold War marked by the Iron Curtain speech on March 5, 1946, the global alignment was essentially that of a bi-polar construct with the west led by the United States and the Communist bloc lead by the Soviet Union. There were various sub-alignments and even a non-aligned movement, but from the perspective of the United States and the Soviet Union, the world was divided into two camps. When this ended in 1990-1991, the world evolved into a series of issue based coalitions for the United States: Kuwait in 1991, Balkans in 1991-2001, Somalia in 1993, Afghanistan in 2001-2002, Iraq in 2004, Arab Spring in 2010, North Korea and so forth.
Despite all of these conflicts and the sustained combat operations for the United States for nearly eighteen years post 9/11, the US has been without a primary power rival for a place on the global stage for nearly thirty years. Thirty years is 75% of a business career and most of the members of US Joint Chiefs of Staff have career lengths of 35 to 40 years, which means their military careers started when the Cold War was ending and that implies that the majority of the officer and enlisted leadership teams in all branches of the US Military have no actual service time during the Cold War.
Taking this one step further, it means that most leadership teams (i.e. military and private sector) in the US based military industrial complex have been operating in world absent of a global rival for their entire career. If a global rival to the US were to emerge, it is not unfair to speculate that there would be a significant knowledge gap; skill set gap and broad learning curve for leadership teams to overcome in the process of retooling their organizations.
Frame 7 – Loss of Face
On May 7, 1999 five US bombs struck the Chinese Embassy in Belgrade killing five people. It has been reported that the embassy was bombed on purpose. Extensive articles have been written in the New York Times and Washington Post describing the how this happened. The CIA testimony before the House Permanent Select Committee is even on line here. Think about that for a moment. Twenty-years later the testimony is available on line. One might argue that these accounts are falsified, but they are available for public discourse.
A year after the bombing a Chinese fighter aircraft collided with US reconnaissance plane over the South China Sea. The plane was forced to land in Chinese territory. The aircrew was interned for ten days, the US delivered a letter to the Chinese Government and the aircrew was released and the plane returned three months later. If you have ever taken the time to read Poorly Made in China by Paul Midler, a story about a dart-throwing match appears towards the end of the book with this quote “it was important for the game to be won, and it mattered less how the score was achieved. Appearance over substance was a cultural theme in China; it likely weighed on the reporting of population statistics. The Chinese had a deep, nationalistic need to feel superior in very way possible. Justification was a driving force in China, one that influenced behaviors in the manufacturing sector as well.”
Frame 8 – US-China Trade and Intellectual Property Dispute
The dispute over trade, technology, spying, and sanctions violations is not a quibble over trade imbalances and off shoring of jobs. It is about power projection in all phases and it is about a place on the world stage. China has been running a sophisticated and sustained operation to acquire technology leadership for nearly forty years. The historic policy goals of China were laid out Frame 4 and when President Carter granted full diplomatic recognition of China and signed the first trade agreement with China in 1979, the race was on and the 1980s exploded for China. On the signing of the first trade agreement in 1979, United States Secretary of Commerce, Juanita M. Kreps said, “For 30 years the people of the United States have had little or no commercial, or other, contact with nearly one‐quarter of the population of the world. Today we take a major step together in resuming the unimpaired exchange of goods and services — and therefore the exchange of ideas, experiences and good will.”
It is not a coincident that 1979 led to 1989 and Tiananmen Square. The years in the decades ending with nines seem to be years of significant events. Let us just run through a simple, limited exercise and that is a cursory review of headlines (all from a single source the WSJ) over the past six months:
- January 2019: U.S. Blocks Some Exports From Huawei’s Silicon Valley Unit
- January 2019: Chinese Huawei Executive Is Charged With Espionage in Poland
- January 2019: Huawei Targeted in U.S. Criminal Probe for Alleged Theft of Trade Secrets
- January 2019: U.S. Weaponizes Its Criminal Courts in Fight Against China and Huawei
- January 2019: Corruption Currents: U.S. Lawmakers Propose Export Bans on ZTE, Huawei
- January 2019: U.S. Authorities Unveil Sweeping Set of Charges Against China’s Huawei
- January 2019: Huawei Faces Deepening Scrutiny in Europe
- April 2019: How the U.S. Surrendered to China on Scientific Research
- April 2019: U.S. Would Rethink Intelligence Ties if Allies Use Huawei Technology
- May 2019: China Formally Arrests Detained Canadians on Spying Charges
- May 2019: Huawei Executive Accused by U.S. Startup of Involvement in Trade-Secrets Theft
- May 2019: Investors Slowly Wake Up to Fears of a New Cold War
- May 2019: Huawei’s Yearslong Rise Is Littered With Accusations of Theft and Dubious Ethics
- May 2019: After U.S. Blacklisting of Huawei, China Plans ‘Unreliable’ Foreigners List
- June 2019: New Huawei Phones Won’t Come With Facebook, Instagram or WhatsApp
- June 2019: China Warns Tech Companies About Complying With Trade Restrictions
- June 2019: U.S. Targets Efforts by China, Others to Recruit Government Scientists
- June 2019: U.S. Targets China’s Supercomputing Push With New Export Restrictions
- June 2019: U.S. Considers Requiring 5G Equipment for Domestic Use Be Made Outside China
- June 2019: How a Big U.S. Chip Maker Gave China the ‘Keys to the Kingdom’
Frame 9 – Outcomes and Proceedings
When I started writing this blog a few days ago I had entitled it “A Return to Vertically Integrated Tech Companies.” I was not thinking that tech companies would go the Full Monty on vertical integration, but rather it would be more of a phased approach. The trend of systems companies developing their own in house silicon for processing, switching, graphics processing, etc. will continue and both nation-states will see less licensing of software from non-national sources. Manufacturing will be become more regional than global. Increased scrutiny of technological capabilities will force companies to limit exports and restrict applications.
There will be a retreat from the globally distributed assumption that the world is flat, but not fully to how technology companies looked in the early 1980s. Charles Gave wrote in the prior mentioned blog post “The conclusion is simple. The days of globalized platform companies are numbered. Supply chains are going to localize. Or more likely they will regionalize, with goods produced locally in three zones—North America, Europe and Asia—while shipping goods from one zone to another will become a great deal more difficult and expensive.” Here are a few additional outcomes and proceedings that I expect to see develop.
As China emerges as comprehensive global rival of the United States, we are going to see an altering of the relationship between the two countries. China is a Communist country in which power is concentrated in the hands of the few. I expect to see a more cold war like rivalry emerge between the US and China. It will be waged on three fronts: technology, economic and military.
The world of technology will retreat from sharing and group systems think. If we go back to 2005 and watch this talk on open-source economics by Yochai Benkler, I think there are a few important vignettes that describe the culture in the global tech community over the past 10-15 years. At the ~7:00 mark he makes the productivity point that outsourcing work by dividing it up amongst thousands, is more efficient than just a few specialists. Why would people be looking for a little bit of work here and there? They are bored. Why watch TV when you can help NASA map images of Mars and feel a sense of place on team journeying to far away places. People, like competitive nation-states seek a place in the world order.
At the ~14:45 comes what I think is the best quote from the speech. Referring to Frame 1 and Proust, people who are without a sense of place, without a community, without a role within a team engaged in a common set of goals, are seekers for a solution to the lost sense of place. Commenting on why people across global communities would want to work for free on Wikipedia, or pictures of Mars or web server software, he says that it provides them “… a certain sense of meaning, or, in places that are more involved, like Wikipedia, gives me a certain set of social relations.” I do think there is a difference in complexity of systems and group work around a server operating system or an encyclopedia entry is far different than open source technologies for networking, compute orchestration, system design, etc. NASA may use crowd sourcing for SETI and pictures of Mars, but they did not use crowd sourcing for the moon mission.
With a defining challenge forming on the world stage, we are going to see an adjustment with regard to cross-border collaboration. It is just the way it will be. China will lock down access to their technology world and the US will do the same. Those who were seeking socialization in the global community will find that to be a shrinking pool. There will be less sharing and it will not be because people do not want to share, it will be because the motivations of people are not always benign.
When Edward Snowden fled to Hong Kong (part of China) and later Russia, he stated that his motivations where because the US Government “… granted itself power it is not entitled to. There is no public oversight. The result is people like myself have the latitude to go further than they are allowed to.” Additionally he stated “These programs were never about terrorism: they’re about economic spying, social control, and diplomatic manipulation. They’re about power.” He remarked further “…my sole motive is to inform the public as to that which is done in their name and that which is done against them.”
In the years following his acts, he has become a regular speaker at tech conferences like SXSW, OpenStack, K(NO)W Identity Conference, 2015 Computers, Freedom and Privacy Conference and others. These conferences are what provide him with his sense of place as he sees himself as a participant in the quest for a better-shared humanity. These conferences are his social community because he is in asylum in Russia. As such he probably does not have much of a social community and like Kim Philby will find a grim life of loneliness and depression.
In the years since 2013 when Snowden fled to Hong Kong and then Russia, the internet has been revealed as a place of absolute fraud and manipulation and much of that has little to do with Government spying programs and more to do with Internet companies themselves. Wired recently published an opinion column by Zeynep Tufekci in which she states “The internet is increasingly a low-trust society—one where an assumption of pervasive fraud is simply built into the way many things function.” The internet is made up of manipulated page rankings, shadow bans, censorship, fake product reviews, fake news, altered content and so on. Does anonymity really matter in a distorted world when the content entities of that world do not uphold the principles of fairness? That is perhaps a topic for a different essay, but what should not be confused is that anonymity does not imply accountability.
In closing, what we are going to see is a new group of leaders emerge who will learn to straddle the space between revealing and concealing. New skills will be required to lead technology and investment companies more closely tied to national interests than the prior thirty years. The culture of technology sharing through papers and conferences will change and it will be less about self-interest, self-selection and more about national interest. Brexit, the 2016 US Election, and the 2019 China-US trade dispute are just early examples of this global transition.
As always, my thoughts on these matters might be completely wrong.