Reed Hundt: Crisis Mode

By CIOinsight  |  Posted 01-11-2007

Reed Hundt is not optimistic. The former chairman of the Federal Communications Commission feels that the United States is not spurring innovation at home and is ceding its competitive edge to China. His book, In China's Shadow: The Crisis of American Entrepreneurship (Yale University Press, 2006), is a call to action. He spoke with Senior Executive Editor Dan Briody about the gravity of the situation—and the responsibilities of U.S. businesses.

CIO Insight: You paint a dire picture of the rivalry between Chinese and U.S. businesses. Are we in an economic war with China?

Hundt: It's a battle between groups of knights or chevaliers—thousands of American firms against thousands of Chinese-based firms. So if you worked in the textile industry, you would say, here are these 20 American firms, each battling their vigorous Chinese competition. Or if you're Cisco, you say, of course, my competition is Huawei.

And if you look at the strength that Chinese firms bring to the competition, it's significant. First of all, China is now at the same level as Japan in R&D spending, and soon will be almost at the level of the United States. Second, it's so much cheaper for Huawei to run its business than for Cisco, by a factor of ten times. And finally, China has extremely easy access to capital, and all their markets are wide open for competition, mostly because they're growing. Nothing is a mature market there. It's very vigorous domestic competition, much more vigorous than most of the American markets. There's much more of what Americans used to think America was.

From a business standpoint, what must the U.S. do to counter the threat?

Right now we're sending our Secretary of the Treasury over there, in his de facto role as the ambassador to China, and we've just had our trade ambassador do a scathing report about China's unwillingness to comply with the World Trade Organization. It's all well and good to pound on the Chinese to open their markets, but that's not going to be the main element of response. There is not a single new American firm that's going to get created because of anything the White House is doing. There is not a single new job that'll be created here because of anything they're doing. There is not a single research breakthrough or entrepreneurial startup that'll start up because of what they're doing.

All those things come from, number one, opening closed markets in America, and, number two, opening new markets in America. And those are the two things that we need to focus on.

Can we do that with legislation?

We need to do it by legislation and by entrepreneurial breakthroughs. Google is a non-legislative breakthrough. Google is a brand-new, huge employer, with enormously high wages. It's a company that essentially took the lead in creating the new market, the market for advertising around search. But Google benefited from the legal paradigm of open networks. The government didn't pick Google, and it didn't fund Google—but it created a legal paradigm of open networks that made Google possible.

How do we continue to feed that entrepreneurial engine?

By adding new markets, and new firms in old markets. It's all about firms and micro-markets, not about the macro conditions of currency exchanges. You can change the relative value of the currency by 10 percent or 20 percent. Huawei's cost advantage is not 10 or 20 percent, it's a factor of 10. You're not going to change the currency 1,000 percent.

We would be better off if the Secretary of the Treasury came back from China and persuaded the president to do this: Spend more money on R&D, pass legislation that breaks up the energy industry, fund startups that provide alternative sources of energy and new pathways of distribution; have a different rule of law for the Federal Energy Regulatory Commission; and open the energy market to the same competition we saw after AT&T was broken up. I guarantee the Treasury Secretary is not going to try to persuade the president to do those things. But he should.

What can the average CIO do about all this?

Well, it's tough because it's politics as usual. The big businesses drive the business input into politics, and big businesses can think of a lot of reasons not to advocate open markets. If you're an AT&T or a BellSouth, you're telling the government that it's okay that we're down to two huge telephone companies. But it's really not okay. It's not okay for IT vendors either. They buy less, not more. It's not okay for innovative startups in wireless, in datacom. It's not okay for Google. It's not the way to have the most productive economy. But you can see why they would be saying it's the way to go.

It leaves you and me. It leaves people. It makes you say, "we need people power."