What is massive modularity? An example can be found in the mobile telecommunication industry. Albeit simplified, Figure 1 visually represents six major modules in three broad functional areas that define a smartphone handset. The modules share common traits: (i) they are interconnected with each other according to standard interfaces; (ii) innovation can take place independently in each module, as long as the interface standard is adhered to and continually updated; and (iii) they can be broken down into smaller, more specialized modules (represented by bullet points in Figure 1), each with its own evolving standards, replicating the modular pattern at progressively deeper levels. 

Massive modularity allows industries to cope with rapidly growing complexity in products and systems.  For instance, after decades of industry evolution, a single phone may incorporate decades of wireless communications standards (2G, 3G, 4G, and now 5G), be compatible with 10 or more WiFi standards, offer multiple, distinct WiFi services, and include seven or more distinct US-led GPS services, not to mention versions of the three other major non-US geolocation systems[1].  Similar structures support the evolution of Google’s Android operating system, Bluetooth, nearfield communications (mobile payment), audio, video, and many others lurking in the depths of the massively modular system (MMS) that is your mobile phone. 

Over the years, the mobile telecom GVC has evolved from a standard GVC structure (with, for example, Finland’s Nokia, Sweden’s Ericsson, and the USA’s Motorola designing their own handsets and selecting suppliers) to a MMS where expertise and market share is dispersed in specific functional modules that have gradually become highly concentrated in specific companies and countries. Figure 2 illustrates the extraordinary geographic concentration in the industry across a few key functions in 2019. 

Figure 1. Major functional modules in a mobile phone

Source: Thun, Taglioni, Sturgeon, and Dallas, forthcoming, “The prospects for decoupling in massively modular industries.”

Figure 2. Mobile handset share of value added in main functions, by geography of supplier ownership, 2019

Source: Thun, Taglioni, Sturgeon, and Dallas, forthcoming, “The prospects for decoupling in massively modular industries.” using data from IHS Market device teardown reports for 40 handsets.

The United States is predominant in the most R&D and design-intensive ICs, such as phones’ application processors (CPU) and advanced radio frequency IC packages. The Rep. of Korea is predominant in capital- and process-intensive memory production and LCD displays. In some cases, global capabilities are focused on a single firm (Qualcomm in processors, and Samsung in memory and displays). And this is just a single layer of the mobile phone.  Opening the proverbial hood of each of these functional areas reveals new standards, dominant players, and platform ecosystems operating at lower levels. Thus, even giants like Qualcomm must stand on the shoulders of hidden giants like Taiwan’s TSMC, which manufactures many of its ICs and provides process-specific design requirements to make this possible, and the United Kingdom’s ARM, which provides the power management architecture present in 95% of mobile handsets. Tellingly, the ARM ecosystem includes hundreds of complementing firms that sell tools to make it easier for handset designers to adhere to the (de facto) ARM standard. As ICT become more important, if not core, in more industries, it appears that more industries are evolving in the direction of massive modularity.[2]

Why is massive modularity important? One reason is cybersecurity risk. Because innovation in MMS is both partitioned and constantly evolving, new modules and standards usually include “legacy” code, circuity and other features that ensure they are compatible with existing and older standards, at least at first, instead of purging them and starting from scratch. In addition, the openness of massively modular systems means that new devices and software can be added without the permission of any single gatekeeper.  While the results might be astounding, MMS typically have accumulated hundreds, if not thousands of backdoors and vulnerabilities that can be, and regularly are, exploited by bad actors. While cybersecurity risks are a special type of strategic vulnerability, and one that will require especially urgent attention, digital services are symbolic of the diverse vulnerabilities that reside in massively modular industries. 

What are the broader implications of MMS for geopolitics, national security and industrial policy? First, the policy challenge is not only that vulnerabilities can surprise and disrupt, but also that policies aimed at reducing risk might have severe unintended consequences, as shocks become amplified and propagate through complex industries in ways that are difficult to predict (as Mandelbrot’s Fractal Geometry teaches us). Clearly, some options that governments are considering risk falling short of confronting the vast multi-dimensional complexity of the industries they are hoping to rebalance. Between the extremes of rebuilding massively modular industries in all their complexity on a national level, or trying to mitigate each crisis as it arises in an endless game of whack-a-mole, there lies a vast middle ground of options that include combinations of strategic buffering and recasting of international cooperation that allow for some degree of global supply chain risk, given that GVCs are likely to remain globally distributed. 

But first we need to see the world as it is and not how it used to be. There is an urgent need to characterize industries not only in terms of trade and investment flows, but also in terms of IPR and asset ownership—something not currently possible with official economic statistics. It will require a new type of policy expertise to help ensure that shocks to the system are reabsorbed and not amplified. Most of all, it will require the uncommon marriage of technical and political skill to needed engage partners in the context of exceedingly complex technological ecosystems and business strategies.

Eric Thun is the Peter Moores Associate Professor in Chinese Business at Oxford’s Saïd Business School and a Fellow of Brasenose College, Oxford. His areas of expertise include business in China, industrial development and upgrading in China, and Chinese political economy, as well as global strategy and global value chains.  His primary research interests revolve around the dynamics of competition and innovation in emerging markets.

Daria Taglioni is Research Manager, Trade and International Integration, Development Research Group. She joined the World Bank Group in 2011 as Senior Trade Economist in the International Trade Department of the Poverty Reducation and Economic Management Network (PREM).  Since then, she has held various positions and roles, including Team-Task Lead for the World Development Report 2020, Principal Economist in the International Finance Corporation, and World Bank’s Global Lead on Global Value Chains.

Dr. Timothy J. Sturgeon is Senior Researcher at the at the Massachusetts Institute of Technology’s Industrial Performance Center (IPC).  His research focuses on the processes of global integration and digital transformation, with an emphasis on offshoring and outsourcing practices in the electronics, automotive, and services industries. He has made significant contributions to Global Value Chain (GVC) theory and is working to improve the metrics and methods available for globalization research.

Mark P. Dallas is an Associate Professor of Political Science and Director of Asian Studies at Union College in New York.  In 2021-22, he will be a Council on Foreign Relations International Affairs Fellow for Tenured International Relations Scholars (IAF-TIRS), working at a US government executive agency on US policies related to China, emerging technologies, supply chains and national security.

To read the full commentary from World Bank Blogs, please click here. 

Image from World Bank Blogs 

The post Why Policy Makers Should Pay Attention to the Concept of Massive Modularity: The Example of the Mobile Telecom Industry appeared first on WITA.

The European Union pitched the council last year. Its leaders realized that it was in the interest of America and Europe—each other’s largest trading partner—to smooth over accumulated differences of opinion and develop a coordinated approach on trade and technology. But a secondary reason for the potential new council might be more consequential: Both sides want to set common technological standards. Doing so would afford the U.S. and EU the ability to deal with the underestimated long-term national security threat posed by China.

The EU’s approach to regulating technology, in particular American technology, is unintentionally exacerbating the China threat. A proposal for sweeping new legislation aimed at American Big Tech may have unwittingly created an opening for China. Introduced last December, the proposed Digital Markets Act intends to promote a level playing field for online services and to prevent anti-competitive practices. Ironically, it might instead enable a country that steals intellectual property as a matter of national policy, blocks access to foreign products, and couldn’t be more opposed to the fundamental values of European democracies.

America traditionally deals with anti-competitive marketplace acts after the fact. But in keeping with Europe’s typically more aggressive regulatory approach, the DMA is designed in anticipation of possible future competitive harm—without specific proof that such harm has occurred. The bill would limit the ability of online “gatekeepers,” such as search engines and marketplaces, to promote their own products. It would downplay security and privacy concerns in order to force app stores to allow apps from other developers using separate payment systems. The DMA would also force gatekeepers to share IP and trade secrets—such as search ranking and click data—with direct competitors.

Just who would the DMA classify as gatekeepers? The law is far from final and doesn’t name explicit targets. But—surprise—it’s Microsoft, Google, Amazon,Apple, and Facebook that would be regulated under its current criteria. No giant European tech firms. Nor any of the Chinese online giants such as WeChat (1.2 billion users around the globe) or its corporate parent Tencent (the largest video game vendor and one of the 10 biggest companies in the world). Far from leveling the playing field, the bill would penalize the business models of successful American tech companies, and naively leave the field open to China. Its companies could exploit the DMA’s arbitrary thresholds to increase their presence in the EU digital economy at the expense of American companies.

The practices targeted by the proposed law are fair topics for debate and regulation. No one’s saying American Big Tech should be shielded from competition. But against China, it’s lopsided competition. Letting that happen is not only unfair, it’s also shortsighted and perhaps dangerous. 

It’s lopsided because of the unique way China enters and then seeks to control overseas markets, the result of a profoundly integrated and coordinated effort by the entirety of the Chinese government and economy. With strategic goals of market domination set by the Chinese Communist Party, the Chinese government puts political pressure on a country to buy Chinese products, a Chinese development bank arranges a low-interest loan, the subsidized state-owned enterprise offers an irresistibly cheap price (and is not subject to U.S. antibribery laws), and even Chinese private sector companies are directed as to how they price and market their products and services. Americans have trouble fully appreciating the scope and effectiveness of China’s system, because this approach seems so different. Our private sector’s success abroad is due far more to superior products than to government promotion.

China requires that its companies turn over data to the government if it asks. The United States and United Kingdom looked at that policy and decided to ban Huawei’s 5G equipment from their networks. If, due to its aggressive tactics, China had an outsized role in the internet on the continent, it would reach deep into European personal and commercial lives. China has a unique way of integrating its payment systems into all online operations. WeChat Pay and Alipay have basically displaced cash in China. If they achieve anything like that prevalence in Europe, the financial and personal details of over 400 million Europeans could be stored on Beijing’s computers. The DMA fits a pattern in which Europeans generally minimize the risks of improper data collection by China for national security purposes (including the advancement of their artificial intelligence programs) and of being locked into Chinese technical standards.

China is perfectly willing to use economic coercion as a tool of statecraft, making market access a means of state ends. When Norway awarded the 2010 Nobel Peace Prize to a Chinese dissident, Norwegian salmon fishermen bore the consequences. China banned their salmon imports and did not relent for six years. Time and again, in disputes with the United States, South Korea, Japan, and others, innocent commercial parties have been held hostage to Chinese government demands. If the DMA succeeds in hampering American tech firms in Europe, and China rushes in to fill the void, Europeans will be vulnerable. WeChat Pay has said it sees Europe as its next key market. It’s not hard to imagine it succeeding. What’s to keep Chinese authorities from threatening to stop commercial payments on that platform until France rectifies some perceived affront to China?

China, Europe, and the United States have much to gain from each other, especially when fair competition drives innovation. Demonizing China is counterproductive if not risky. But it’s equally a mistake to not candidly face the threats posed by a powerful nation that does not share our democratic values. At a minimum, these issues need a frank and honest airing. The EU-US Trade and Tech Council could be a vehicle to persuade Europe it isn’t fully appreciating those national security threats.

Glenn S. Gerstell served as the general counsel of the National Security Agency from 2015 to 2020, and is currently a senior adviser at the Center for Strategic & International Studies.

To read the full commentary from Barron’s, please click here.

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