Everything Is Computer — But Who Controls the Middle?

The once-radical integration of electronics into everyday products—pioneered by the smartphone—is now the common fabric of countless modern systems, from electric vehicles to missile guidance. Beneath this surface innovation lies a stark divergence in industrial strategy: while the U.S. transitioned away from manufacturing the physical layers of innovation, China methodically mastered and scaled the "modular middle," gaining disproportionate economic and strategic leverage. With national security and technological leadership at stake, the U.S. faces a defining challenge: Can it rebuild the ecosystem it chose to abandon?

The smartphone may seem like a far cry from a missile system or an electric vehicle, yet today these technologies share a common industrial lineage. “Everything is a smartphone. Everything is computer,” wrote Ryan McEntush in a recent essay for a16z. From drones to robotics and consumer appliances, these products are no longer separate categories, but variations on a single design logic. “An electric vehicle is a smartphone with wheels. A drone is a smartphone with propellers.”

This convergence is powered by a hidden industrial layer referred to as the "modular middle," the critical subsystem of global supply chains where batteries, sensors, processors, and other components are validated, standardized, and integrated. Mastery of this layer, McEntush argues, is what determines speed, scalability, and, increasingly, geopolitical advantage. And here, the story turns sharply. While China deliberately poured resources into developing and controlling this modular middle—elevating it to a cornerstone of its economy and industrial strategy—America spent decades offshoring it, prioritizing intellectual property and design over domestic production. The implications of that decision are now unavoidable.

“It’s a myth that the United States ‘lost manufacturing,’ as if we misplaced our industrial sector,” McEntush wrote. “We made the conscious decision to stop being a country that manufactures things.” This approach, he noted, overlooked a hard reality: the longer production systems remain on foreign soil, the less capable domestic industry becomes of ever reclaiming that expertise. As consumer electronics became the proving ground for modern technologies, countries like China—which actively pursued dense supplier networks and manufacturing iteration—were positioned to dominate not only commercial markets but also defense-critical sectors.

China’s systematic approach to modular manufacturing offers a sharp contrast to the fragmented and predominantly offshore framework in the U.S. By leveraging economies of scale across industries, Chinese firms repeatedly recombine the same components—batteries, motors, controllers, and sensors—into new iterations. “These firms are not ‘diversifying’ in the traditional sense. Rather, they are doubling down. They are repeatedly assembling the same electro-industrial stack — batteries, power electronics, motors, compute, and sensors — into new permutations. Their advantage is not breadth for its own sake, but mastery of a single electro-industrial production model that can be applied almost without end.”

One telling example surfaced recently when Chinese smartphone maker Xiaomi debuted an electric vehicle capable of matching the sophistication of established luxury brands—complete with high-performance batteries and autonomous driving systems, as highlighted by Marques Brownlee in a December review. The company did not build these capabilities from scratch; instead, it reused and optimized supply chain advantages honed over years of producing phones. The result? A seamless pivot from one industry to another, blurring the line between consumer electronics and transportation.

In contrast, American firms have struggled to adapt. McEntush highlighted companies like Tesla as an exception—deploying aggressive vertical integration to compensate for gaps in the U.S. supplier ecosystem. Tesla’s Shanghai Gigafactory exemplifies the strengths of China’s model: “When Tesla committed to Shanghai in 2018, Li Qiang… personally cleared obstacles… and helped stand up a world-class factory in under a year that now produces half of Tesla’s vehicles,” according to McEntush. While Tesla benefits from the hybrid approach of maintaining system-level control while leveraging local supplier efficiencies, this is not a scalable fix for the U.S. “We cannot make national success contingent on finding a hundred more Elons,” McEntush warned.

The stakes extend beyond market competition. Consumer electronics, once considered peripheral to strategic industries, now form their backbone. Lithium-ion batteries refined for phones power electric vehicles. Smartphone cameras enable autonomous drones. Wi-Fi modules once designed for homes now support hardened military systems. “Where innovation once flowed from defense and automotive firms into consumer markets, today it moves in the opposite direction,” McEntush wrote. This shift exposes vulnerabilities in national security. “Defense-critical capabilities now emerge from the same process improvements that drive consumer electronics. The country that masters those processes gains the skills needed to shape the strategic industries of the future.”

America’s semiconductor policy highlights how industrial gaps compound. While the CHIPS Act directs tens of billions into domestic chip fabrication, building advanced logic chips is just one piece of the broader puzzle, according to McEntush. Without an ecosystem of advanced suppliers willing to prototype, iterate, and scale alongside them, downstream firms that rely on modular integration may still find themselves dependent on foreign manufacturers to bring products to market. As McEntush explained, “American startups lead in product vision but often struggle to find suppliers willing to prototype alongside them, iterate quickly, and then scale with demand.”

Simply reshoring manufacturing or subsidizing incumbents, McEntush argued, risks papering over the deeper structural issue: America lacks a well-developed modular ecosystem that adapts across multiple industries. Meanwhile, Chinese industrial policy explicitly encourages this cross-domain reuse of capabilities, amplifying efficiency across sectors.

For the U.S., restoring competitiveness will require a shift in perspective. Success in the hardware era is not about rebuilding legacy factories or achieving narrow self-sufficiency. Instead, it requires nurturing an ecosystem where innovation in manufacturing and design reinforces one another—a system that enables scale, iteration, and startup-driven innovation. “Reclaiming our electro-industrial future starts with building an American modular middle,” McEntush wrote. That vision, he emphasized, rests on systems thinking rather than nostalgic rhetoric. The smartphone, after all, is not just a transformative product—it is a playbook.