A political battle is raging in the angular corridors of the Pentagon over the future of the U.S. jetfighter fleet. The Bush Administration wants to replace the aging squadrons with the new and relatively affordable F-35 Lightning II limited capability multi-role fighter. The military brass, however, wants to continue building its inventory of the F-22 Raptor, an expensive stealthy air-superiority craft born out of the Cold War. 

The trap many military planners fall into is preparing to fight the last war. History is replete with examples of elaborate and expensive weapons systems that proved useless when put into battle because they were designed for a fights of the past. The argument for the F-35 is that it’s designed for insurgency wars such as those in Iraq and Afghanistan, which the Bush Administration believes is the future threat. The military, on the other hand, wants the F-22 to counter the rising military might of China.

Which view is correct? Unfortunately, only history will tell.

The same question of which direction to follow is applicable to the battle for Yahoo. Microsoft desperately wants Web portal to stave off the seemingly unstoppable machine that is Google. A litany of others have joined or a considering engaging in the fight for Yahoo to stake their claim to the $80 billion online advertising market. The names are all very familiar: TimeWarner, AOL, Comcast, AT&T, Amazon, eBay, even Google is a potential Yahoo savior.

But is everyone aiming at the right target? Is Microsoft—which is launching a proxy fight for Yahoo—building a machine for tomorrow’s market or still trying to fight the last war against Google? What all of these companies may find in their rearview mirrors is what the Pentagon brass fears: the rising might of China. In this case, the twin threats of Alibaba and Baidu.

Neither one is in a position to join the fight for control of Yahoo, but both have the potential of being disruptive to the global online advertising market. Consider this: Alibaba went public last fall raising nearly $1.5 billion, that’s nearly the same amount Google raised. Alibaba also owns Yahoo China and Yahoo owns a 40 percent stake in the company, giving CEO Jack Ma the right to claim a seat at Microsoft-Yahoo table.

Baidu and Alibaba have managed to keep Google, Yahoo and other American companies at bay in the massive and growing Chinese market. Alibaba’s Ma boasted that former eBay CEO Meg Whitman spent the summer of 2005 in Shanghai trying to figure out how to compete against his company’s rival offerings.

Both companies may dominate China, but they’re puny compared to the likes of Google, Yahoo and Microsoft. Baidu’s 2006 revenue was $107 million compared to Google’s $10 billion. But consider this: China’s economy is growing at 10 percent annually, raising the standard of living of its 1.3 billion population. Last year, China Telecom reported a record number of landline subscribers—973 million. The number of Chinese Web users is roughly equal to the total U.S. population—300 million—and growing. The potential is staggering.

When you consider the potential of Alibaba’s and Baidu’s home market and the Chinese government’s willingness to protect their IT industry, it becomes clear that these future Internet powerhouses have the potential of undercutting the established American players. It’s happened countless times before. Just 10 years ago, Yahoo rejected Sergey Brin and Larry Page’s business plan which lead to the formation of Google.

As Microsoft looks for weapons to battle Google and other Internet players seek entry points into the online advertising game, they should all take a look east—far east—for the competitors that may be in their futures. Failure to take these Chinese upstarts seriously could lead them to fight—and lose—the last war.

Lawrence M. Walsh is the editor of Baseline. Share your thoughts Microsoft-Yahoo battle and the rising strength of Chinese competitors at lawrence.walsh@ziffdavisenterprise.com.