Interesting take......there are significant head-winds for all three of the sectors you outlined for China. BTW as background I was a senior executive for a company which employed over 300K in China (in electronics).
1) New technologies that start off in niche markets ==> To date, China has built an industrial machinery which rewards fast follower flows (by theft or partnership). In this model, it is much easier to catchup when the road ahead has been already built. However, the industrial machinery needed for true innovation is very different (IP rights, freedom-of-thought, freedom in markets to inject disruptive technology). It is not easy to build and would involve a massive cultural change which seems difficult to navigate.
2) Primary industries and simple manufacturing industries that require massive resource inputs to eke out a profit ==> This is certainly true, but the competition is not only other low-cost situations (India, Vietnam). Rather, the real competition is automation (robots). Robots are very good at this sort of work. The US is automating at an astounding rate. The Chinese labor model prevents and resists these sorts of shifts because of the need for full employment.
3) Mid-tech industries where lots of little innovations add up ==> This is quite possible ... not sure this is a particular advantage for China (vs Mexico as an example).
Outside of these comments.... China's real value is as a large consuming market... IF there is sufficient wealth generated to build a positive cycle. To date, a lot of the underlying growth has been driven by massive explosion in debt. The core economy has to catchup in productivity to reach escape velocity. It is not clear this will happen...especially with the demographic challenges. The economic decoupling is certainly not going to help.
Overall, it is preferable for the world to have a stable China, it is not clear that this is going to be the case. It does not look good.
Experience in China's vast hinterland also can give Chinese companies an edge when selling to "the South". Unreliable power, broken A/C, lack of local skilled repair people led companies like Huawei to start off with rugged, low cost, easy to install products that meet third world needs. This is in their DNA and gives them an edge when selling in today's most rapidly developing markets in Africa and South Asia.
I like your Substack because you're an optimist. I can't be optimistic in a world where the current Chinese government is in a dominating position. However, I believe that you underrated the internal disruption caused by the swing to neo-Maoism. Having politically"safe" managers, rather than economically knowledgeable, seems like a recipe for stagnation. It will be even more disruptive than American manufacturing being dominated by financial experts.
It's mentioned in the first section but it seems very important how far into a cold war things slide. Because if things becoming truly hostile then the number of industries China will dominate will be the same as the number of industries the USSR dominated, zero. Not that there will not be major industries in China. Just that these cannot dominate globally as they won't have access to a majority of global markets.
I think it is also worth considering that dominance of industries at a global level in cars and semiconductors has tended to be fleeting. Japan's peaks in both industries are may be analogous to where China is now. Of course there is a complicated question of whether that was due to specific factors that won't be replicated, or a more general process that counteracts single countries dominating an industry for extended periods.
Personally, I'd bet on China heading towards lost decade territory with erosion of dominance in most industries. Domestic trends, which seem difficult to reverse, all seem to be pushing towards reduced export competitiveness.
Don't the reasons that are allowing China to be poised to dominate EV's and other of these emerging industries also mean that the US and the "free world order" could catch up quickly? Also, couldn't we be aggressive in stealing the engineering talant away from China? Maybe I'm too polyanna here but I see opportunities if we get our act together. As mentioned in several other posts, solidifying ties between the US and India seems crucial. I have no expertise in any of these areas, but it seems to me that it's possible the US may be able to change its ways and become more aggressive as it switches roles with China and starts becoming the underdog.
China has a massive, long-term demographic problem because of a generations-long One Child policy. It also has thousands of unemployed, educated engineers, who refer to themselves as “ghosts.” Li-ion batteries with 40-100% more energy density via silicon anodes and technology that prevents thermal runway are in production in the U.S. and soon in a PAC-Rim country. Every conventional Li-ion battery has a significant risk of thermal runway. Just ask the NYFD. Cheap Chinese batteries have flooded various markets (e.g., e-bikes, battery packs for charging mobile devices, etc). As you say, labor is the key component in the long-term. This is why I don’t think China will invade Taiwan. Russia is an example that won’t be lost on China. If you’re short of enough working-age people, you certainly don’t want to sacrifice them in a regional war, or have them choose to flee to other countries because they’re more interested in pursuing education instead of combat. Chinese students aspire to attend American universities. It doesn’t mean they’ll remain in the U.S. But the U.S. needs more young, educated engineers, so there’s no shortage of incentives. Finally, housing is unaffordable for young workers in China. Living with your aging parents doesn’t encourage having children, forming new families. Demographics is destiny, and both China and Russia are not doing well in this area. Poland, an EU success story, was happy to take in two million young, educated, and talented Russian refugees.
I have come to the conclusion that some developed democracies need something like an SEZ if they want to maintain internal manufacturing supply chain. A fairly large geographical area where it’s very easy to build and very easy to hire from anywhere. Think Texas meets Shenzhen. Would love to see Noah’s take on this.
China's coming dominance in electric motors and batteries will also give it a big advantage in electric aviation. Electric planes will initially be expensive until battery costs drop. But they'll have significantly lower maintenance and energy costs, not to mention simpler airports. Shorter runways, quieter traffic, no fuel depots—these will be extremely attractive to the secondary cities that lost out on the high-speed train lottery.
China has a) lots of people who want simpler and faster travel b) a big country with complicated geography and lots of destinations c) the engineering expertise and d) maybe most significant, a light-speed permitting system that allows a gigafactory to go up in 9 months instead of 2 years and change for Berlin.
By contrast, the West is being told to wait by Boeing and Airbus, who have no interest in hurting their profits. And think how long it will take for a commercial airliner to be approved. Or the hurdles involved in building new airports, because again, legacy will be very protective of their routes.
First mover advantage will be tremendous. Now, does a China that can dominate road and air travel really want to go its own way? Why?
This seems to be somewhat in contrast to your Jan 9 substack "China's Industrial policy has been a flop".
You make a good argument that China will be major player with name brand companies in certain industries such as EV's. China's ability to "dominate" will be seriously hamstrung by Xi's current policies that make China a bully and aggressor especially to Asian neighbors. Current policies stress what makes China militarily strong and a world power at the expense of increasing the well being of average consumer and citizen. Amazing progress but if China had truly chose to be a partner in the democratic world order then dominance would be a matter of when not if.
For people who say hey it not China it the US that the problem please see Hong Kong.
Yasheng Huang (Capitalism with Chinese Characteristics) has a new book in the works (Princeton University Press) in re how China failed to carry forward its advanced technologies in the 17th Century. China have the world paper/printing, the compass, and gunpowder. Chinese sails to Africa centuries before Spain, Portugal, and The Netherlands took to the sea. Yet, its political system failed to maintain its technological advantages. Huang points out that China has has six leaders since 1976, all of them protégés of Mao or Deng. None of them has the charisma or the talent to lead China forward. Deng created the conditions for China to rise as the workshop of the world. Now, demographic disadvantages and the middle-income trap are the ball-and-chain on China for two generations, if not more. If we think realigning or disrupting the supply chain is inflationary, it will look like a nothing burger if China invades Taiwan. This is not to say China won’t make this mistake. Maybe it will fall on its sword. But China depends on the outside world for food and energy. It has no international network of military bases and can’t provision its ships more than 1,000 nautical miles. It has a couple of sandboxes in the South China Sea, but it’s at the end of its tether beyond that International water.
I think you're taking too mechanistic of a take here, Noah. The notion that either bloc (China or West) would dominate specific industries is certainly valid in a globalized world, but not completely valid in a "friendshored" one.
“It [is] much cheaper to make and trade for what you want than to build military power and spill the blood of your own people in order to extract it from others.”
This tells me that the US and Europe should be aggressively courting African, Indian and Latin American nations to get their students to come to the West to learn. This can help counter the population advantages.
All true. But top-down centralized systems are capable of doing long-term damage. Japan evolved to a democracy. I think Deng was the kind of leader that comes along once in a century. A polar opposite of Mao, Deng opened China to the world again. His successor seems determined to sacrifice this openness for a relatively small gain: Taiwan. Putin is making the same mistake with Ukraine. Again, China has no network of military bases throughout the world, a function of centuries of a closed society. Time is the ultimate critic.
Interesting take......there are significant head-winds for all three of the sectors you outlined for China. BTW as background I was a senior executive for a company which employed over 300K in China (in electronics).
1) New technologies that start off in niche markets ==> To date, China has built an industrial machinery which rewards fast follower flows (by theft or partnership). In this model, it is much easier to catchup when the road ahead has been already built. However, the industrial machinery needed for true innovation is very different (IP rights, freedom-of-thought, freedom in markets to inject disruptive technology). It is not easy to build and would involve a massive cultural change which seems difficult to navigate.
2) Primary industries and simple manufacturing industries that require massive resource inputs to eke out a profit ==> This is certainly true, but the competition is not only other low-cost situations (India, Vietnam). Rather, the real competition is automation (robots). Robots are very good at this sort of work. The US is automating at an astounding rate. The Chinese labor model prevents and resists these sorts of shifts because of the need for full employment.
3) Mid-tech industries where lots of little innovations add up ==> This is quite possible ... not sure this is a particular advantage for China (vs Mexico as an example).
Outside of these comments.... China's real value is as a large consuming market... IF there is sufficient wealth generated to build a positive cycle. To date, a lot of the underlying growth has been driven by massive explosion in debt. The core economy has to catchup in productivity to reach escape velocity. It is not clear this will happen...especially with the demographic challenges. The economic decoupling is certainly not going to help.
Overall, it is preferable for the world to have a stable China, it is not clear that this is going to be the case. It does not look good.
Experience in China's vast hinterland also can give Chinese companies an edge when selling to "the South". Unreliable power, broken A/C, lack of local skilled repair people led companies like Huawei to start off with rugged, low cost, easy to install products that meet third world needs. This is in their DNA and gives them an edge when selling in today's most rapidly developing markets in Africa and South Asia.
I like your Substack because you're an optimist. I can't be optimistic in a world where the current Chinese government is in a dominating position. However, I believe that you underrated the internal disruption caused by the swing to neo-Maoism. Having politically"safe" managers, rather than economically knowledgeable, seems like a recipe for stagnation. It will be even more disruptive than American manufacturing being dominated by financial experts.
It's mentioned in the first section but it seems very important how far into a cold war things slide. Because if things becoming truly hostile then the number of industries China will dominate will be the same as the number of industries the USSR dominated, zero. Not that there will not be major industries in China. Just that these cannot dominate globally as they won't have access to a majority of global markets.
I think it is also worth considering that dominance of industries at a global level in cars and semiconductors has tended to be fleeting. Japan's peaks in both industries are may be analogous to where China is now. Of course there is a complicated question of whether that was due to specific factors that won't be replicated, or a more general process that counteracts single countries dominating an industry for extended periods.
Personally, I'd bet on China heading towards lost decade territory with erosion of dominance in most industries. Domestic trends, which seem difficult to reverse, all seem to be pushing towards reduced export competitiveness.
Don't the reasons that are allowing China to be poised to dominate EV's and other of these emerging industries also mean that the US and the "free world order" could catch up quickly? Also, couldn't we be aggressive in stealing the engineering talant away from China? Maybe I'm too polyanna here but I see opportunities if we get our act together. As mentioned in several other posts, solidifying ties between the US and India seems crucial. I have no expertise in any of these areas, but it seems to me that it's possible the US may be able to change its ways and become more aggressive as it switches roles with China and starts becoming the underdog.
China has a massive, long-term demographic problem because of a generations-long One Child policy. It also has thousands of unemployed, educated engineers, who refer to themselves as “ghosts.” Li-ion batteries with 40-100% more energy density via silicon anodes and technology that prevents thermal runway are in production in the U.S. and soon in a PAC-Rim country. Every conventional Li-ion battery has a significant risk of thermal runway. Just ask the NYFD. Cheap Chinese batteries have flooded various markets (e.g., e-bikes, battery packs for charging mobile devices, etc). As you say, labor is the key component in the long-term. This is why I don’t think China will invade Taiwan. Russia is an example that won’t be lost on China. If you’re short of enough working-age people, you certainly don’t want to sacrifice them in a regional war, or have them choose to flee to other countries because they’re more interested in pursuing education instead of combat. Chinese students aspire to attend American universities. It doesn’t mean they’ll remain in the U.S. But the U.S. needs more young, educated engineers, so there’s no shortage of incentives. Finally, housing is unaffordable for young workers in China. Living with your aging parents doesn’t encourage having children, forming new families. Demographics is destiny, and both China and Russia are not doing well in this area. Poland, an EU success story, was happy to take in two million young, educated, and talented Russian refugees.
I have come to the conclusion that some developed democracies need something like an SEZ if they want to maintain internal manufacturing supply chain. A fairly large geographical area where it’s very easy to build and very easy to hire from anywhere. Think Texas meets Shenzhen. Would love to see Noah’s take on this.
China's coming dominance in electric motors and batteries will also give it a big advantage in electric aviation. Electric planes will initially be expensive until battery costs drop. But they'll have significantly lower maintenance and energy costs, not to mention simpler airports. Shorter runways, quieter traffic, no fuel depots—these will be extremely attractive to the secondary cities that lost out on the high-speed train lottery.
China has a) lots of people who want simpler and faster travel b) a big country with complicated geography and lots of destinations c) the engineering expertise and d) maybe most significant, a light-speed permitting system that allows a gigafactory to go up in 9 months instead of 2 years and change for Berlin.
By contrast, the West is being told to wait by Boeing and Airbus, who have no interest in hurting their profits. And think how long it will take for a commercial airliner to be approved. Or the hurdles involved in building new airports, because again, legacy will be very protective of their routes.
First mover advantage will be tremendous. Now, does a China that can dominate road and air travel really want to go its own way? Why?
This seems to be somewhat in contrast to your Jan 9 substack "China's Industrial policy has been a flop".
You make a good argument that China will be major player with name brand companies in certain industries such as EV's. China's ability to "dominate" will be seriously hamstrung by Xi's current policies that make China a bully and aggressor especially to Asian neighbors. Current policies stress what makes China militarily strong and a world power at the expense of increasing the well being of average consumer and citizen. Amazing progress but if China had truly chose to be a partner in the democratic world order then dominance would be a matter of when not if.
For people who say hey it not China it the US that the problem please see Hong Kong.
Yasheng Huang (Capitalism with Chinese Characteristics) has a new book in the works (Princeton University Press) in re how China failed to carry forward its advanced technologies in the 17th Century. China have the world paper/printing, the compass, and gunpowder. Chinese sails to Africa centuries before Spain, Portugal, and The Netherlands took to the sea. Yet, its political system failed to maintain its technological advantages. Huang points out that China has has six leaders since 1976, all of them protégés of Mao or Deng. None of them has the charisma or the talent to lead China forward. Deng created the conditions for China to rise as the workshop of the world. Now, demographic disadvantages and the middle-income trap are the ball-and-chain on China for two generations, if not more. If we think realigning or disrupting the supply chain is inflationary, it will look like a nothing burger if China invades Taiwan. This is not to say China won’t make this mistake. Maybe it will fall on its sword. But China depends on the outside world for food and energy. It has no international network of military bases and can’t provision its ships more than 1,000 nautical miles. It has a couple of sandboxes in the South China Sea, but it’s at the end of its tether beyond that International water.
Hey Noah. Yes. This is what’s most intereting to myself:
“In future posts, I’ll try to pull together some ideas about how the developed democracies can respond to those advantages”
- what can the US do. Realistically.
https://www.visualcapitalist.com/vintage-viz-chinas-export-economy-in-the-early-20th-century/?utm_source=Visual+Capitalist+Infographics+%28All%29&utm_campaign=b32efa20cb-EMAIL_CAMPAIGN_2023_03_11&utm_medium=email&utm_term=0_31b4d09e8a-b32efa20cb-44045021&mc_cid=b32efa20cb&mc_eid=097e07f767
I think you're taking too mechanistic of a take here, Noah. The notion that either bloc (China or West) would dominate specific industries is certainly valid in a globalized world, but not completely valid in a "friendshored" one.
“It [is] much cheaper to make and trade for what you want than to build military power and spill the blood of your own people in order to extract it from others.”
-- Norman Angell, The Great Illusion (1909)
This tells me that the US and Europe should be aggressively courting African, Indian and Latin American nations to get their students to come to the West to learn. This can help counter the population advantages.
All true. But top-down centralized systems are capable of doing long-term damage. Japan evolved to a democracy. I think Deng was the kind of leader that comes along once in a century. A polar opposite of Mao, Deng opened China to the world again. His successor seems determined to sacrifice this openness for a relatively small gain: Taiwan. Putin is making the same mistake with Ukraine. Again, China has no network of military bases throughout the world, a function of centuries of a closed society. Time is the ultimate critic.