1 00:00:08,840 --> 00:00:12,440 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:12,480 --> 00:00:18,320 Speaker 1: I'm Joel and I'm Tracy Alloway. So, Tracy, I think, um, 3 00:00:18,320 --> 00:00:21,960 Speaker 1: you know, we're obviously in the midst of this ongoing 4 00:00:22,160 --> 00:00:27,600 Speaker 1: trade dispute between US and China. Lots of big questions 5 00:00:27,600 --> 00:00:31,360 Speaker 1: about what's going to happen there. We talked with Brad 6 00:00:31,440 --> 00:00:35,239 Speaker 1: Setser a few weeks ago about this topic, but it's 7 00:00:35,280 --> 00:00:37,319 Speaker 1: such a big topic. I feel like there's a lot 8 00:00:37,320 --> 00:00:40,199 Speaker 1: more to cover. Yeah, I I totally agree with you. 9 00:00:40,280 --> 00:00:42,400 Speaker 1: I remember when we spoke to Brad, there was one 10 00:00:42,560 --> 00:00:46,120 Speaker 1: section in particular of US China trade relations that you 11 00:00:46,159 --> 00:00:50,760 Speaker 1: were quite interested in, which was the intellectual property proportion. 12 00:00:50,840 --> 00:00:53,559 Speaker 1: And the US is always accusing China of trying to 13 00:00:53,640 --> 00:00:58,440 Speaker 1: steal its technological expertise or it's intellectual property. Meanwhile, China 14 00:00:58,520 --> 00:01:01,840 Speaker 1: is always saying that it's trying to cultivate its own 15 00:01:02,000 --> 00:01:06,400 Speaker 1: home grown expertise. Yeah, and I think that this trade 16 00:01:06,480 --> 00:01:10,000 Speaker 1: dispute is probably one of the first times that the 17 00:01:10,040 --> 00:01:13,080 Speaker 1: American public, to the extent that the American public is 18 00:01:13,080 --> 00:01:16,560 Speaker 1: paying attention to trade disputes, is really learning about the 19 00:01:16,600 --> 00:01:21,000 Speaker 1: full extent of China's ambitions to be a real global 20 00:01:21,200 --> 00:01:24,400 Speaker 1: leader in many high tech industries, and that there is 21 00:01:24,440 --> 00:01:29,679 Speaker 1: a very extensive plan in place to really get ahead 22 00:01:29,720 --> 00:01:32,160 Speaker 1: from at least where they are right now. Well, I guess, 23 00:01:32,200 --> 00:01:35,200 Speaker 1: to be fair, you wouldn't expect much else from a 24 00:01:35,280 --> 00:01:39,360 Speaker 1: centrally planned economy, right, I mean, people talk about China liberalizing, 25 00:01:39,360 --> 00:01:42,080 Speaker 1: but at its heart it's still very much a sort 26 00:01:42,120 --> 00:01:45,520 Speaker 1: of command economy with a huge degree of power coming 27 00:01:45,600 --> 00:01:49,960 Speaker 1: from the ruling class. I guess, yeah, And I think 28 00:01:50,000 --> 00:01:52,120 Speaker 1: that's exactly right. And of course there're gonna be a 29 00:01:52,160 --> 00:01:56,240 Speaker 1: lot of people who question whether a centrally planned economy 30 00:01:56,360 --> 00:02:00,840 Speaker 1: really can be an innovative leader. I think in technologies 31 00:02:00,920 --> 00:02:03,840 Speaker 1: we often sort of I think we sort of associate 32 00:02:04,480 --> 00:02:10,400 Speaker 1: innovation with free market capitalism quite a bit, and China 33 00:02:10,560 --> 00:02:13,639 Speaker 1: is perhaps trying to show that there is another model 34 00:02:13,680 --> 00:02:15,799 Speaker 1: for how you can get there, well, not just free 35 00:02:15,840 --> 00:02:19,240 Speaker 1: market capitalism. You think of technological innovation, you think sort 36 00:02:19,280 --> 00:02:22,640 Speaker 1: of the Silicon Valley model, right, A bunch of guys 37 00:02:22,680 --> 00:02:25,480 Speaker 1: sort of sat in a garage somewhere coming up with 38 00:02:25,520 --> 00:02:29,560 Speaker 1: brilliant ideas, and because of the way our economy is structured, 39 00:02:29,600 --> 00:02:32,800 Speaker 1: they're allowed to act on those ideas and eventually build 40 00:02:32,840 --> 00:02:37,560 Speaker 1: successful businesses. So it's almost a cultural difference. I guess yeah. 41 00:02:37,680 --> 00:02:40,520 Speaker 1: I think that's well put. So anyway, today we're going 42 00:02:40,560 --> 00:02:42,799 Speaker 1: to be talking to someone who is actually one of 43 00:02:42,840 --> 00:02:46,600 Speaker 1: the first people to introduce me to this idea, and 44 00:02:46,680 --> 00:02:49,640 Speaker 1: so I'm very excited to talk to him. He's Dan Wong. 45 00:02:49,840 --> 00:02:53,880 Speaker 1: He is a analyst at gav quel Dragon Omics. He's 46 00:02:53,919 --> 00:02:57,120 Speaker 1: a technology analyst based in Hong Kong there and he 47 00:02:57,240 --> 00:03:01,120 Speaker 1: has been following China's ambitions to really grow its own 48 00:03:01,160 --> 00:03:11,200 Speaker 1: homegrown technology sector for a while and he joined us. Now, hey, damn, 49 00:03:11,240 --> 00:03:13,679 Speaker 1: thanks for joining us. Hey guys, thanks for having me on. 50 00:03:14,720 --> 00:03:18,240 Speaker 1: So let's start with the big picture. What is the 51 00:03:18,840 --> 00:03:23,760 Speaker 1: Made in China initiatives? Sure thing so Made in China 52 00:03:25,120 --> 00:03:29,600 Speaker 1: is a comprehensive industrial upgrading plan that the government unfailed 53 00:03:30,240 --> 00:03:34,440 Speaker 1: three years ago. Its targets about twenty different technologies for 54 00:03:34,720 --> 00:03:42,040 Speaker 1: broad technological leadership. These include things like semiconductors, telecom equipment, robotics, 55 00:03:42,080 --> 00:03:47,200 Speaker 1: electric vehicles, medical devices and pharmaceuticals, aviation equipment, and a 56 00:03:47,240 --> 00:03:49,880 Speaker 1: whole bunch of other things. To make it happen, that 57 00:03:50,400 --> 00:03:54,000 Speaker 1: the Chinese government is offering an enormous amount of credit, 58 00:03:54,080 --> 00:03:58,600 Speaker 1: subsidies and policy support to make it all work. So, 59 00:03:59,080 --> 00:04:02,120 Speaker 1: just to be clear, we think of a lot of 60 00:04:02,320 --> 00:04:07,080 Speaker 1: high tech manufacturing already happening in China. US tech giants 61 00:04:07,120 --> 00:04:11,920 Speaker 1: like Apple obviously work with big Chinese tech companies to 62 00:04:12,000 --> 00:04:15,560 Speaker 1: assemble their iPhones. But I guess the idea is that 63 00:04:15,600 --> 00:04:18,359 Speaker 1: a lot of that is sort of still pretty low 64 00:04:18,400 --> 00:04:21,880 Speaker 1: on the value chain labor type stuff, and that the 65 00:04:21,960 --> 00:04:25,880 Speaker 1: real innovative stuff on things like semiconductors that you mentioned, 66 00:04:26,120 --> 00:04:29,839 Speaker 1: that's still not really happening in China. Yeah, that's right. 67 00:04:30,360 --> 00:04:34,159 Speaker 1: So basically, the further downstream you go, the more that 68 00:04:34,279 --> 00:04:38,440 Speaker 1: China looks pretty innovative. So Chinese companies have become pretty 69 00:04:38,440 --> 00:04:44,240 Speaker 1: good at making consumer goods and offering fun our retail experiences. 70 00:04:44,960 --> 00:04:48,040 Speaker 1: China is also the only country aside from the US 71 00:04:48,120 --> 00:04:51,520 Speaker 1: to have built big internet companies, namely ten Cent and 72 00:04:51,680 --> 00:04:54,520 Speaker 1: Ali Baba. I used to work in Silicon Valley, and 73 00:04:54,600 --> 00:04:57,279 Speaker 1: the level of dynamism I observed in the tech scenes 74 00:04:57,320 --> 00:05:01,000 Speaker 1: of Beijing and Shinjen our justice and pressive as what 75 00:05:01,120 --> 00:05:04,600 Speaker 1: I saw when I worked in California. But basically, if 76 00:05:04,600 --> 00:05:07,880 Speaker 1: you look a little bit more upstream at what the 77 00:05:08,480 --> 00:05:13,520 Speaker 1: at the more upstream segments of China's technology foundations, it's 78 00:05:13,560 --> 00:05:17,120 Speaker 1: really quite weak. So China is pretty heavily dependent on 79 00:05:17,240 --> 00:05:22,880 Speaker 1: other countries for semiconductors, airplanes, machinery goods, and many other things. 80 00:05:23,800 --> 00:05:26,159 Speaker 1: So I'm glad you brought up the iPhone. So the 81 00:05:26,200 --> 00:05:30,040 Speaker 1: full value of an iPhone is booked as a Chinese export, 82 00:05:30,360 --> 00:05:33,120 Speaker 1: but only about ten percent of the value added was 83 00:05:33,200 --> 00:05:37,160 Speaker 1: actually generated in China. So that means it's the value 84 00:05:37,200 --> 00:05:39,960 Speaker 1: of the labor used in assembling the phone and a 85 00:05:40,000 --> 00:05:43,800 Speaker 1: few of the components. But the most important technologies are 86 00:05:43,839 --> 00:05:47,320 Speaker 1: not actually Chinese. The processor for the phone is coming 87 00:05:47,320 --> 00:05:50,599 Speaker 1: from Taiwan, the memory chips are coming from Korea, the 88 00:05:50,680 --> 00:05:54,000 Speaker 1: screen from Korea, and so on. So China would be 89 00:05:54,080 --> 00:05:57,839 Speaker 1: much happier if the value added generated in the country 90 00:05:58,240 --> 00:06:01,800 Speaker 1: actually approaches little closer to the full value of the 91 00:06:01,800 --> 00:06:03,880 Speaker 1: iPhone export. And so I think that's a good way 92 00:06:03,920 --> 00:06:08,600 Speaker 1: of seeing what is about So jan why are they 93 00:06:08,760 --> 00:06:13,039 Speaker 1: focused on these particular technologies, because I guess the law 94 00:06:13,160 --> 00:06:16,320 Speaker 1: of comparative advantage in economics would suggest that they should 95 00:06:16,400 --> 00:06:19,320 Speaker 1: keep doing what they've been doing, what they're good at 96 00:06:19,520 --> 00:06:22,240 Speaker 1: um and instead they're they're clearly trying to branch out 97 00:06:22,240 --> 00:06:24,800 Speaker 1: into things that they haven't done before, So why is 98 00:06:24,839 --> 00:06:28,799 Speaker 1: that sure? So I think there are three big reasons 99 00:06:29,000 --> 00:06:33,520 Speaker 1: that China is trying to do made in China. First 100 00:06:33,560 --> 00:06:36,080 Speaker 1: of all, the GDP per capita is now close to 101 00:06:36,120 --> 00:06:39,080 Speaker 1: about ten thousand dollars and at that level it's close 102 00:06:39,120 --> 00:06:42,919 Speaker 1: to middle income status defined by the World Bank. And 103 00:06:42,960 --> 00:06:45,040 Speaker 1: the World Bank has also come up with this concept 104 00:06:45,080 --> 00:06:48,479 Speaker 1: called the middle income trap, which is a fairly common 105 00:06:48,680 --> 00:06:51,960 Speaker 1: term that you can see in the domestic media, and 106 00:06:52,080 --> 00:06:55,160 Speaker 1: the middle income trap in the original World Bank formulation 107 00:06:55,560 --> 00:06:59,159 Speaker 1: outlines the problem in industrializing country faces when it gets 108 00:06:59,160 --> 00:07:03,320 Speaker 1: squeezed tween poorer countries which have cheap labor and richer 109 00:07:03,360 --> 00:07:07,600 Speaker 1: countries which have advanced technologies. So only a small handful 110 00:07:07,640 --> 00:07:09,880 Speaker 1: of countries have managed to pull out of the middle 111 00:07:09,920 --> 00:07:13,800 Speaker 1: income trap, and China is really obsessed with leaving it. Japan, 112 00:07:13,960 --> 00:07:17,240 Speaker 1: South Korea, and Taiwan each managed to escape the middle 113 00:07:17,280 --> 00:07:21,720 Speaker 1: income trap by climbing various technological pinnacles, almost always with 114 00:07:21,760 --> 00:07:25,640 Speaker 1: the help of the state, and is the Chinese government's 115 00:07:25,680 --> 00:07:31,840 Speaker 1: plan to climb a bunch of related or different technological pinnacles. 116 00:07:31,840 --> 00:07:34,400 Speaker 1: So that's one reason that China wants to do this. 117 00:07:35,360 --> 00:07:39,760 Speaker 1: A second element is there's this bit of economic security 118 00:07:39,840 --> 00:07:43,080 Speaker 1: and its concerns. So a fairly salient data point that 119 00:07:43,160 --> 00:07:47,200 Speaker 1: shows how dependent China is on foreign technologies is that 120 00:07:47,320 --> 00:07:50,720 Speaker 1: every year it imports more semiconductors by value than it 121 00:07:50,760 --> 00:07:53,840 Speaker 1: does crude oil. Now, some countries go to pretty great 122 00:07:53,880 --> 00:07:57,040 Speaker 1: lens to secure their supply of oil, and China wants 123 00:07:57,080 --> 00:08:02,200 Speaker 1: to secure its supply of semiconductors by creating strong domestic companies. 124 00:08:02,880 --> 00:08:06,600 Speaker 1: And third, there's this national security element to it as well. 125 00:08:06,880 --> 00:08:10,760 Speaker 1: When I talk to Chinese, a name keeps coming up Snowden. 126 00:08:11,480 --> 00:08:14,800 Speaker 1: So the Snowden documents revealed that, you know, the US 127 00:08:14,840 --> 00:08:19,960 Speaker 1: tech companies have been fairly cozy with the US government. Uh, 128 00:08:20,000 --> 00:08:24,040 Speaker 1: And China's importing hundreds of billions of dollars worth of 129 00:08:24,280 --> 00:08:27,080 Speaker 1: American semiconductors every year, and it doesn't want to be 130 00:08:27,960 --> 00:08:31,520 Speaker 1: spied on because it has to import these things. It's 131 00:08:31,520 --> 00:08:35,320 Speaker 1: funny because obviously a big source of anxiety here these 132 00:08:35,400 --> 00:08:39,520 Speaker 1: days is the fear of being spied on with goods 133 00:08:39,559 --> 00:08:43,400 Speaker 1: that the US imports from China or Russia. So interesting 134 00:08:44,000 --> 00:08:46,640 Speaker 1: that it the anxiety goes in both directions, though, I 135 00:08:46,640 --> 00:08:50,080 Speaker 1: guess that's just sort of perhaps to be expected. All right, 136 00:08:50,120 --> 00:08:54,520 Speaker 1: let's talk about the mechanics that the government is actually 137 00:08:54,840 --> 00:08:59,840 Speaker 1: using to foster this technological leap forward. How does it 138 00:09:00,080 --> 00:09:03,560 Speaker 1: allocate resources or know how much to invest and say, 139 00:09:03,800 --> 00:09:08,600 Speaker 1: semiconductors versus medical equipment versus wide body planes. What does 140 00:09:08,679 --> 00:09:12,679 Speaker 1: it do specifically and how does it make those decisions? Sure, 141 00:09:13,480 --> 00:09:17,320 Speaker 1: so it's trying to catch up to the technological frontier, UH, 142 00:09:17,360 --> 00:09:20,600 Speaker 1: and to do so, I think you need at least 143 00:09:20,679 --> 00:09:25,320 Speaker 1: three things. One of that is money, another is I 144 00:09:25,520 --> 00:09:29,439 Speaker 1: P the technology, and the third is this process knowledge 145 00:09:29,559 --> 00:09:33,520 Speaker 1: or what we can also call tacit knowledge managerial expertise 146 00:09:34,040 --> 00:09:37,240 Speaker 1: or no. How So, if we look at each of 147 00:09:37,240 --> 00:09:40,520 Speaker 1: these segments, we can pretty much assume that money is 148 00:09:40,559 --> 00:09:42,640 Speaker 1: not going to be a problem. The state is going 149 00:09:42,679 --> 00:09:44,880 Speaker 1: to be UH is going to provide a lot of 150 00:09:45,040 --> 00:09:48,400 Speaker 1: credit subsidies to build up these industries. There's a lot 151 00:09:48,400 --> 00:09:51,319 Speaker 1: of figures we see floating around, some as high as 152 00:09:51,400 --> 00:09:54,400 Speaker 1: three hundred billion US dollars that the that the government 153 00:09:54,440 --> 00:09:58,120 Speaker 1: is willing to spend on this and about hundred thirty 154 00:09:58,120 --> 00:10:01,600 Speaker 1: billion dollars. So that is e R MAR for semiconductors alone, 155 00:10:01,920 --> 00:10:04,440 Speaker 1: and that's just from the government. There will be private 156 00:10:04,480 --> 00:10:08,199 Speaker 1: funds that will invest too. The second element when you 157 00:10:08,440 --> 00:10:11,520 Speaker 1: look at technology of China trying to acquire I P. 158 00:10:11,960 --> 00:10:13,800 Speaker 1: I think the best thing to read on this is 159 00:10:13,880 --> 00:10:17,600 Speaker 1: the U s TRS Section three or one report. It 160 00:10:17,840 --> 00:10:21,720 Speaker 1: prepares a pretty comprehensive case of all the ways that 161 00:10:21,840 --> 00:10:25,480 Speaker 1: China tries to obtain technology UH. These include trying to 162 00:10:25,559 --> 00:10:31,240 Speaker 1: venture requirements for foreign firms, compulsory licensing schemes, administrative demands 163 00:10:31,240 --> 00:10:35,560 Speaker 1: for technology transfer, strategic overseas investments, and what the U 164 00:10:35,600 --> 00:10:40,400 Speaker 1: s TR calls unauthorized cyber intrusions. And finally, in terms 165 00:10:40,400 --> 00:10:43,400 Speaker 1: of know how, which is the knowledge that exists in 166 00:10:43,440 --> 00:10:46,600 Speaker 1: people's heads that are hard to write down and actually 167 00:10:46,640 --> 00:10:49,840 Speaker 1: give as instructions. China has been fairly active in trying 168 00:10:49,880 --> 00:10:53,760 Speaker 1: to recruit people from overseas to share expertise. A lot 169 00:10:53,800 --> 00:10:56,439 Speaker 1: of this involves trying to get overseas Chinese to move 170 00:10:56,520 --> 00:11:00,000 Speaker 1: to China, but they also try to hire foreigners from 171 00:11:00,320 --> 00:11:03,520 Speaker 1: all parts of the world. So is it easier or 172 00:11:03,640 --> 00:11:06,400 Speaker 1: is it better to be able to sort of buy 173 00:11:06,840 --> 00:11:10,080 Speaker 1: a tech industry like that or create a tech industry 174 00:11:10,120 --> 00:11:14,080 Speaker 1: like that with this sort of centralized planning versus what 175 00:11:14,120 --> 00:11:18,240 Speaker 1: we've seen in Western countries where the tech industry sort 176 00:11:18,280 --> 00:11:22,480 Speaker 1: of grows up in some cases relatively natural, Like what 177 00:11:22,520 --> 00:11:26,480 Speaker 1: are the differences between those two industries. So I think 178 00:11:26,520 --> 00:11:29,360 Speaker 1: the big thing to keep in mind is that China 179 00:11:29,440 --> 00:11:33,000 Speaker 1: is trying to catch up to the technological frontier for 180 00:11:33,120 --> 00:11:35,480 Speaker 1: most of these things. There are a few of its 181 00:11:35,559 --> 00:11:39,280 Speaker 1: technologies which seem to be at the technological frontier, and 182 00:11:39,320 --> 00:11:42,760 Speaker 1: so these things would include I would say solar panels, 183 00:11:43,160 --> 00:11:46,959 Speaker 1: telecom equipment, high speed rail, and wind turbines. China seems 184 00:11:46,960 --> 00:11:50,000 Speaker 1: to be already fairly advanced in all of these before 185 00:11:50,000 --> 00:11:55,600 Speaker 1: all the rest things like semiconductors, aviation equipment, pharmaceuticals. China 186 00:11:55,640 --> 00:12:00,160 Speaker 1: is trying to follow a path that another country or 187 00:12:00,280 --> 00:12:05,280 Speaker 1: company has already plazed. So in terms of trying to 188 00:12:05,360 --> 00:12:09,839 Speaker 1: just basically reach what the what the what the technological 189 00:12:09,840 --> 00:12:12,400 Speaker 1: front here is today, I think that's that that that 190 00:12:12,520 --> 00:12:16,200 Speaker 1: is kind of a almost a qualitative difference with UH, 191 00:12:16,200 --> 00:12:20,240 Speaker 1: this sustained innovation that we see UH in in the 192 00:12:20,360 --> 00:12:26,760 Speaker 1: US of just incrementally pushing that technological frontier forward. I'm 193 00:12:26,760 --> 00:12:30,400 Speaker 1: so curious about the specifics of the resource allocation. So 194 00:12:30,440 --> 00:12:34,800 Speaker 1: you mentioned a hundred and thirty billion dollars to invest 195 00:12:34,960 --> 00:12:38,760 Speaker 1: in UH semiconductor development, But who gets the money other 196 00:12:39,240 --> 00:12:42,960 Speaker 1: startups that apply for grants? Are there existing state owned 197 00:12:42,960 --> 00:12:46,280 Speaker 1: companies that then launched semiconductor units, how do they actually 198 00:12:46,320 --> 00:12:49,400 Speaker 1: go and go about allocating it? And then you know, 199 00:12:49,440 --> 00:12:53,400 Speaker 1: I assume it goes to multiple companies. Who decides who's 200 00:12:53,520 --> 00:12:56,480 Speaker 1: leading the way and then gets further allocation, and then 201 00:12:56,520 --> 00:12:59,199 Speaker 1: who decides you know, you're not cutting it. This project 202 00:12:59,280 --> 00:13:01,320 Speaker 1: isn't going anywhere because I think in a lot of 203 00:13:01,360 --> 00:13:04,800 Speaker 1: people's minds, this is where they see the free market 204 00:13:04,880 --> 00:13:07,800 Speaker 1: doing a good job of, in theory, figuring out the 205 00:13:07,840 --> 00:13:10,839 Speaker 1: winners and losers and allocating more to the winners. So 206 00:13:10,880 --> 00:13:16,160 Speaker 1: how does China solve that problem? So pretty much this 207 00:13:16,280 --> 00:13:21,199 Speaker 1: is um pretty much entirely decided by the state. So 208 00:13:21,320 --> 00:13:25,520 Speaker 1: China has a bunch of money available. Some of it 209 00:13:25,520 --> 00:13:30,880 Speaker 1: it will allocate to some of the existing semiconductor foundries 210 00:13:31,040 --> 00:13:35,480 Speaker 1: fabs that have already been around, and then some of 211 00:13:35,520 --> 00:13:39,640 Speaker 1: it will go towards just totally fresh efforts. So, for example, 212 00:13:39,800 --> 00:13:43,840 Speaker 1: China basically has not done UH, does not have much 213 00:13:43,880 --> 00:13:47,200 Speaker 1: of a position in making memory chips at all, and 214 00:13:47,280 --> 00:13:51,600 Speaker 1: so the government basically decided to put something like UH 215 00:13:51,760 --> 00:13:57,079 Speaker 1: thirty to forty billion dollars between these UH four different 216 00:13:57,600 --> 00:14:03,319 Speaker 1: semiconductor fabs in Central China, So these were fresh efforts. 217 00:14:03,800 --> 00:14:07,959 Speaker 1: The process of which city would get a memory fab 218 00:14:08,400 --> 00:14:12,600 Speaker 1: was not entirely transparent. They're dispersed across a couple of 219 00:14:13,040 --> 00:14:17,240 Speaker 1: big cities in central China, and they were they were 220 00:14:17,280 --> 00:14:20,000 Speaker 1: given this money from the central government, from the from 221 00:14:20,000 --> 00:14:23,520 Speaker 1: the local government, from the provincial government, and also from 222 00:14:23,720 --> 00:14:27,320 Speaker 1: other state owned companies. So these things are not super transparent, 223 00:14:27,480 --> 00:14:30,960 Speaker 1: and it's probably correct to suspect that a lot of 224 00:14:30,960 --> 00:14:34,200 Speaker 1: this is driven by political connections. And that's just in 225 00:14:34,240 --> 00:14:38,280 Speaker 1: the case of semiconductors. So if in seven years time 226 00:14:38,640 --> 00:14:41,880 Speaker 1: we wake up and China has built a world class 227 00:14:41,880 --> 00:14:46,040 Speaker 1: semiconductor industry, is that going to discredit the sort of 228 00:14:46,120 --> 00:14:50,280 Speaker 1: western um pre economy way of doing things. Does that 229 00:14:50,360 --> 00:14:53,480 Speaker 1: suggest that maybe the Chinese model is correct. I'm not 230 00:14:53,520 --> 00:14:56,960 Speaker 1: sure that it does. I think that if China manages 231 00:14:57,000 --> 00:15:01,720 Speaker 1: to catch up, basically, UH, this be another case of 232 00:15:02,360 --> 00:15:06,400 Speaker 1: there is some success of protectionism. Basically, if you look 233 00:15:06,440 --> 00:15:12,920 Speaker 1: at every country that has industrialized after Britain, did the US, Germany, Meiji, Japan, 234 00:15:13,240 --> 00:15:17,840 Speaker 1: uh and UH. More recently, the East Asian countries. They 235 00:15:17,880 --> 00:15:23,080 Speaker 1: each built their industries with some level of teriff protections, 236 00:15:23,360 --> 00:15:28,680 Speaker 1: teriff protections, some level of government support, some level of 237 00:15:29,160 --> 00:15:34,640 Speaker 1: trying to acquire technologies from overseas and plowing state subsidies, 238 00:15:35,240 --> 00:15:38,720 Speaker 1: especially in more recent times, plowing state subsidies into trying 239 00:15:38,760 --> 00:15:41,520 Speaker 1: to build to try to catch up to the technological 240 00:15:41,520 --> 00:15:44,720 Speaker 1: front here. And that's pretty much what China is doing. 241 00:15:45,160 --> 00:15:48,640 Speaker 1: China has taken a look at basically the memory industry 242 00:15:48,720 --> 00:15:52,640 Speaker 1: is pretty interesting. Actually, uh memory was in d RAM 243 00:15:52,720 --> 00:15:57,280 Speaker 1: was invented by this small American company named Intel. The 244 00:15:57,400 --> 00:16:00,760 Speaker 1: US got pretty good at making d RAM. Japan took 245 00:16:00,800 --> 00:16:03,200 Speaker 1: a look at memory, thought that it could do it 246 00:16:03,240 --> 00:16:06,160 Speaker 1: as well, built up its memory industry, turned out to 247 00:16:06,160 --> 00:16:09,920 Speaker 1: be pretty successful, mostly drove US players out of business. 248 00:16:10,400 --> 00:16:13,160 Speaker 1: And then the Koreans did pretty much exactly the same 249 00:16:13,160 --> 00:16:15,640 Speaker 1: things to Japan, and Taiwan also tried to do this 250 00:16:15,680 --> 00:16:19,080 Speaker 1: to Korea. So at least in memory chips, at least 251 00:16:19,400 --> 00:16:23,560 Speaker 1: we see that there is this progression of leadership helped 252 00:16:23,600 --> 00:16:27,560 Speaker 1: by different countries. Right now, it's been Korea has continued 253 00:16:27,600 --> 00:16:30,720 Speaker 1: to be the leader in making memory chips, and China 254 00:16:30,760 --> 00:16:35,280 Speaker 1: is trying to unseat to Korea as Korea and seated Japan. Yeah. 255 00:16:35,320 --> 00:16:37,960 Speaker 1: I wanted to follow up a little further and push 256 00:16:38,040 --> 00:16:41,440 Speaker 1: the question about the U S model. You mentioned you 257 00:16:41,600 --> 00:16:45,040 Speaker 1: used to work in Silicon Valley. Is there a myth 258 00:16:45,120 --> 00:16:47,560 Speaker 1: that we have about Silicon Valley that's incorrect where we 259 00:16:47,560 --> 00:16:51,800 Speaker 1: imagine all these people toiling away and their garages, raising 260 00:16:51,800 --> 00:16:54,080 Speaker 1: money from friends and family and then building the next 261 00:16:54,480 --> 00:16:58,480 Speaker 1: Hewlett Packard or Intel, We're Google, and that we end 262 00:16:58,560 --> 00:17:03,920 Speaker 1: up downplaying the all that federal subsidies and federal industrial 263 00:17:04,000 --> 00:17:09,480 Speaker 1: planning or military planning played in the fostering of U 264 00:17:09,560 --> 00:17:12,679 Speaker 1: S technology. I think that's a great question, and to 265 00:17:12,800 --> 00:17:17,480 Speaker 1: some extent, Silicon Valley itself downplaced this story. I think, UH, 266 00:17:17,600 --> 00:17:22,080 Speaker 1: semiconductors were initially bootstrapped by a lot of government spending, 267 00:17:22,440 --> 00:17:26,520 Speaker 1: including for for the space program and also for the military. 268 00:17:26,600 --> 00:17:29,360 Speaker 1: So Silicon Valley, you know, silicon is in the name, 269 00:17:29,800 --> 00:17:34,520 Speaker 1: comes from semiconductors, and that was significantly bootstrapped by federal 270 00:17:34,600 --> 00:17:40,200 Speaker 1: funding UH and UH federal subsidies. UM, if we wanted 271 00:17:40,280 --> 00:17:43,320 Speaker 1: to think about, you know, what is the opposite model 272 00:17:43,480 --> 00:17:47,320 Speaker 1: of innovation UH from from Silicon Valley, I would say 273 00:17:47,359 --> 00:17:52,520 Speaker 1: something like what we see in Germany Germany has basically 274 00:17:53,160 --> 00:17:56,880 Speaker 1: a pretty strong culture of engineering that it's kept through 275 00:17:57,359 --> 00:18:02,040 Speaker 1: many decades, arguably many centuries. And I was in Germany 276 00:18:02,080 --> 00:18:04,520 Speaker 1: for a research trip a couple of weeks ago and 277 00:18:05,240 --> 00:18:10,000 Speaker 1: listening to some of them explained basically, the German model 278 00:18:10,080 --> 00:18:14,560 Speaker 1: of innovation is that they've built these systems of quality 279 00:18:14,600 --> 00:18:20,520 Speaker 1: improvement to incrementally improve their technologies. UH. They have these 280 00:18:20,520 --> 00:18:26,760 Speaker 1: systems of corporate encouragement, of vocational training, bridge between academia 281 00:18:26,800 --> 00:18:30,679 Speaker 1: and companies. UH, this very strong sense that older people 282 00:18:30,720 --> 00:18:33,960 Speaker 1: have to transfer their knowledge to the younger people. That 283 00:18:34,119 --> 00:18:36,719 Speaker 1: is kind of what we see the opposite of what 284 00:18:36,800 --> 00:18:39,679 Speaker 1: we see in Silicon Valley. Both of these places I 285 00:18:39,680 --> 00:18:43,399 Speaker 1: think are fairly innovative, but in different ways. So should 286 00:18:43,400 --> 00:18:47,360 Speaker 1: the world be at all concerned over China's plans? Here? 287 00:18:47,400 --> 00:18:50,800 Speaker 1: Over the plans, is there any reason to worry if 288 00:18:50,840 --> 00:18:55,000 Speaker 1: if they're essentially just pursuing protectionist measures that other countries 289 00:18:55,119 --> 00:18:58,240 Speaker 1: at one time or another seemed to do themselves, I 290 00:18:58,240 --> 00:19:01,040 Speaker 1: think there is a pretty good reason and to worry. 291 00:19:01,240 --> 00:19:05,280 Speaker 1: So Chinese industrial policy has created a lot of overcapacity, 292 00:19:05,440 --> 00:19:09,920 Speaker 1: for example in UH, in sectors like steel and solar panels, 293 00:19:10,480 --> 00:19:14,800 Speaker 1: over capacity crushes everyone's profits, so that might reduce aggregate 294 00:19:15,080 --> 00:19:19,960 Speaker 1: R and D spending and thereby slowing overall innovation around 295 00:19:20,000 --> 00:19:23,280 Speaker 1: the world. And I think if we take a look 296 00:19:23,280 --> 00:19:25,960 Speaker 1: a little bit more closely at the experience of high 297 00:19:25,960 --> 00:19:31,200 Speaker 1: speed rail companies, that's also another cause for concern. So UM. 298 00:19:31,320 --> 00:19:33,720 Speaker 1: When China was trying to build its high speed rail network, 299 00:19:34,280 --> 00:19:38,720 Speaker 1: there were four companies that were around to basically supply 300 00:19:38,840 --> 00:19:41,960 Speaker 1: it for high speed rail. It was Seamens of Germany, 301 00:19:42,080 --> 00:19:46,879 Speaker 1: Kawasaki Heavy Industries of Japan, Bombardier of Canada, and Austam 302 00:19:47,160 --> 00:19:50,760 Speaker 1: of France. UH. They brought their technologies to China, and 303 00:19:50,880 --> 00:19:54,960 Speaker 1: China basically was in a pretty strong negotiating position at 304 00:19:54,960 --> 00:19:58,320 Speaker 1: the time. There weren't that many other countries building high 305 00:19:58,359 --> 00:20:02,040 Speaker 1: speed rail systems, and so ch ask these companies to 306 00:20:02,119 --> 00:20:06,560 Speaker 1: transfer their technologies as a condition for accessing the Chinese market, 307 00:20:06,920 --> 00:20:09,679 Speaker 1: and these four companies basically decided that they had to 308 00:20:09,720 --> 00:20:14,440 Speaker 1: agree to transfer these technologies to domestic joint venture partners. 309 00:20:14,880 --> 00:20:19,440 Speaker 1: The domestic joint venture partners digested their technology uh the 310 00:20:19,720 --> 00:20:23,359 Speaker 1: Chinese term for for absorbing foreign technologies, and then they 311 00:20:23,400 --> 00:20:27,959 Speaker 1: out computed these companies in the Chinese domestic market. So 312 00:20:28,000 --> 00:20:33,520 Speaker 1: these foreign firms gave their technologies to um Chinese firms. Uh, 313 00:20:33,640 --> 00:20:36,399 Speaker 1: they first lost the China market, and then they had 314 00:20:36,440 --> 00:20:39,720 Speaker 1: to compete with Chinese companies in the global market. So 315 00:20:39,760 --> 00:20:43,840 Speaker 1: that's another cautionary tale that makes people nervous about the 316 00:20:43,920 --> 00:20:47,960 Speaker 1: success of And then there is this other aspect that 317 00:20:47,960 --> 00:20:52,200 Speaker 1: the US is concerned about. China's doesn't allow much reciprocity. 318 00:20:52,600 --> 00:20:55,960 Speaker 1: So China can invest in important companies of other countries, 319 00:20:56,040 --> 00:20:59,439 Speaker 1: but it doesn't allow foreign companies to really invest in 320 00:20:59,560 --> 00:21:03,200 Speaker 1: important domestic projects. It's a fairly protectionist place, and it's 321 00:21:03,240 --> 00:21:08,119 Speaker 1: not a level playing field. You mentioned the overcapacity issue. 322 00:21:08,200 --> 00:21:11,600 Speaker 1: The flip side is that for many of the things 323 00:21:11,640 --> 00:21:14,960 Speaker 1: that China is building, there could be tremendous benefit to 324 00:21:15,040 --> 00:21:18,560 Speaker 1: the consumers of those good So one area that comes 325 00:21:18,560 --> 00:21:22,160 Speaker 1: to mind in recent years is the incredible collapse we've 326 00:21:22,160 --> 00:21:25,399 Speaker 1: seen in the cost of solar panels all around the world. 327 00:21:25,960 --> 00:21:29,760 Speaker 1: The estimate for when solar would reach price parity with 328 00:21:29,840 --> 00:21:34,480 Speaker 1: other energy technologies have all proven to be way too pessimistic, 329 00:21:34,520 --> 00:21:37,640 Speaker 1: and solar prices continue to plunge much faster than people expect. 330 00:21:38,200 --> 00:21:42,080 Speaker 1: And that's a theoretically benefit too many people around the world. 331 00:21:42,240 --> 00:21:46,680 Speaker 1: And uh sort of Chinese industrial policy has played a 332 00:21:46,720 --> 00:21:49,359 Speaker 1: big role in that. Yeah, I think that's a pretty 333 00:21:49,359 --> 00:21:52,720 Speaker 1: good example. If solar panels are really good for the environment, 334 00:21:52,880 --> 00:21:55,680 Speaker 1: then this could be something that people can be glad about. 335 00:21:56,400 --> 00:22:00,960 Speaker 1: And I think it's also possible that can be good 336 00:22:01,000 --> 00:22:04,960 Speaker 1: for the world more broadly because downstream businesses can benefit 337 00:22:04,960 --> 00:22:08,160 Speaker 1: a little bit. So capital goods industries tend to be 338 00:22:08,280 --> 00:22:11,960 Speaker 1: pretty consolidated. If you want to buy memory chips, basically 339 00:22:12,040 --> 00:22:16,360 Speaker 1: you only have three companies making d ram It's Samsun, SKA, 340 00:22:16,480 --> 00:22:19,840 Speaker 1: high Nes, Micron, and that's it. So I've spoken to 341 00:22:19,960 --> 00:22:22,440 Speaker 1: a smart phonemaker who told me that, you know, if 342 00:22:22,440 --> 00:22:25,680 Speaker 1: the Chinese government is willing to spend billions and subsidies 343 00:22:25,680 --> 00:22:29,639 Speaker 1: to lift Samsung's thumb from his business, uh, they're not 344 00:22:29,680 --> 00:22:33,679 Speaker 1: going to complain about that. UM aviation is famously a 345 00:22:33,760 --> 00:22:37,640 Speaker 1: duopoly between Boeing and Airbus, and many of these capital 346 00:22:37,640 --> 00:22:42,199 Speaker 1: goods industries tend to be pretty consolidated. So if Chinese 347 00:22:42,240 --> 00:22:47,520 Speaker 1: competition comes in and UH introduces a little bit more competition, Uh, 348 00:22:47,560 --> 00:22:51,400 Speaker 1: that could be good for downstream users of these technologies. 349 00:22:52,320 --> 00:22:55,600 Speaker 1: I'm curious, so looking at the list of different industries 350 00:22:56,520 --> 00:22:59,240 Speaker 1: We've talked a lot about semi conductors, but there's obviously 351 00:22:59,280 --> 00:23:04,560 Speaker 1: others include a wide body aircraft, advanced medical devices. Is 352 00:23:04,560 --> 00:23:09,240 Speaker 1: there anything that you've seen so far in how the 353 00:23:09,280 --> 00:23:13,320 Speaker 1: different industries or the different technologies have progressed that suggests 354 00:23:13,320 --> 00:23:16,199 Speaker 1: that some of this is working better than others, or 355 00:23:16,240 --> 00:23:21,400 Speaker 1: that this particular Chinese model of technological innovation might work 356 00:23:21,480 --> 00:23:24,840 Speaker 1: really well in some areas, but it has more obvious 357 00:23:25,000 --> 00:23:28,800 Speaker 1: limitations in the development of other areas. Sure, that's a 358 00:23:28,800 --> 00:23:34,080 Speaker 1: great question. UM so China has already succeeded in reaching 359 00:23:34,080 --> 00:23:36,760 Speaker 1: the technological front here in a few industries UH and 360 00:23:36,960 --> 00:23:40,879 Speaker 1: I cited solar panels, telecom equipment, high speed rail, and 361 00:23:41,000 --> 00:23:44,320 Speaker 1: wind turbans. And I think a couple of the things 362 00:23:44,400 --> 00:23:49,639 Speaker 1: that unite UH these together is one is UH the 363 00:23:50,680 --> 00:23:54,600 Speaker 1: UM nature of the buyers. So for basically all of 364 00:23:54,640 --> 00:24:00,639 Speaker 1: these midstream products, government is an important procure of these 365 00:24:00,840 --> 00:24:05,360 Speaker 1: UH different technology segments. And if government is a big procure, 366 00:24:06,080 --> 00:24:11,600 Speaker 1: you can basically have UM provinces competing amongst themselves to 367 00:24:11,680 --> 00:24:16,439 Speaker 1: get the best telecom equipment or solar panel offering from 368 00:24:16,440 --> 00:24:21,400 Speaker 1: from these different companies, and then UH, basically these companies 369 00:24:21,480 --> 00:24:24,880 Speaker 1: can get pretty good at making these technologies because there's 370 00:24:24,880 --> 00:24:28,520 Speaker 1: a lot of government procurement of their products. Another is 371 00:24:28,560 --> 00:24:32,920 Speaker 1: that these usually tend to have fairly long product cycles. 372 00:24:33,400 --> 00:24:36,520 Speaker 1: So the longer the product cycle, the easier it is 373 00:24:36,640 --> 00:24:40,119 Speaker 1: for Chinese firms to catch up to the frontier before 374 00:24:40,560 --> 00:24:44,640 Speaker 1: it moves away again. So that's another characteristic of these 375 00:24:44,640 --> 00:24:49,400 Speaker 1: different technologies. And China has had much less success trying 376 00:24:49,440 --> 00:24:54,160 Speaker 1: to build through industrial policy more downstream goods, so things 377 00:24:54,200 --> 00:24:58,440 Speaker 1: like automobiles is something that the leadership concedes has been 378 00:24:58,920 --> 00:25:01,879 Speaker 1: a fairly big earlier in terms of trying to build 379 00:25:02,240 --> 00:25:07,240 Speaker 1: homegrown companies that are making really excellent cars that are 380 00:25:07,240 --> 00:25:11,040 Speaker 1: exportable as well. So the nature of the buyers, the 381 00:25:11,119 --> 00:25:14,880 Speaker 1: product cycle, these are all factors that play into how 382 00:25:14,920 --> 00:25:21,000 Speaker 1: successful industrial policy can be. Dan, that was a fascinating conversation. 383 00:25:21,280 --> 00:25:24,040 Speaker 1: I feel like this is a going to be well 384 00:25:24,040 --> 00:25:27,400 Speaker 1: obviously a huge story for the years ahead, and regardless 385 00:25:27,400 --> 00:25:30,399 Speaker 1: of what happens with the trade talks right now, it 386 00:25:30,480 --> 00:25:33,280 Speaker 1: just seems inevitable that there's going to be so much 387 00:25:33,320 --> 00:25:37,800 Speaker 1: more interest in the progression of China on these various 388 00:25:37,800 --> 00:25:40,560 Speaker 1: technological fronts in the years ahead. So thank you very 389 00:25:40,640 --> 00:25:42,920 Speaker 1: much for joining well, thank you back. Thanks for having 390 00:25:42,960 --> 00:26:00,320 Speaker 1: me on, Tracy. I really like that conversation, and why 391 00:26:00,359 --> 00:26:03,480 Speaker 1: I liked it so much is the degree of specificity 392 00:26:03,840 --> 00:26:06,760 Speaker 1: that Dan brought to the table in terms of this stuff. 393 00:26:06,760 --> 00:26:08,720 Speaker 1: I mean, I think we sort of lots of people 394 00:26:08,960 --> 00:26:13,400 Speaker 1: maybe understand the sort of real broad strokes here about 395 00:26:13,520 --> 00:26:17,800 Speaker 1: China trying to acquire its own technology and the complaints 396 00:26:17,840 --> 00:26:21,040 Speaker 1: that other countries have about how they're forced to hand 397 00:26:21,080 --> 00:26:23,800 Speaker 1: over technology in order to compete in the market. But 398 00:26:23,920 --> 00:26:26,879 Speaker 1: it's interesting to get in the weeds and learn about 399 00:26:26,920 --> 00:26:31,359 Speaker 1: the specifics of how each industry operates in where they are. Yes, 400 00:26:31,600 --> 00:26:36,680 Speaker 1: we know all about China's ambitious plans for advanced medical equipment. 401 00:26:36,760 --> 00:26:39,280 Speaker 1: Now I feel good about that. I think you're right. 402 00:26:39,320 --> 00:26:42,159 Speaker 1: It's an important conversation. It also throws up a lot 403 00:26:42,240 --> 00:26:47,560 Speaker 1: of ideological questions around different economic models and also how 404 00:26:47,600 --> 00:26:50,560 Speaker 1: they develop, which I find really fascinating. And you know, 405 00:26:50,600 --> 00:26:55,440 Speaker 1: the notion that China is being criticized for doing something 406 00:26:55,840 --> 00:26:58,879 Speaker 1: now that a lot of developed economies had done a 407 00:26:58,960 --> 00:27:03,040 Speaker 1: hundred years ago or so. It's not really new, but 408 00:27:03,240 --> 00:27:06,320 Speaker 1: you can see it's sort of an ongoing tension in 409 00:27:06,359 --> 00:27:09,200 Speaker 1: the world economy. Yeah, and it is also a good 410 00:27:09,320 --> 00:27:13,000 Speaker 1: reminder that, yeah, as you say, it's not really new. 411 00:27:13,119 --> 00:27:17,680 Speaker 1: Every country has had its own model that is some 412 00:27:17,760 --> 00:27:23,240 Speaker 1: combination of markets and private enterprise plus state directed R 413 00:27:23,320 --> 00:27:27,280 Speaker 1: and D and subsidies. So there is a fair amount 414 00:27:27,400 --> 00:27:30,920 Speaker 1: of double standard I think in this idea that suddenly 415 00:27:31,040 --> 00:27:35,120 Speaker 1: China is doing something really terrible or really really flouting 416 00:27:35,200 --> 00:27:38,920 Speaker 1: the rules of development. Yeah, that's right. But one other 417 00:27:38,960 --> 00:27:42,320 Speaker 1: good thing about this conversation is it's only seven years until, 418 00:27:43,359 --> 00:27:46,120 Speaker 1: which is kind of fascinating. So I guess we'll get 419 00:27:46,119 --> 00:27:50,720 Speaker 1: to see the results of China's initiative here relatively soon. 420 00:27:51,000 --> 00:27:54,919 Speaker 1: I'm sure we'll still be doing odd lots in yeah, 421 00:27:54,960 --> 00:27:58,359 Speaker 1: seven years from now, and so let's schedule one for 422 00:27:58,520 --> 00:28:01,200 Speaker 1: seven years from now, and then we will will grade 423 00:28:01,240 --> 00:28:04,000 Speaker 1: them on how they did in each category. All right, 424 00:28:04,080 --> 00:28:07,240 Speaker 1: I'm putting it in my diary right now, Joe. Okay, 425 00:28:07,640 --> 00:28:10,800 Speaker 1: this has been another edition of the Odd Thoughts podcast. 426 00:28:10,840 --> 00:28:13,359 Speaker 1: I'm Tracy Allowaite. You can follow me on Twitter at 427 00:28:13,400 --> 00:28:16,679 Speaker 1: Tracy Allowhite, and I'm Joe wisn'hal. You can follow me 428 00:28:16,760 --> 00:28:20,080 Speaker 1: on Twitter at the Stalwart, and you could follow Dan 429 00:28:20,280 --> 00:28:24,960 Speaker 1: on Twitter at Dan w Wong. And you should follow 430 00:28:24,960 --> 00:28:29,000 Speaker 1: our producer top foreheads at for Hest, as well as 431 00:28:29,080 --> 00:28:34,800 Speaker 1: the bloomberg head of podcast, Francesca Levy at Francesca Today. 432 00:28:34,800 --> 00:28:35,639 Speaker 1: Thanks for listening.