WEBVTT - This Is China's Plan To Be A Technology Powerhouse By The Year 2025 0:00:08.840 --> 0:00:12.440 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:12.480 --> 0:00:18.320 I'm Joel and I'm Tracy Alloway. So, Tracy, I think, um, 0:00:18.320 --> 0:00:21.960 you know, we're obviously in the midst of this ongoing 0:00:22.160 --> 0:00:27.600 trade dispute between US and China. Lots of big questions 0:00:27.600 --> 0:00:31.360 about what's going to happen there. We talked with Brad 0:00:31.440 --> 0:00:35.239 Setser a few weeks ago about this topic, but it's 0:00:35.280 --> 0:00:37.319 such a big topic. I feel like there's a lot 0:00:37.320 --> 0:00:40.199 more to cover. Yeah, I I totally agree with you. 0:00:40.280 --> 0:00:42.400 I remember when we spoke to Brad, there was one 0:00:42.560 --> 0:00:46.120 section in particular of US China trade relations that you 0:00:46.159 --> 0:00:50.760 were quite interested in, which was the intellectual property proportion. 0:00:50.840 --> 0:00:53.559 And the US is always accusing China of trying to 0:00:53.640 --> 0:00:58.440 steal its technological expertise or it's intellectual property. Meanwhile, China 0:00:58.520 --> 0:01:01.840 is always saying that it's trying to cultivate its own 0:01:02.000 --> 0:01:06.400 home grown expertise. Yeah, and I think that this trade 0:01:06.480 --> 0:01:10.000 dispute is probably one of the first times that the 0:01:10.040 --> 0:01:13.080 American public, to the extent that the American public is 0:01:13.080 --> 0:01:16.560 paying attention to trade disputes, is really learning about the 0:01:16.600 --> 0:01:21.000 full extent of China's ambitions to be a real global 0:01:21.200 --> 0:01:24.400 leader in many high tech industries, and that there is 0:01:24.440 --> 0:01:29.679 a very extensive plan in place to really get ahead 0:01:29.720 --> 0:01:32.160 from at least where they are right now. Well, I guess, 0:01:32.200 --> 0:01:35.200 to be fair, you wouldn't expect much else from a 0:01:35.280 --> 0:01:39.360 centrally planned economy, right, I mean, people talk about China liberalizing, 0:01:39.360 --> 0:01:42.080 but at its heart it's still very much a sort 0:01:42.120 --> 0:01:45.520 of command economy with a huge degree of power coming 0:01:45.600 --> 0:01:49.960 from the ruling class. I guess, yeah, And I think 0:01:50.000 --> 0:01:52.120 that's exactly right. And of course there're gonna be a 0:01:52.160 --> 0:01:56.240 lot of people who question whether a centrally planned economy 0:01:56.360 --> 0:02:00.840 really can be an innovative leader. I think in technologies 0:02:00.920 --> 0:02:03.840 we often sort of I think we sort of associate 0:02:04.480 --> 0:02:10.400 innovation with free market capitalism quite a bit, and China 0:02:10.560 --> 0:02:13.639 is perhaps trying to show that there is another model 0:02:13.680 --> 0:02:15.799 for how you can get there, well, not just free 0:02:15.840 --> 0:02:19.240 market capitalism. You think of technological innovation, you think sort 0:02:19.280 --> 0:02:22.640 of the Silicon Valley model, right, A bunch of guys 0:02:22.680 --> 0:02:25.480 sort of sat in a garage somewhere coming up with 0:02:25.520 --> 0:02:29.560 brilliant ideas, and because of the way our economy is structured, 0:02:29.600 --> 0:02:32.800 they're allowed to act on those ideas and eventually build 0:02:32.840 --> 0:02:37.560 successful businesses. So it's almost a cultural difference. I guess yeah. 0:02:37.680 --> 0:02:40.520 I think that's well put. So anyway, today we're going 0:02:40.560 --> 0:02:42.799 to be talking to someone who is actually one of 0:02:42.840 --> 0:02:46.600 the first people to introduce me to this idea, and 0:02:46.680 --> 0:02:49.640 so I'm very excited to talk to him. He's Dan Wong. 0:02:49.840 --> 0:02:53.880 He is a analyst at gav quel Dragon Omics. He's 0:02:53.919 --> 0:02:57.120 a technology analyst based in Hong Kong there and he 0:02:57.240 --> 0:03:01.120 has been following China's ambitions to really grow its own 0:03:01.160 --> 0:03:11.200 homegrown technology sector for a while and he joined us. Now, hey, damn, 0:03:11.240 --> 0:03:13.679 thanks for joining us. Hey guys, thanks for having me on. 0:03:14.720 --> 0:03:18.240 So let's start with the big picture. What is the 0:03:18.840 --> 0:03:23.760 Made in China initiatives? Sure thing so Made in China 0:03:25.120 --> 0:03:29.600 is a comprehensive industrial upgrading plan that the government unfailed 0:03:30.240 --> 0:03:34.440 three years ago. Its targets about twenty different technologies for 0:03:34.720 --> 0:03:42.040 broad technological leadership. These include things like semiconductors, telecom equipment, robotics, 0:03:42.080 --> 0:03:47.200 electric vehicles, medical devices and pharmaceuticals, aviation equipment, and a 0:03:47.240 --> 0:03:49.880 whole bunch of other things. To make it happen, that 0:03:50.400 --> 0:03:54.000 the Chinese government is offering an enormous amount of credit, 0:03:54.080 --> 0:03:58.600 subsidies and policy support to make it all work. So, 0:03:59.080 --> 0:04:02.120 just to be clear, we think of a lot of 0:04:02.320 --> 0:04:07.080 high tech manufacturing already happening in China. US tech giants 0:04:07.120 --> 0:04:11.920 like Apple obviously work with big Chinese tech companies to 0:04:12.000 --> 0:04:15.560 assemble their iPhones. But I guess the idea is that 0:04:15.600 --> 0:04:18.359 a lot of that is sort of still pretty low 0:04:18.400 --> 0:04:21.880 on the value chain labor type stuff, and that the 0:04:21.960 --> 0:04:25.880 real innovative stuff on things like semiconductors that you mentioned, 0:04:26.120 --> 0:04:29.839 that's still not really happening in China. Yeah, that's right. 0:04:30.360 --> 0:04:34.159 So basically, the further downstream you go, the more that 0:04:34.279 --> 0:04:38.440 China looks pretty innovative. So Chinese companies have become pretty 0:04:38.440 --> 0:04:44.240 good at making consumer goods and offering fun our retail experiences. 0:04:44.960 --> 0:04:48.040 China is also the only country aside from the US 0:04:48.120 --> 0:04:51.520 to have built big internet companies, namely ten Cent and 0:04:51.680 --> 0:04:54.520 Ali Baba. I used to work in Silicon Valley, and 0:04:54.600 --> 0:04:57.279 the level of dynamism I observed in the tech scenes 0:04:57.320 --> 0:05:01.000 of Beijing and Shinjen our justice and pressive as what 0:05:01.120 --> 0:05:04.600 I saw when I worked in California. But basically, if 0:05:04.600 --> 0:05:07.880 you look a little bit more upstream at what the 0:05:08.480 --> 0:05:13.520 at the more upstream segments of China's technology foundations, it's 0:05:13.560 --> 0:05:17.120 really quite weak. So China is pretty heavily dependent on 0:05:17.240 --> 0:05:22.880 other countries for semiconductors, airplanes, machinery goods, and many other things. 0:05:23.800 --> 0:05:26.159 So I'm glad you brought up the iPhone. So the 0:05:26.200 --> 0:05:30.040 full value of an iPhone is booked as a Chinese export, 0:05:30.360 --> 0:05:33.120 but only about ten percent of the value added was 0:05:33.200 --> 0:05:37.160 actually generated in China. So that means it's the value 0:05:37.200 --> 0:05:39.960 of the labor used in assembling the phone and a 0:05:40.000 --> 0:05:43.800 few of the components. But the most important technologies are 0:05:43.839 --> 0:05:47.320 not actually Chinese. The processor for the phone is coming 0:05:47.320 --> 0:05:50.599 from Taiwan, the memory chips are coming from Korea, the 0:05:50.680 --> 0:05:54.000 screen from Korea, and so on. So China would be 0:05:54.080 --> 0:05:57.839 much happier if the value added generated in the country 0:05:58.240 --> 0:06:01.800 actually approaches little closer to the full value of the 0:06:01.800 --> 0:06:03.880 iPhone export. And so I think that's a good way 0:06:03.920 --> 0:06:08.600 of seeing what is about So jan why are they 0:06:08.760 --> 0:06:13.039 focused on these particular technologies, because I guess the law 0:06:13.160 --> 0:06:16.320 of comparative advantage in economics would suggest that they should 0:06:16.400 --> 0:06:19.320 keep doing what they've been doing, what they're good at 0:06:19.520 --> 0:06:22.240 um and instead they're they're clearly trying to branch out 0:06:22.240 --> 0:06:24.800 into things that they haven't done before, So why is 0:06:24.839 --> 0:06:28.799 that sure? So I think there are three big reasons 0:06:29.000 --> 0:06:33.520 that China is trying to do made in China. First 0:06:33.560 --> 0:06:36.080 of all, the GDP per capita is now close to 0:06:36.120 --> 0:06:39.080 about ten thousand dollars and at that level it's close 0:06:39.120 --> 0:06:42.919 to middle income status defined by the World Bank. And 0:06:42.960 --> 0:06:45.040 the World Bank has also come up with this concept 0:06:45.080 --> 0:06:48.479 called the middle income trap, which is a fairly common 0:06:48.680 --> 0:06:51.960 term that you can see in the domestic media, and 0:06:52.080 --> 0:06:55.160 the middle income trap in the original World Bank formulation 0:06:55.560 --> 0:06:59.159 outlines the problem in industrializing country faces when it gets 0:06:59.160 --> 0:07:03.320 squeezed tween poorer countries which have cheap labor and richer 0:07:03.360 --> 0:07:07.600 countries which have advanced technologies. So only a small handful 0:07:07.640 --> 0:07:09.880 of countries have managed to pull out of the middle 0:07:09.920 --> 0:07:13.800 income trap, and China is really obsessed with leaving it. Japan, 0:07:13.960 --> 0:07:17.240 South Korea, and Taiwan each managed to escape the middle 0:07:17.280 --> 0:07:21.720 income trap by climbing various technological pinnacles, almost always with 0:07:21.760 --> 0:07:25.640 the help of the state, and is the Chinese government's 0:07:25.680 --> 0:07:31.840 plan to climb a bunch of related or different technological pinnacles. 0:07:31.840 --> 0:07:34.400 So that's one reason that China wants to do this. 0:07:35.360 --> 0:07:39.760 A second element is there's this bit of economic security 0:07:39.840 --> 0:07:43.080 and its concerns. So a fairly salient data point that 0:07:43.160 --> 0:07:47.200 shows how dependent China is on foreign technologies is that 0:07:47.320 --> 0:07:50.720 every year it imports more semiconductors by value than it 0:07:50.760 --> 0:07:53.840 does crude oil. Now, some countries go to pretty great 0:07:53.880 --> 0:07:57.040 lens to secure their supply of oil, and China wants 0:07:57.080 --> 0:08:02.200 to secure its supply of semiconductors by creating strong domestic companies. 0:08:02.880 --> 0:08:06.600 And third, there's this national security element to it as well. 0:08:06.880 --> 0:08:10.760 When I talk to Chinese, a name keeps coming up Snowden. 0:08:11.480 --> 0:08:14.800 So the Snowden documents revealed that, you know, the US 0:08:14.840 --> 0:08:19.960 tech companies have been fairly cozy with the US government. Uh, 0:08:20.000 --> 0:08:24.040 And China's importing hundreds of billions of dollars worth of 0:08:24.280 --> 0:08:27.080 American semiconductors every year, and it doesn't want to be 0:08:27.960 --> 0:08:31.520 spied on because it has to import these things. It's 0:08:31.520 --> 0:08:35.320 funny because obviously a big source of anxiety here these 0:08:35.400 --> 0:08:39.520 days is the fear of being spied on with goods 0:08:39.559 --> 0:08:43.400 that the US imports from China or Russia. So interesting 0:08:44.000 --> 0:08:46.640 that it the anxiety goes in both directions, though, I 0:08:46.640 --> 0:08:50.080 guess that's just sort of perhaps to be expected. All right, 0:08:50.120 --> 0:08:54.520 let's talk about the mechanics that the government is actually 0:08:54.840 --> 0:08:59.840 using to foster this technological leap forward. How does it 0:09:00.080 --> 0:09:03.560 allocate resources or know how much to invest and say, 0:09:03.800 --> 0:09:08.600 semiconductors versus medical equipment versus wide body planes. What does 0:09:08.679 --> 0:09:12.679 it do specifically and how does it make those decisions? Sure, 0:09:13.480 --> 0:09:17.320 so it's trying to catch up to the technological frontier, UH, 0:09:17.360 --> 0:09:20.600 and to do so, I think you need at least 0:09:20.679 --> 0:09:25.320 three things. One of that is money, another is I 0:09:25.520 --> 0:09:29.439 P the technology, and the third is this process knowledge 0:09:29.559 --> 0:09:33.520 or what we can also call tacit knowledge managerial expertise 0:09:34.040 --> 0:09:37.240 or no. How So, if we look at each of 0:09:37.240 --> 0:09:40.520 these segments, we can pretty much assume that money is 0:09:40.559 --> 0:09:42.640 not going to be a problem. The state is going 0:09:42.679 --> 0:09:44.880 to be UH is going to provide a lot of 0:09:45.040 --> 0:09:48.400 credit subsidies to build up these industries. There's a lot 0:09:48.400 --> 0:09:51.319 of figures we see floating around, some as high as 0:09:51.400 --> 0:09:54.400 three hundred billion US dollars that the that the government 0:09:54.440 --> 0:09:58.120 is willing to spend on this and about hundred thirty 0:09:58.120 --> 0:10:01.600 billion dollars. So that is e R MAR for semiconductors alone, 0:10:01.920 --> 0:10:04.440 and that's just from the government. There will be private 0:10:04.480 --> 0:10:08.199 funds that will invest too. The second element when you 0:10:08.440 --> 0:10:11.520 look at technology of China trying to acquire I P. 0:10:11.960 --> 0:10:13.800 I think the best thing to read on this is 0:10:13.880 --> 0:10:17.600 the U s TRS Section three or one report. It 0:10:17.840 --> 0:10:21.720 prepares a pretty comprehensive case of all the ways that 0:10:21.840 --> 0:10:25.480 China tries to obtain technology UH. These include trying to 0:10:25.559 --> 0:10:31.240 venture requirements for foreign firms, compulsory licensing schemes, administrative demands 0:10:31.240 --> 0:10:35.560 for technology transfer, strategic overseas investments, and what the U 0:10:35.600 --> 0:10:40.400 s TR calls unauthorized cyber intrusions. And finally, in terms 0:10:40.400 --> 0:10:43.400 of know how, which is the knowledge that exists in 0:10:43.440 --> 0:10:46.600 people's heads that are hard to write down and actually 0:10:46.640 --> 0:10:49.840 give as instructions. China has been fairly active in trying 0:10:49.880 --> 0:10:53.760 to recruit people from overseas to share expertise. A lot 0:10:53.800 --> 0:10:56.439 of this involves trying to get overseas Chinese to move 0:10:56.520 --> 0:11:00.000 to China, but they also try to hire foreigners from 0:11:00.320 --> 0:11:03.520 all parts of the world. So is it easier or 0:11:03.640 --> 0:11:06.400 is it better to be able to sort of buy 0:11:06.840 --> 0:11:10.080 a tech industry like that or create a tech industry 0:11:10.120 --> 0:11:14.080 like that with this sort of centralized planning versus what 0:11:14.120 --> 0:11:18.240 we've seen in Western countries where the tech industry sort 0:11:18.280 --> 0:11:22.480 of grows up in some cases relatively natural, Like what 0:11:22.520 --> 0:11:26.480 are the differences between those two industries. So I think 0:11:26.520 --> 0:11:29.360 the big thing to keep in mind is that China 0:11:29.440 --> 0:11:33.000 is trying to catch up to the technological frontier for 0:11:33.120 --> 0:11:35.480 most of these things. There are a few of its 0:11:35.559 --> 0:11:39.280 technologies which seem to be at the technological frontier, and 0:11:39.320 --> 0:11:42.760 so these things would include I would say solar panels, 0:11:43.160 --> 0:11:46.959 telecom equipment, high speed rail, and wind turbines. China seems 0:11:46.960 --> 0:11:50.000 to be already fairly advanced in all of these before 0:11:50.000 --> 0:11:55.600 all the rest things like semiconductors, aviation equipment, pharmaceuticals. China 0:11:55.640 --> 0:12:00.160 is trying to follow a path that another country or 0:12:00.280 --> 0:12:05.280 company has already plazed. So in terms of trying to 0:12:05.360 --> 0:12:09.839 just basically reach what the what the what the technological 0:12:09.840 --> 0:12:12.400 front here is today, I think that's that that that 0:12:12.520 --> 0:12:16.200 is kind of a almost a qualitative difference with UH, 0:12:16.200 --> 0:12:20.240 this sustained innovation that we see UH in in the 0:12:20.360 --> 0:12:26.760 US of just incrementally pushing that technological frontier forward. I'm 0:12:26.760 --> 0:12:30.400 so curious about the specifics of the resource allocation. So 0:12:30.440 --> 0:12:34.800 you mentioned a hundred and thirty billion dollars to invest 0:12:34.960 --> 0:12:38.760 in UH semiconductor development, But who gets the money other 0:12:39.240 --> 0:12:42.960 startups that apply for grants? Are there existing state owned 0:12:42.960 --> 0:12:46.280 companies that then launched semiconductor units, how do they actually 0:12:46.320 --> 0:12:49.400 go and go about allocating it? And then you know, 0:12:49.440 --> 0:12:53.400 I assume it goes to multiple companies. Who decides who's 0:12:53.520 --> 0:12:56.480 leading the way and then gets further allocation, and then 0:12:56.520 --> 0:12:59.199 who decides you know, you're not cutting it. This project 0:12:59.280 --> 0:13:01.320 isn't going anywhere because I think in a lot of 0:13:01.360 --> 0:13:04.800 people's minds, this is where they see the free market 0:13:04.880 --> 0:13:07.800 doing a good job of, in theory, figuring out the 0:13:07.840 --> 0:13:10.839 winners and losers and allocating more to the winners. So 0:13:10.880 --> 0:13:16.160 how does China solve that problem? So pretty much this 0:13:16.280 --> 0:13:21.199 is um pretty much entirely decided by the state. So 0:13:21.320 --> 0:13:25.520 China has a bunch of money available. Some of it 0:13:25.520 --> 0:13:30.880 it will allocate to some of the existing semiconductor foundries 0:13:31.040 --> 0:13:35.480 fabs that have already been around, and then some of 0:13:35.520 --> 0:13:39.640 it will go towards just totally fresh efforts. So, for example, 0:13:39.800 --> 0:13:43.840 China basically has not done UH, does not have much 0:13:43.880 --> 0:13:47.200 of a position in making memory chips at all, and 0:13:47.280 --> 0:13:51.600 so the government basically decided to put something like UH 0:13:51.760 --> 0:13:57.079 thirty to forty billion dollars between these UH four different 0:13:57.600 --> 0:14:03.319 semiconductor fabs in Central China, So these were fresh efforts. 0:14:03.800 --> 0:14:07.959 The process of which city would get a memory fab 0:14:08.400 --> 0:14:12.600 was not entirely transparent. They're dispersed across a couple of 0:14:13.040 --> 0:14:17.240 big cities in central China, and they were they were 0:14:17.280 --> 0:14:20.000 given this money from the central government, from the from 0:14:20.000 --> 0:14:23.520 the local government, from the provincial government, and also from 0:14:23.720 --> 0:14:27.320 other state owned companies. So these things are not super transparent, 0:14:27.480 --> 0:14:30.960 and it's probably correct to suspect that a lot of 0:14:30.960 --> 0:14:34.200 this is driven by political connections. And that's just in 0:14:34.240 --> 0:14:38.280 the case of semiconductors. So if in seven years time 0:14:38.640 --> 0:14:41.880 we wake up and China has built a world class 0:14:41.880 --> 0:14:46.040 semiconductor industry, is that going to discredit the sort of 0:14:46.120 --> 0:14:50.280 western um pre economy way of doing things. Does that 0:14:50.360 --> 0:14:53.480 suggest that maybe the Chinese model is correct. I'm not 0:14:53.520 --> 0:14:56.960 sure that it does. I think that if China manages 0:14:57.000 --> 0:15:01.720 to catch up, basically, UH, this be another case of 0:15:02.360 --> 0:15:06.400 there is some success of protectionism. Basically, if you look 0:15:06.440 --> 0:15:12.920 at every country that has industrialized after Britain, did the US, Germany, Meiji, Japan, 0:15:13.240 --> 0:15:17.840 uh and UH. More recently, the East Asian countries. They 0:15:17.880 --> 0:15:23.080 each built their industries with some level of teriff protections, 0:15:23.360 --> 0:15:28.680 teriff protections, some level of government support, some level of 0:15:29.160 --> 0:15:34.640 trying to acquire technologies from overseas and plowing state subsidies, 0:15:35.240 --> 0:15:38.720 especially in more recent times, plowing state subsidies into trying 0:15:38.760 --> 0:15:41.520 to build to try to catch up to the technological 0:15:41.520 --> 0:15:44.720 front here. And that's pretty much what China is doing. 0:15:45.160 --> 0:15:48.640 China has taken a look at basically the memory industry 0:15:48.720 --> 0:15:52.640 is pretty interesting. Actually, uh memory was in d RAM 0:15:52.720 --> 0:15:57.280 was invented by this small American company named Intel. The 0:15:57.400 --> 0:16:00.760 US got pretty good at making d RAM. Japan took 0:16:00.800 --> 0:16:03.200 a look at memory, thought that it could do it 0:16:03.240 --> 0:16:06.160 as well, built up its memory industry, turned out to 0:16:06.160 --> 0:16:09.920 be pretty successful, mostly drove US players out of business. 0:16:10.400 --> 0:16:13.160 And then the Koreans did pretty much exactly the same 0:16:13.160 --> 0:16:15.640 things to Japan, and Taiwan also tried to do this 0:16:15.680 --> 0:16:19.080 to Korea. So at least in memory chips, at least 0:16:19.400 --> 0:16:23.560 we see that there is this progression of leadership helped 0:16:23.600 --> 0:16:27.560 by different countries. Right now, it's been Korea has continued 0:16:27.600 --> 0:16:30.720 to be the leader in making memory chips, and China 0:16:30.760 --> 0:16:35.280 is trying to unseat to Korea as Korea and seated Japan. Yeah. 0:16:35.320 --> 0:16:37.960 I wanted to follow up a little further and push 0:16:38.040 --> 0:16:41.440 the question about the U S model. You mentioned you 0:16:41.600 --> 0:16:45.040 used to work in Silicon Valley. Is there a myth 0:16:45.120 --> 0:16:47.560 that we have about Silicon Valley that's incorrect where we 0:16:47.560 --> 0:16:51.800 imagine all these people toiling away and their garages, raising 0:16:51.800 --> 0:16:54.080 money from friends and family and then building the next 0:16:54.480 --> 0:16:58.480 Hewlett Packard or Intel, We're Google, and that we end 0:16:58.560 --> 0:17:03.920 up downplaying the all that federal subsidies and federal industrial 0:17:04.000 --> 0:17:09.480 planning or military planning played in the fostering of U 0:17:09.560 --> 0:17:12.679 S technology. I think that's a great question, and to 0:17:12.800 --> 0:17:17.480 some extent, Silicon Valley itself downplaced this story. I think, UH, 0:17:17.600 --> 0:17:22.080 semiconductors were initially bootstrapped by a lot of government spending, 0:17:22.440 --> 0:17:26.520 including for for the space program and also for the military. 0:17:26.600 --> 0:17:29.360 So Silicon Valley, you know, silicon is in the name, 0:17:29.800 --> 0:17:34.520 comes from semiconductors, and that was significantly bootstrapped by federal 0:17:34.600 --> 0:17:40.200 funding UH and UH federal subsidies. UM, if we wanted 0:17:40.280 --> 0:17:43.320 to think about, you know, what is the opposite model 0:17:43.480 --> 0:17:47.320 of innovation UH from from Silicon Valley, I would say 0:17:47.359 --> 0:17:52.520 something like what we see in Germany Germany has basically 0:17:53.160 --> 0:17:56.880 a pretty strong culture of engineering that it's kept through 0:17:57.359 --> 0:18:02.040 many decades, arguably many centuries. And I was in Germany 0:18:02.080 --> 0:18:04.520 for a research trip a couple of weeks ago and 0:18:05.240 --> 0:18:10.000 listening to some of them explained basically, the German model 0:18:10.080 --> 0:18:14.560 of innovation is that they've built these systems of quality 0:18:14.600 --> 0:18:20.520 improvement to incrementally improve their technologies. UH. They have these 0:18:20.520 --> 0:18:26.760 systems of corporate encouragement, of vocational training, bridge between academia 0:18:26.800 --> 0:18:30.679 and companies. UH, this very strong sense that older people 0:18:30.720 --> 0:18:33.960 have to transfer their knowledge to the younger people. That 0:18:34.119 --> 0:18:36.719 is kind of what we see the opposite of what 0:18:36.800 --> 0:18:39.679 we see in Silicon Valley. Both of these places I 0:18:39.680 --> 0:18:43.399 think are fairly innovative, but in different ways. So should 0:18:43.400 --> 0:18:47.360 the world be at all concerned over China's plans? Here? 0:18:47.400 --> 0:18:50.800 Over the plans, is there any reason to worry if 0:18:50.840 --> 0:18:55.000 if they're essentially just pursuing protectionist measures that other countries 0:18:55.119 --> 0:18:58.240 at one time or another seemed to do themselves, I 0:18:58.240 --> 0:19:01.040 think there is a pretty good reason and to worry. 0:19:01.240 --> 0:19:05.280 So Chinese industrial policy has created a lot of overcapacity, 0:19:05.440 --> 0:19:09.920 for example in UH, in sectors like steel and solar panels, 0:19:10.480 --> 0:19:14.800 over capacity crushes everyone's profits, so that might reduce aggregate 0:19:15.080 --> 0:19:19.960 R and D spending and thereby slowing overall innovation around 0:19:20.000 --> 0:19:23.280 the world. And I think if we take a look 0:19:23.280 --> 0:19:25.960 a little bit more closely at the experience of high 0:19:25.960 --> 0:19:31.200 speed rail companies, that's also another cause for concern. So UM. 0:19:31.320 --> 0:19:33.720 When China was trying to build its high speed rail network, 0:19:34.280 --> 0:19:38.720 there were four companies that were around to basically supply 0:19:38.840 --> 0:19:41.960 it for high speed rail. It was Seamens of Germany, 0:19:42.080 --> 0:19:46.879 Kawasaki Heavy Industries of Japan, Bombardier of Canada, and Austam 0:19:47.160 --> 0:19:50.760 of France. UH. They brought their technologies to China, and 0:19:50.880 --> 0:19:54.960 China basically was in a pretty strong negotiating position at 0:19:54.960 --> 0:19:58.320 the time. There weren't that many other countries building high 0:19:58.359 --> 0:20:02.040 speed rail systems, and so ch ask these companies to 0:20:02.119 --> 0:20:06.560 transfer their technologies as a condition for accessing the Chinese market, 0:20:06.920 --> 0:20:09.679 and these four companies basically decided that they had to 0:20:09.720 --> 0:20:14.440 agree to transfer these technologies to domestic joint venture partners. 0:20:14.880 --> 0:20:19.440 The domestic joint venture partners digested their technology uh the 0:20:19.720 --> 0:20:23.359 Chinese term for for absorbing foreign technologies, and then they 0:20:23.400 --> 0:20:27.959 out computed these companies in the Chinese domestic market. So 0:20:28.000 --> 0:20:33.520 these foreign firms gave their technologies to um Chinese firms. Uh, 0:20:33.640 --> 0:20:36.399 they first lost the China market, and then they had 0:20:36.440 --> 0:20:39.720 to compete with Chinese companies in the global market. So 0:20:39.760 --> 0:20:43.840 that's another cautionary tale that makes people nervous about the 0:20:43.920 --> 0:20:47.960 success of And then there is this other aspect that 0:20:47.960 --> 0:20:52.200 the US is concerned about. China's doesn't allow much reciprocity. 0:20:52.600 --> 0:20:55.960 So China can invest in important companies of other countries, 0:20:56.040 --> 0:20:59.439 but it doesn't allow foreign companies to really invest in 0:20:59.560 --> 0:21:03.200 important domestic projects. It's a fairly protectionist place, and it's 0:21:03.240 --> 0:21:08.119 not a level playing field. You mentioned the overcapacity issue. 0:21:08.200 --> 0:21:11.600 The flip side is that for many of the things 0:21:11.640 --> 0:21:14.960 that China is building, there could be tremendous benefit to 0:21:15.040 --> 0:21:18.560 the consumers of those good So one area that comes 0:21:18.560 --> 0:21:22.160 to mind in recent years is the incredible collapse we've 0:21:22.160 --> 0:21:25.399 seen in the cost of solar panels all around the world. 0:21:25.960 --> 0:21:29.760 The estimate for when solar would reach price parity with 0:21:29.840 --> 0:21:34.480 other energy technologies have all proven to be way too pessimistic, 0:21:34.520 --> 0:21:37.640 and solar prices continue to plunge much faster than people expect. 0:21:38.200 --> 0:21:42.080 And that's a theoretically benefit too many people around the world. 0:21:42.240 --> 0:21:46.680 And uh sort of Chinese industrial policy has played a 0:21:46.720 --> 0:21:49.359 big role in that. Yeah, I think that's a pretty 0:21:49.359 --> 0:21:52.720 good example. If solar panels are really good for the environment, 0:21:52.880 --> 0:21:55.680 then this could be something that people can be glad about. 0:21:56.400 --> 0:22:00.960 And I think it's also possible that can be good 0:22:01.000 --> 0:22:04.960 for the world more broadly because downstream businesses can benefit 0:22:04.960 --> 0:22:08.160 a little bit. So capital goods industries tend to be 0:22:08.280 --> 0:22:11.960 pretty consolidated. If you want to buy memory chips, basically 0:22:12.040 --> 0:22:16.360 you only have three companies making d ram It's Samsun, SKA, 0:22:16.480 --> 0:22:19.840 high Nes, Micron, and that's it. So I've spoken to 0:22:19.960 --> 0:22:22.440 a smart phonemaker who told me that, you know, if 0:22:22.440 --> 0:22:25.680 the Chinese government is willing to spend billions and subsidies 0:22:25.680 --> 0:22:29.639 to lift Samsung's thumb from his business, uh, they're not 0:22:29.680 --> 0:22:33.679 going to complain about that. UM aviation is famously a 0:22:33.760 --> 0:22:37.640 duopoly between Boeing and Airbus, and many of these capital 0:22:37.640 --> 0:22:42.199 goods industries tend to be pretty consolidated. So if Chinese 0:22:42.240 --> 0:22:47.520 competition comes in and UH introduces a little bit more competition, Uh, 0:22:47.560 --> 0:22:51.400 that could be good for downstream users of these technologies. 0:22:52.320 --> 0:22:55.600 I'm curious, so looking at the list of different industries 0:22:56.520 --> 0:22:59.240 We've talked a lot about semi conductors, but there's obviously 0:22:59.280 --> 0:23:04.560 others include a wide body aircraft, advanced medical devices. Is 0:23:04.560 --> 0:23:09.240 there anything that you've seen so far in how the 0:23:09.280 --> 0:23:13.320 different industries or the different technologies have progressed that suggests 0:23:13.320 --> 0:23:16.199 that some of this is working better than others, or 0:23:16.240 --> 0:23:21.400 that this particular Chinese model of technological innovation might work 0:23:21.480 --> 0:23:24.840 really well in some areas, but it has more obvious 0:23:25.000 --> 0:23:28.800 limitations in the development of other areas. Sure, that's a 0:23:28.800 --> 0:23:34.080 great question. UM so China has already succeeded in reaching 0:23:34.080 --> 0:23:36.760 the technological front here in a few industries UH and 0:23:36.960 --> 0:23:40.879 I cited solar panels, telecom equipment, high speed rail, and 0:23:41.000 --> 0:23:44.320 wind turbans. And I think a couple of the things 0:23:44.400 --> 0:23:49.639 that unite UH these together is one is UH the 0:23:50.680 --> 0:23:54.600 UM nature of the buyers. So for basically all of 0:23:54.640 --> 0:24:00.639 these midstream products, government is an important procure of these 0:24:00.840 --> 0:24:05.360 UH different technology segments. And if government is a big procure, 0:24:06.080 --> 0:24:11.600 you can basically have UM provinces competing amongst themselves to 0:24:11.680 --> 0:24:16.439 get the best telecom equipment or solar panel offering from 0:24:16.440 --> 0:24:21.400 from these different companies, and then UH, basically these companies 0:24:21.480 --> 0:24:24.880 can get pretty good at making these technologies because there's 0:24:24.880 --> 0:24:28.520 a lot of government procurement of their products. Another is 0:24:28.560 --> 0:24:32.920 that these usually tend to have fairly long product cycles. 0:24:33.400 --> 0:24:36.520 So the longer the product cycle, the easier it is 0:24:36.640 --> 0:24:40.119 for Chinese firms to catch up to the frontier before 0:24:40.560 --> 0:24:44.640 it moves away again. So that's another characteristic of these 0:24:44.640 --> 0:24:49.400 different technologies. And China has had much less success trying 0:24:49.440 --> 0:24:54.160 to build through industrial policy more downstream goods, so things 0:24:54.200 --> 0:24:58.440 like automobiles is something that the leadership concedes has been 0:24:58.920 --> 0:25:01.879 a fairly big earlier in terms of trying to build 0:25:02.240 --> 0:25:07.240 homegrown companies that are making really excellent cars that are 0:25:07.240 --> 0:25:11.040 exportable as well. So the nature of the buyers, the 0:25:11.119 --> 0:25:14.880 product cycle, these are all factors that play into how 0:25:14.920 --> 0:25:21.000 successful industrial policy can be. Dan, that was a fascinating conversation. 0:25:21.280 --> 0:25:24.040 I feel like this is a going to be well 0:25:24.040 --> 0:25:27.400 obviously a huge story for the years ahead, and regardless 0:25:27.400 --> 0:25:30.399 of what happens with the trade talks right now, it 0:25:30.480 --> 0:25:33.280 just seems inevitable that there's going to be so much 0:25:33.320 --> 0:25:37.800 more interest in the progression of China on these various 0:25:37.800 --> 0:25:40.560 technological fronts in the years ahead. So thank you very 0:25:40.640 --> 0:25:42.920 much for joining well, thank you back. Thanks for having 0:25:42.960 --> 0:26:00.320 me on, Tracy. I really like that conversation, and why 0:26:00.359 --> 0:26:03.480 I liked it so much is the degree of specificity 0:26:03.840 --> 0:26:06.760 that Dan brought to the table in terms of this stuff. 0:26:06.760 --> 0:26:08.720 I mean, I think we sort of lots of people 0:26:08.960 --> 0:26:13.400 maybe understand the sort of real broad strokes here about 0:26:13.520 --> 0:26:17.800 China trying to acquire its own technology and the complaints 0:26:17.840 --> 0:26:21.040 that other countries have about how they're forced to hand 0:26:21.080 --> 0:26:23.800 over technology in order to compete in the market. But 0:26:23.920 --> 0:26:26.879 it's interesting to get in the weeds and learn about 0:26:26.920 --> 0:26:31.359 the specifics of how each industry operates in where they are. Yes, 0:26:31.600 --> 0:26:36.680 we know all about China's ambitious plans for advanced medical equipment. 0:26:36.760 --> 0:26:39.280