Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, do you realize it's almost the end of twenty
Speaker 2: twenty four?
Speaker 3: Yeah? Well, yeah, it's crazy.
Speaker 4: You know.
Speaker 3: It's been a really warm month in October.
Speaker 5: Yeah, I know.
Speaker 3: So I feel like we got this free month of
Speaker 3: summer and so yeah, like we're basically almost here and
Speaker 3: we sort of like got a free, one less month
Speaker 3: of winter.
Speaker 2: It feels like I feel like the warm weather is
Speaker 2: also throwing everyone's sense of time off. Yeah, but anyway,
Speaker 2: we're almost done with twenty twenty four. Who knows what
Speaker 2: the rest of the year is going to look like,
Speaker 2: but that means that twenty twenty five is coming up.
Speaker 2: And you know what I think of When I think
Speaker 2: of twenty twenty five.
Speaker 3: You and I think of the same thing. And we're
Speaker 3: the only two journalists in America that don't think of
Speaker 3: Project twenty.
Speaker 2: Twenty Oh yeah, of course. Okay, So Joe and I
Speaker 2: are thinking of Made in China twenty twenty five, which,
Speaker 2: of course was the big program that China launched ten
Speaker 2: years ago. Almost ten years ago now back in twenty
Speaker 2: fifteen to bulk out strategically important advanced technology sectors. And
Speaker 2: so I'm kind of curious what exactly happens in twenty
Speaker 2: twenty five, how much progress China has made on this front.
Speaker 2: You know, next year, are they suddenly going to like
Speaker 2: declare victory in advanced technology and that'll be the end
Speaker 2: of it. What criteria are they actually using to judge
Speaker 2: its success. I have a bunch of.
Speaker 3: Questions, you know, I just have to say that I
Speaker 3: appreciate things like made in twenty twenty five initiatives or
Speaker 3: even like you know, five year plans or ten year
Speaker 3: plans or whatever, just because they provide a very convenient
Speaker 3: spot to go back and look, did the goals get
Speaker 3: hit or not. It's one thing to talk about moonshots
Speaker 3: and like, oh, we're going to lead all this, But
Speaker 3: unless you put a date on when you want to
Speaker 3: achieve it by, you don't really know whether you're successful,
Speaker 3: right because you never really know where you are in
Speaker 3: sort of the arc of progress. But if you have
Speaker 3: a system that puts dates on where you want to be,
Speaker 3: at least you can go back and judge, well, were
Speaker 3: we successful or not. And so now we're on the
Speaker 3: verge of being able to look at the start of
Speaker 3: that initiative and the end of that initiative and sort
Speaker 3: of a say whether it worked or not.
Speaker 2: Is that your pitch for All Thoughts World Domination twenty
Speaker 2: twenty five.
Speaker 3: Well, we'd have maybe twenty thirty five, okay, and we
Speaker 3: need some like very specific metrics, you know, we have
Speaker 3: to like really know what that means in advance, and
Speaker 3: then yeah, we'll see if we hit it or not.
Speaker 2: Okay, you're right, though, deadlines are very important. So speaking
Speaker 2: of deadlines, why don't I go ahead and bring in
Speaker 2: our very perfect guests for this particular episode. We're speaking
Speaker 2: with Gerard de Pippo, senior geoeconomics analyst over at Bloomberg Economics,
Speaker 2: as well as Rebecca Ka Chung Wilkins, senior correspondent for
Speaker 2: the Government and Economy Team Asia. I knew her back
Speaker 2: when I was in Hong Kong and she covered China
Speaker 2: credit and she was so good at it. So who
Speaker 2: better to kind of draw the connection between technology and
Speaker 2: finance and economics than these two. So Girard and Rebecca,
Speaker 2: thank you so much for coming back on our lots.
Speaker 4: Thank you for has such a pleasure to be here.
Speaker 2: Let's start with the beginning. I guess twenty fifteen, China
Speaker 2: decides to launch this Maid in China twenty twenty five program.
Speaker 2: What was the thinking behind it, what were the goals?
Speaker 4: Well, I think one thing to remember is this sort
Speaker 4: of a hole Made in China industrial policy. This comes
Speaker 4: just a couple of years into President She's in pain
Speaker 4: getting his leadership underway in China. So this is also
Speaker 4: very much President She's vision for the Chinese economy, his
Speaker 4: idea that these key sectors, these key industries are sentially
Speaker 4: going to underpin the national development. So this is not
Speaker 4: sort of, I suppose, just a discussion about china strategic ambitions,
Speaker 4: but also specifically She's own vision for the direction for China.
Speaker 5: Also that in the context of Chinese industrial policy, so
Speaker 5: Made in China twenty five is an example of an
Speaker 5: iterative process and also sort of a reflective process with
Speaker 5: the rest of the world. So there obviously were other
Speaker 5: industrial policies before, and that would include something like the
Speaker 5: Medium Long Term Plan from two thousand and five, which
Speaker 5: is a fifteen year plan. There are of course five
Speaker 5: year plans, but also mad in China twenty five was
Speaker 5: partially inspired by Germany's Industry four point zero plan, which
Speaker 5: is much less detailed than ambitious. But there's a sort
Speaker 5: of a reactive effect there which ends up having knock
Speaker 5: on effects because then the US reacts to Made in
Speaker 5: China twenty five, and so it's just part of the cycle.
Speaker 5: I think what makes Made in China twenty five different
Speaker 5: than other plans that China had is that it was
Speaker 5: more comprehensive, more ambitious, and much more focused on not
Speaker 5: just catching up, but actually leading in ten strategic sectors.
Speaker 5: Previous plans have been more about say lower value added
Speaker 5: or megaproject right, and this is basically they want to
Speaker 5: be the world leader and all the technologies that circut
Speaker 5: twenty fifteen they had identified as being the most important.
Speaker 3: That's interesting. So one way of thinking about development is like, Okay,
Speaker 3: we're going to build lots of bridges and rail and
Speaker 3: housing and hospitals and other sorts of things, but this
Speaker 3: is about really leading the technological frontier. And of course
Speaker 3: this is what is the source of tremendous angst in Washington,
Speaker 3: d C. And various US industrial giants and so forth.
Speaker 3: I mean I don't know if we need to like
Speaker 3: list all fifteen, but what are the big areas that
Speaker 3: China felt it had to pursue.
Speaker 5: Sure, so they have ten strategic sectors, but then within
Speaker 5: that there's any number of technologies. So the big ones
Speaker 5: would be like information technology, which includes things like semiconductors,
Speaker 5: five G artificial intelligence, and then things like aviation and
Speaker 5: space technology, Energy equipment whichuld include things like solar panels,
Speaker 5: and then new energy vehicles, things like electric vehicles. So
Speaker 5: it spans pretty much everything, but it's skews towards the
Speaker 5: industrial sector, and it's really a manufacturing based view of development.
Speaker 2: So one thing that was interesting, Jared is you said
Speaker 2: that it was an iterative process. How has it changed
Speaker 2: in your mind from like twenty fifteen to now. Has
Speaker 2: there been maybe more of a focus or a shift
Speaker 2: in direction.
Speaker 5: A few things the original made in China twenty five Blueprint,
Speaker 5: which is what people treat as being the plan that
Speaker 5: was announced in early twenty fifteen, But then actually when
Speaker 5: people talk about all the targets, those mostly come from
Speaker 5: something that's commonly called the Green Book, which was published
Speaker 5: by the Chinese Academy of Engineers, and that's where you
Speaker 5: have the two hundred and fifty plus targets that are
Speaker 5: looking at specific technologies over time. It is sort of
Speaker 5: like an authoritative addendum. But then on top of that,
Speaker 5: there are something like four hundred plus other authoritative documents
Speaker 5: going through technologies, going through different levels of government. So
Speaker 5: it's not just one thing, and that's part of the
Speaker 5: fact that those other plans don't come out at exactly
Speaker 5: the same time. That makes it iterative. The other thing
Speaker 5: that I think is really important is the Chinese government
Speaker 5: realized around twenty nineteen that the phrase mid in China
Speaker 5: twenty five was provoking antibodies in the West, particularly in
Speaker 5: the US. I would say that, along with Belton Road
Speaker 5: Initiative or the two slogans ended up having the biggest
Speaker 5: effect in a discourse. But BRI is, you know, more
Speaker 5: favorably viewed in a lot of parts of the world,
Speaker 5: whereas been at China twenty five was considered more of
Speaker 5: a threat by a lot of industrial economies. So what
Speaker 5: did China do. They actually tamp down on it, so
Speaker 5: you will struggle to find any direct references to it
Speaker 5: now in Chinese official documents, at least publicly, But it's
Speaker 5: not dead, So a lot of the key goals are
Speaker 5: now incorporated into the fourteen to five year plan, which
Speaker 5: is the one that we're currently in going through twenty
Speaker 5: twenty five. The other thing to keep in mind is
Speaker 5: that the targets were what they thought circa late twenty fifteen, right,
Speaker 5: So I would think that within the Chinese government they
Speaker 5: actually have adjusted some things or realized that maybe that
Speaker 5: wasn't the right forecasts. Some of them were actually quite vague,
Speaker 5: for things like what nanometer technology would semi conductors be
Speaker 5: circa twenty third, because of course they didn't actually know.
Speaker 5: But my strong suspicion is that this framework still remains
Speaker 5: in place, but it's sort of an evolution because the
Speaker 5: point is not necessarily to hit all those individual targets.
Speaker 5: It's are you basically fulfilling the plan in the broad sense?
Speaker 5: Are you actually achieving leadership and all those key technologies.
Speaker 4: I just add there that, you know, some of that
Speaker 4: antipathy among Western powers around the idea, and even the
Speaker 4: phrase of made in China twenty twenty five is still
Speaker 4: sort of quite live. I was at a meeting with
Speaker 4: some policymakers think tankers at university recently, and there was
Speaker 4: still this quite lively discussion I call it politely discussion
Speaker 4: between a visiting European political advisor and Hong Kong officials
Speaker 4: and Chinese officials about precisely what made in China is,
Speaker 4: whether it's just an industrial policy or in the view
Speaker 4: of this particular visitor, something much more sort of malign.
Speaker 3: I just got to say, so weird to be the
Speaker 3: idea of like technological development along these lines being malign.
Speaker 3: I mean, you know, this is human progress, right, technology
Speaker 3: advances and countries want to be technological leaders, and I
Speaker 3: understand why governments and companies around the world feel threatened
Speaker 3: by it. But anyway, just one of the main storializing right.
Speaker 2: Because for instance, the US will say, well, we want
Speaker 2: to develop more clean energy technology domestically because it's important
Speaker 2: for the environment. But on the other hand, you could
Speaker 2: probably have more progress on the clean energy front if
Speaker 2: you just imported a bunch of stuff from China.
Speaker 4: Right now, one of the challenges here are the differences
Speaker 4: here is precisely over what it means when Beijing says
Speaker 4: it's going to back a certain sector. Right. The idea
Speaker 4: that if Beijing identifies let's say, electric vehicles or solar
Speaker 4: panels as a sector to back. It really can throw
Speaker 4: its weight behind it. It can ask banks to provide
Speaker 4: cheap credit, it can ask local governments to provide land
Speaker 4: at cheap or no cost. It can get state owned
Speaker 4: enterprises to pour there's significant resources, talent, innovation into those industries.
Speaker 4: It really has sort of a huge machinery that it
Speaker 4: can redirect, which you know other countries feel is quote
Speaker 4: unquote unfair, and in some ways that's sort of behind
Speaker 4: the whole accusation around unfair use of subsidies. For instance.
Speaker 5: I will try to channel both Beijing and Washington to
Speaker 5: address your comment. So from Beijing's perspective, I think they
Speaker 5: would say it's a bit ridiculous that the WES was
Speaker 5: more or less fine with China moving up the value
Speaker 5: chain as long as it wasn't in sectors that are
Speaker 5: too high value added or too competitive with advanced economy industry.
Speaker 5: So textile is fine, but when you say, oh, we
Speaker 5: want to have our own jet airliners, that becomes a problem.
Speaker 5: And I think there's actually truth to that, right, So
Speaker 5: what changes that China went from lower to higher value
Speaker 5: added and now it's companies are direct competitors in many
Speaker 5: cases with like G seven companies On the US side,
Speaker 5: I think part of the response would be, well, the
Speaker 5: threat part of it is it's not development per se,
Speaker 5: It's that the Chinese government, particularly of late, is quite
Speaker 5: clear that self reliance or self sufficiency are the maybe
Speaker 5: primary goal. This is clear in the third Planum that
Speaker 5: came out in July that it's about self reliance, and
Speaker 5: self reliance has a heavy national security undertone. So I'll
Speaker 5: go back to what I was saying earlier that I
Speaker 5: think both sides sort of feed off each other. So
Speaker 5: why is China so worried about self reliance? Well, part
Speaker 5: of that is a response to Western tariffs and US
Speaker 5: export controls. But the fact is they are basically saying
Speaker 5: we want to be free to the extent they can
Speaker 5: be from the Western technological supply chain. And they're doing
Speaker 5: that because they're worried about national security. So of course
Speaker 5: in Washington they would think, why are you worried about
Speaker 5: national security? Right, So it sort of goes in both directions.
Speaker 3: I guess I could see this sort of malign angle
Speaker 3: also if it's like this is not real technological development,
Speaker 3: this is just loss making companies that are backed by
Speaker 3: the government that are going to then bankrupt and destroy
Speaker 3: the industrial base of the West and not actually make
Speaker 3: any progress. I guess I get all of these debates
Speaker 3: and nuances and why people talk about China overcapacity as
Speaker 3: a problem and all that stuff. But Okay, the other
Speaker 3: thing that happened over the last several years is, in
Speaker 3: addition to these ominous sounding phrases and slogans like made
Speaker 3: in twenty twenty five and the Belton Road initiative that
Speaker 3: created anxiety in the West, the US like actively started
Speaker 3: to try to suppress Chinese technological development, starting under the
Speaker 3: Trump administration and then obviously continuing under the Biden administration,
Speaker 3: and it may get ratcheted up even further under the
Speaker 3: next administration. Whoever that is, what's that done? How would
Speaker 3: you describe specifically what the US has tried to do
Speaker 3: in terms of constraining China's technological development and what's the
Speaker 3: basics of the impact that these efforts have had.
Speaker 5: What the US is trying to do is somewhat subject
Speaker 5: to debate. The official line is that the United States
Speaker 5: is not trying to stop China's development. It's not about
Speaker 5: overall delinking of the economies. Is just about select de risking.
Speaker 5: It's about remaining ahead in the strategic and critical technologies
Speaker 5: of the future. But it's not about sort of stifling
Speaker 5: the macro economy of China. In Beijing, the view is
Speaker 5: that it's all around containment and that the United States
Speaker 5: mostly but some other Western countries are trying to encircle
Speaker 5: China and basically prevent it from moving up the ladder
Speaker 5: economically and technologically. Is it working. It's complicated because there's
Speaker 5: a series of policies. So when we talk about what started,
Speaker 5: the thing that people mostly focus on is, of course
Speaker 5: the trade war, which effectively started in twenty eighteen in
Speaker 5: a Trump administration. The purpose that the trade war is complicated.
Speaker 5: It wasn't really to stunt China's growth, though there were
Speaker 5: people in the Trump administration would have hoped that it
Speaker 5: was actually for the president, for President Trump's perspective, to
Speaker 5: try to balance trade and get a deal, which we
Speaker 5: got in the form of the Phase one deal, whatever
Speaker 5: you think of that. But the other thing that happened
Speaker 5: that I think was actually a bigger deal from the
Speaker 5: Chinese perspective was when the US added Huawei to the
Speaker 5: Commerce Department's entity list in early twenty nineteen, because what
Speaker 5: that signal was that the United States was effectively trying
Speaker 5: to kill what was arguably China's best global technology company.
Speaker 5: The US would say, we're not trying to kill it,
Speaker 5: but the restrictions are pretty draconian, and there's very much
Speaker 5: that vibe, And so what it did was convinced not
Speaker 5: just Beijing but the local governments and Chinese companies that
Speaker 5: otherwise would it prefer to just use sometimes cheaper or
Speaker 5: better foreign inputs, like for semiconductors, that actually what Beijing
Speaker 5: was saying about self sufficiency was indeed a national security imperative.
Speaker 5: Is it working. It's complicated, but our basic take is
Speaker 5: that at the macro level, what's happening in a Chinese
Speaker 5: economy is primarily due to the property sector. You could
Speaker 5: call it a meltdown, because it's pretty dramatic. That Chinese
Speaker 5: government arguably started that with the three Red Lines policy.
Speaker 5: But I would be careful about conflating the idea that
Speaker 5: Chinese economic weakness is due to basically industrial policy, when
Speaker 5: really there's clearly a more obvious macro phenomenon that explains it.
Speaker 5: On the technology side, the export controls, I think are
Speaker 5: really the crux of the question of are they slowing
Speaker 5: China's development? I think they're The focus on the US
Speaker 5: side is primarily on semiconductors, and there's even recent news
Speaker 5: as Bloomberg has reported that, for example, TSMC, the famous
Speaker 5: semiconductor foundry in Taiwan, might have been sending some Nvidia
Speaker 5: chips to Huawei through some indirect body. Maybe they didn't
Speaker 5: know about it, But there's all this debate about how
Speaker 5: far ahead is China really and are they actually able
Speaker 5: to make the most advanced chips on their own, And
Speaker 5: I think that is really the question of when you
Speaker 5: get to how effective are the export controls, it looks
Speaker 5: like they are having some effect, but not a lot.
Speaker 5: At a macro perspective.
Speaker 4: We also sort of discovering in real time precisely the
Speaker 4: sort of miscalculation the idea of export controls. Initially, the
Speaker 4: belief was that it would help the US stay ahead
Speaker 4: by eight to ten years. But last year we saw
Speaker 4: Huawei launch their Mate sixty smartphone, which included a seven
Speaker 4: nanometer chip that suggested actually that Huawei's chip making partner, Smick,
Speaker 4: was actually somewhere between sort of four or five years behind.
Speaker 4: So there have been these sort of series of nasty
Speaker 4: surprises and led to recalibrations of precisely where Chinese tech
Speaker 4: advancement actually is.
Speaker 2: So just on the idea of what the US needs
Speaker 2: to do here, I mean, one of the criticisms of
Speaker 2: some of its response is that the problem really is
Speaker 2: the cost of these technologies. So in order to make
Speaker 2: them domestically and maybe internationally competitive, the US really needs
Speaker 2: to bring down the cost curve. And that's hard to
Speaker 2: do when you're competing with China and it has maybe
Speaker 2: fewer regulations and certainly cheaper labor. Is there anything that
Speaker 2: can be done on that front to make American technology
Speaker 2: more competitive, for instance, via more tariffs.
Speaker 5: In theory, if the US erects tariff falls, which we
Speaker 5: already have, but if Trump is re elected, he's promising
Speaker 5: sixty percent tariffs on China, which would be huge and
Speaker 5: might shut off eventually a good share of direct US
Speaker 5: China trade. His theory, as he explained recently on his
Speaker 5: Bloomberg interview with John Micklethwaite, is that essentially that will
Speaker 5: compel all these companies to reshore or onshore production back
Speaker 5: in the United States to sell in the United States.
Speaker 5: Now generally speaking, import substitution has a pretty bad track
Speaker 5: record internationally. But the US has the advantage of being
Speaker 5: the largest economy in the world, right and it's the
Speaker 5: largest consumer market, and so there is some feasibility to it.
Speaker 5: But I think something that might be under emphasized in
Speaker 5: a general discourse is that the tariffs, particularly as they
Speaker 5: are constituted now, but especially if they increase them, also
Speaker 5: hit a lot of intermediate goods right, actually makes it
Speaker 5: more expensive to import things like steel or all the
Speaker 5: components you need to build a factory or inputs for whatever,
Speaker 5: And so you have to sort of decide. So the
Speaker 5: US wants to protect at steel sector, Okay, we can
Speaker 5: do that. We do do that, but that also means
Speaker 5: it's steel costs more in the US, and it means
Speaker 5: construction costs than or up, which means making a factory
Speaker 5: and say Taiwan or China or whatever is cheaper. So
Speaker 5: there are trade offs there. In my personal view, I
Speaker 5: don't think tariffs are a good way to go about it.
Speaker 5: I think industrial policy, which is a much wider set
Speaker 5: of tools as some promise, but tariff to me are
Speaker 5: like a sledgehammer.
Speaker 3: I think there's a really interesting point about intermediate I mean,
Speaker 3: I imagine that even if you were to go into
Speaker 3: an Intel factory or fab somewhere in the United States,
Speaker 3: they are just numerous imported goods of all sorts. So if
Speaker 3: we want Intel to be a powerhouse, the idea of
Speaker 3: tariffs are going to make that much easier. I think
Speaker 3: it's complicated, And then of course there's all the questions
Speaker 3: about like how do you know it's coming from China,
Speaker 3: or what if the final assembly is somewhere else, et cetera.
Speaker 3: Let's get into civics. Both of you talk about some
Speaker 3: key industries where China was in twenty fifteen and where
Speaker 3: they are today in twenty twenty five, and what kind
Speaker 3: of progress has been made.
Speaker 4: Well, I think the sort of really obvious consumer ones
Speaker 4: where we've seen these kind of extraordinary leaps in evs
Speaker 4: and solar panels. I mean, I think a company like BYD,
Speaker 4: which is basically unheard of. I think globally a couple
Speaker 4: of years ago, now a Chinese leader outpacing its global competitors.
Speaker 4: It thinks it's going to sell half of its products
Speaker 4: overseas in the future, so certainly also doesn't really see
Speaker 4: tariffs or potential tariffs as an impediment to its expansion overseas,
Speaker 4: and I think in a way it's sort of unimaginable.
Speaker 4: I remember reporting in China about a decade ago around
Speaker 4: the time that Made in China was actually announced, and
Speaker 4: officials OCA Gunment officials are very excited to take me
Speaker 4: to a lithium battery factory which batteries were going to
Speaker 4: be used for electric vehicles, and it seemed to have
Speaker 4: to say, like something of a pipe dream, Like I said,
Speaker 4: totally misunderestimated the future of this sector and the future
Speaker 4: of the company. But even at that time, it was
Speaker 4: something that you know, local officials were really had this
Speaker 4: sort of razor sharp focus.
Speaker 5: On evs are probably the best example, because they are
Speaker 5: the technology where China has exceeded the plan, so to speak, right,
Speaker 5: they've done much better than their internal forecasts would have
Speaker 5: suggested in the twenty fifteen documents. But there are other
Speaker 5: sectors where they've also done well, so unmanned area vehicles,
Speaker 5: which is to say drones like that DJI makes China
Speaker 5: is clearly the world's leader, and that the US tries
Speaker 5: to restrict imports and use of that in the US,
Speaker 5: but elsewhere they're dominant. There are other things like solar
Speaker 5: panels that China clearly has dominance in other areas, they're
Speaker 5: not exactly their world leader, but they're clearly starting to
Speaker 5: catch up, and they're better off than they would have been,
Speaker 5: say circa twenty fifteen. So semiconductors are one area where
Speaker 5: they're not the world's leader, but they are on a
Speaker 5: relative basis stronger than they were five years ago. Industrial robots,
Speaker 5: things like that, machine tools. There are other sort of
Speaker 5: you know, maybe more obscure things like large tractors. So
Speaker 5: part of the plan talks about things like agricultural equipment
Speaker 5: and pharmaceuticals. They're also making gains. So really in all
Speaker 5: areas except arguably for maybe commercial aircraft, they're making relative gains.
Speaker 4: I guess the other element in China in some ways
Speaker 4: China sort of had set itself up to succeed because
Speaker 4: there are some areas right JO where you know, China
Speaker 4: was already a global leader.
Speaker 5: Yeah. Well, so that's a good point because the new
Speaker 5: energy vehicle plans go back to I believe two thousand
Speaker 5: and nine, right, so when they're deciding in twenty fifteen,
Speaker 5: whereas it's going to go some of those technologies, they
Speaker 5: already had plans in place that were underway, and so
Speaker 5: they could sort of project, Okay, we already know how
Speaker 5: this is starting to work, whereas other things like artificial intelligence. Yeah,
Speaker 5: it was a thing people spoke about in twenty fifteen,
Speaker 5: but it wasn't nearly as real as it is now, right,
Speaker 5: so that was much more speculative.
Speaker 2: Can we maybe talk about semiconductors specifically, because this obviously
Speaker 2: has been a very hot button area for both the
Speaker 2: US and China and maybe one of the areas where
Speaker 2: we've seen a lot of money pouring in. How's that
Speaker 2: shaking out?
Speaker 4: I mean, by and large, semi conductors is probably the
Speaker 4: one area where the US has had most success in
Speaker 4: rolling out export controls and curbing China's access to these
Speaker 4: really key strategic technologies. And part of that is down to,
Speaker 4: you know, the success of the Biden administration enlisting support
Speaker 4: from its allies. It's just a handful of companies that
Speaker 4: are involved in making these types of chips. And you know,
Speaker 4: there's an argument you made that unless Biden had sort
Speaker 4: of convinced Japan and the Netherlands to come on site,
Speaker 4: that actually the controls that he rolled out would have
Speaker 4: been far, far less effective. And one key area here
Speaker 4: is actually preventing China from accessing the manufacturing equipment that's
Speaker 4: needed to actually make these types of really advanced chips
Speaker 4: that are used in AI and quantum computing.
Speaker 5: There's an interesting and I think quite important counterfactual to
Speaker 5: be discussed, which is that you know, what if the
Speaker 5: US had not done the export controls. In essence, what
Speaker 5: the US is doing is imposing import substitution on China
Speaker 5: in a way that China hadn't preferred. But we can
Speaker 5: also see in the data, including for filings for Smick,
Speaker 5: their main foundry, that they upped the amount of subsidies
Speaker 5: they were getting after twenty nineteen. Right, So it means
Speaker 5: that China sort of turned the industrial policy dial from
Speaker 5: ten to eleven. You could debate how much effect it has,
Speaker 5: but it seems clear that that is the overriding priority
Speaker 5: now more than anything else, actually semic conductors, right, because
Speaker 5: they know that is the keynode both sides except that
Speaker 5: is it working. I mean, clearly it has slowed down
Speaker 5: their ability to get the most advanced chips, but China's
Speaker 5: clearly making gains on so called legacy nos or mature nodes, right,
Speaker 5: so sort of slightly older technology, and they're building out
Speaker 5: a lot of capacity there and that's something that they
Speaker 5: still have access to a lot of the lithography equipment
Speaker 5: to do. So other areas like packaging, they've improved it's design,
Speaker 5: maybe some improvement, but that they're still lagging the West,
Speaker 5: so qualcomm and video, et cetera. I think, really, as
Speaker 5: Rebecca said, it's the equipment, so specifically, the most advanced
Speaker 5: lithography machines that China as far as we know, has
Speaker 5: not been able to make on its own, and that
Speaker 5: is the current roadblock.
Speaker 3: But like whatever the most advanced lithography machine that China
Speaker 3: is able to make today on October twenty fourth, twenty
Speaker 3: twenty four, is it substantially higher than the most advanced
Speaker 3: lithography machine that China was able to make at some
Speaker 3: point in twenty fifteen, And is the number of years
Speaker 3: gap between that most advanced machine versus the one that
Speaker 3: ASML makes is it perceived to have narrowed?
Speaker 4: I actually don't know the narrowing of the generations Gerardine, Okay.
Speaker 5: Well, first of all, this is something where I think
Speaker 5: would be subject to debate. Right, So there's the fact,
Speaker 5: as Rebeca already mentioned, the Mate Pro, the Huawei phone
Speaker 5: that had the seven animeter chip. When that came out,
Speaker 5: there was a debate, and I don't think it's been
Speaker 5: conclusively settled as far as I know, as exactly what
Speaker 5: happened how they got those chips. The fact that we
Speaker 5: have news recently saying that maybe actually Huawei is kitting
Speaker 5: chips from TSMC indirectly as a wrinkle, because if that's true,
Speaker 5: then it would suggest that actually they don't have their
Speaker 5: own technology. They're essentially just finding a way around the
Speaker 5: export controls, which is a problem for the US in
Speaker 5: one sense, but it also means that maybe the export
Speaker 5: controls are working in that China doesn't have the indigenous
Speaker 5: capacity to make those things on lithography. I'm not an
Speaker 5: expert on that, which is a super technical topic, but
Speaker 5: my strong suspicion is that the quality of China's domestic
Speaker 5: capacity has increased, but the gap is still there. And
Speaker 5: so TSMC, I believe, is still pretty confident in SML
Speaker 5: that they're, you know, the world's leader, and there's there's
Speaker 5: going to be a gap going forward.
Speaker 4: I just had you, the gap that we know of
Speaker 4: now between Smick and the industry leaded to TSMC is
Speaker 4: about two generations, so that's roughly four years. But as
Speaker 4: Gerard says, there is actual sort of still life debate
Speaker 4: over precisely where that gap might be. Something it's bigger,
Speaker 4: something it's smaller.
Speaker 5: So I think semiconductors are also. They're interesting for many reasons,
Speaker 5: but one of them is that the technological race is
Speaker 5: very much ongoing. So if More's law hasn't been exhausted yet,
Speaker 5: so if there's still the ability to get to lower
Speaker 5: and lower nanometers, then you could imagine that TSMC or
Speaker 5: the West or whatever is able to stay ahead. But
Speaker 5: if that slows, if at some point in a not
Speaker 5: too distant future, that innovation is not moving as quickly,
Speaker 5: I would imagine that with enough resources, the odds of
Speaker 5: China catching up is higher. So there are other areas,
Speaker 5: like say commercial aircraft right where there's clearly an innovative field,
Speaker 5: but it's not as cutting edge as semiconductors, and yet
Speaker 5: COMAC China is struggling. I think that is more of
Speaker 5: a function of the sort of dualopoly nature of that
Speaker 5: market and the difficulty of having sort of product integration
Speaker 5: and then sort of market share. But from a technological perspective,
Speaker 5: they're getting there and they eventually will catch up.
Speaker 2: So the other thing I was wondering is the role
Speaker 2: of foreign investment, and I don't just mean foreign direct investment,
Speaker 2: but also companies that come into China and set up
Speaker 2: factories and then workers learn some of those techniques for
Speaker 2: advanced manufacturing and things like that. Obviously there's a debate
Speaker 2: over intellectual property and things like that as well. But
Speaker 2: what role does FDI, foreign investment, foreign expertise play in
Speaker 2: China's technological progress?
Speaker 5: Now, I would say a lot less than the ease
Speaker 5: to So it would vary by sector and technology, right,
Speaker 5: But generally speaking, if you look at, for example, the
Speaker 5: trade data that China Customs puts out, they actually break
Speaker 5: down whether the entity that's doing the trading is a
Speaker 5: state on enterprise, is a foreign funded enterprises which is
Speaker 5: basically an FDI company, or actually a private Chinese company.
Speaker 5: And what you see is that China's exports are now
Speaker 5: overwhelmingly dominated by private Chinese companies. So in the two thousands,
Speaker 5: during the sort of peak China Shock years, a lot
Speaker 5: of that growth and exports were actually foreign invested firms
Speaker 5: in China that had set up factories. Over the past
Speaker 5: decade that it's shifted, it's really just private firms, and
Speaker 5: so I think more and more, at least in terms
Speaker 5: of brands and manufacturing, it's really indigenous companies that are
Speaker 5: doing the work. Now. There are some things like AI
Speaker 5: where I think having some of the research links might
Speaker 5: still matter, but by and large, I think China is
Speaker 5: moving closer towards indigenous innovation, as they call it.
Speaker 4: One area that we really see that transition that Gerard
Speaker 4: is talking about is about ten years ago, if you're
Speaker 4: a foreign investor in China setting up a factory, you
Speaker 4: were deeply concerned about IP and about you know, information
Speaker 4: leakage and all of those sort of issues. And now actually,
Speaker 4: as we see for example, more Chinese going to set
Speaker 4: up their own factories overseas in part in response to
Speaker 4: issues around tariffs, we actually see state owned enterprises and
Speaker 4: private businesses. Chinese private business is concerned about that same problem,
Speaker 4: concerned that you know, their international competitors and local workers
Speaker 4: will actually be picking up sort of technological skills and
Speaker 4: be picking up on potential company secrets and they're worried
Speaker 4: about information leakage the other way.
Speaker 3: One big question. You know, we're obviously in the US
Speaker 3: doing our own industrial policy of various sorts. One thing
Speaker 3: we haven't really gotten into in the Maid and twenty
Speaker 3: fifteen specific conversation is the operationalization of a goal. Okay,
Speaker 3: so it's one thing to say in ten years we
Speaker 3: want to be leaders in all these areas. And I
Speaker 3: think you know clearly they've made extraordinary strides. And I'm
Speaker 3: sure this is a very long, separate question, but I'd
Speaker 3: be curious from both of you, you know, maybe start
Speaker 3: with Rebecca, Like, you know, you went to that factory
Speaker 3: ten years ago and it seemed like a pipe dream,
Speaker 3: and now it's extraordinary. How would you characterize what the
Speaker 3: government did, or what the government did along with banks
Speaker 3: and other et cetera and private companies to make these
Speaker 3: dreams of reality.
Speaker 4: Well, just the scale of resources that were poured into
Speaker 4: these sectors. I mean, the sort of two key parts
Speaker 4: of the MAID. In China, on the one hand, there
Speaker 4: was this idea of self sufficiency, that China should be
Speaker 4: less reliant on other countries, and it wanted to essentially
Speaker 4: to stand on its own. Two feet and that was
Speaker 4: clearly linked fundamentally to a national security goal. The other
Speaker 4: part of it was this drive for innovation that China
Speaker 4: wanted to create these sectors that became global competitors, that
Speaker 4: they were able to export high value added goods into
Speaker 4: the rest of the world. So there was these sort
Speaker 4: of dual ambitions that were also feeding into the sort
Speaker 4: of raison detre for supporting all of these industries. And
Speaker 4: I think there's also this sort of prevailing issue too
Speaker 4: for Beijing about the idea of needing to really shore
Speaker 4: up its own security. So, for example, Beijing officials are
Speaker 4: increasingly sort of concerned about making sure that has access
Speaker 4: to its own sources of energy, particularly in any kind of,
Speaker 4: you know, potential wartime scenario, and that is part of
Speaker 4: a whole ethos that we see also for example, in
Speaker 4: food security in China too, but really an increasing focus
Speaker 4: on trying to make sure that Beijing isn't unnecessarily exposed
Speaker 4: and perhaps even exposed in any way to oversee supply
Speaker 4: chains for these key areas.
Speaker 5: In terms of policy instruments, quantifying what China's doing is
Speaker 5: actually very difficult, except for things like rebates for electric
Speaker 5: vehicles or things that show up in listed firm data,
Speaker 5: but things like state linked credit or even totally in
Speaker 5: government guidance fund allocations is quite difficult. I would say,
Speaker 5: you know, in China's case, subsidies are not new, so
Speaker 5: subsidies are not the secret sauce. What is different now? Well,
Speaker 5: generally speaking, around really twenty thirteen twenty fourteen, they tried
Speaker 5: to pivot to more market orientation. The big policy innovation
Speaker 5: at that time was the reinvigoration of government guidance funds,
Speaker 5: which are essentially state owned private equity funds or venture
Speaker 5: capital funds. Those played a very large role in the
Speaker 5: first say five ish years of the plan. My sense
Speaker 5: is they've slowed in part because they weren't having the
Speaker 5: market oriented return so they were hoping to have. But
Speaker 5: in general, the state's essential ownership of much of the
Speaker 5: financial sector matters a lot, and you see private investors
Speaker 5: in the stock market, for example, where if Beijing says
Speaker 5: this sector is a priority, then people invest in it.
Speaker 5: Or on the other side, when they said, you know,
Speaker 5: five or so years ago that ed tech was not
Speaker 5: a priority, that tanked, and so there's a way of
Speaker 5: sort of allocating all the market resources towards priority sectors.
Speaker 5: The other thing I would flag is that there are
Speaker 5: some technologies I think EV is the best example of
Speaker 5: this where they really got the market orientation right in
Speaker 5: a sense that they allowed consumers to adjudicate. So every
Speaker 5: EV company, if actually eligible, could get the credits for
Speaker 5: purchases to reduce the price of their evs. Their localities
Speaker 5: might have been helping them in different ways, but ultimately
Speaker 5: the best cars from a consumer perspective, one out like
Speaker 5: so vyd why is byd great. It's not just subsidies. Yes,
Speaker 5: they benefited from somethings, but a lot of other companies
Speaker 5: did too. I think the hard part now for China,
Speaker 5: and this is what their system is less good at,
Speaker 5: is while they might have fixed the problem of picking
Speaker 5: winners so to speak, by having the market do it,
Speaker 5: they're less bad at eliminating losers. And there's a consolidation
Speaker 5: that now has to happen. That you look at areas
Speaker 5: like solar panels where a lot of these companies they
Speaker 5: have negative margins actually, right, so how do you address that?
Speaker 5: So it's sort of like the tide goes in and
Speaker 5: goes out, But as long as it's market oriented it's
Speaker 5: generally more effective.
Speaker 2: Yeah, I think it's interesting. A lot of people forget
Speaker 2: the sort of volatility that we've seen, especially in EV
Speaker 2: funding specifically because a few years ago we had lots
Speaker 2: of Chinese EV makers that were going bankrupt, and there
Speaker 2: are still some going bankrupt now, but there are also
Speaker 2: those that are sort of getting I guess, revived from
Speaker 2: the dead with new funding. So it's interesting to see
Speaker 2: that flow kind of go back and forth. But what
Speaker 2: happens in twenty twenty five? So the Maid in China
Speaker 2: label brand is being downplayed somewhat, So what exactly does
Speaker 2: that anniversary the end of the timeframe actually mean.
Speaker 4: I kindly add one more for Geral, which I'm also
Speaker 4: curious about, which is what happens in twenty thirty.
Speaker 5: Well, in both cases, I would say the fifteenth and
Speaker 5: sixteenth five year plans respectively, Right, I think it's iterative.
Speaker 5: So Made in China twenty twenty five, somewhat misleadingly, actually
Speaker 5: has a lot of targets to go out to twenty thirty.
Speaker 5: They're typically vaguer than the twenty twenty five targets, but
Speaker 5: the plan doesn't end in twenty twenty five, and so
Speaker 5: I think they will as part of the five year
Speaker 5: plan that will be coming out in early twenty twenty
Speaker 5: six will probably essentially incorporate some of that. And as
Speaker 5: I said up front, there are so many documents that
Speaker 5: are associated with this one blueprint. It's like think of
Speaker 5: it as the phrase I prefer as someone that's coined
Speaker 5: as cascade of plans. Right, It's not just one plan.
Speaker 5: It's a plan that then begets a whole bunch of
Speaker 5: other plans, and it is iterative and requires a lot.
Speaker 5: It actually, I think eats up a lot of the
Speaker 5: bureaucracy is time because they have to assess and reassess
Speaker 5: and come up with new targets. But the bottom line
Speaker 5: is China's definitely not giving up an industrial policy. The
Speaker 5: signals coming out of Beijing in recent years, if anything,
Speaker 5: suggests there's an even greater urgency in part to the
Speaker 5: national security concerns. And so whatever the successor to Made
Speaker 5: in China twenty twenty five is, it's going to happen.
Speaker 5: It probably won't be called Made in China twenty forty
Speaker 5: or whatever, but it's going to exist.
Speaker 4: Part of the question is, I guess over that packaging
Speaker 4: precisely because of all of the responses and suspicions that
Speaker 4: were provoked by the made in China twenty twenty five label,
Speaker 4: and it's no longer advantageous. In fact, it's sort of
Speaker 4: geopolitically disadvantageous to be advertising your industrial policy in this way.
Speaker 2: If you're Beijing and Gerard, you read all of those plans, right,
Speaker 2: the hundreds and hundreds of pages, thousands of pages.
Speaker 5: There are plenty of people around the world to do
Speaker 5: that work for us. Even reading just the so called
Speaker 5: green Book of the targets is quite a slog.
Speaker 2: All right, we're going to have to leave it there,
Speaker 2: but thank you so much to both of you for
Speaker 2: coming on all thoughts.
Speaker 5: That was great, Thank you, Thank you so much. Joe.
Speaker 2: I thought that was a fantastic overview of what China
Speaker 2: is doing and to some extent, what the US is
Speaker 2: trying to do too.
Speaker 3: I did too. I had a lot of thoughts, and
Speaker 3: obviously anyone who listens to the podcast knows that we're
Speaker 3: both extremely interested in this specifically and all the other
Speaker 3: things related to it. Can I say, you know one
Speaker 3: thing at the end, and Gerard was talking about like
Speaker 3: I think he called it a cascade of plans and
Speaker 3: all I've been reading, you know, a lot of Chinese history,
Speaker 3: twentieth century history. They love meetings and planted They always
Speaker 3: have all these like work groups and study groups and
Speaker 3: random people or it's like I'll get appointed to a
Speaker 3: new study group. I don't know if that's good or bad,
Speaker 3: but they love a study group.
Speaker 2: I think it's funny that you're just discovering this. Actually,
Speaker 2: you know, one of the interesting books just speaking of bureaucracies,
Speaker 2: One of the interesting books I read when I moved
Speaker 2: to Abu Dhabi was about Saudi Arabian government ministries and
Speaker 2: what it was actually like to work there, and it
Speaker 2: was sort of a similar thing. There were lots of
Speaker 2: meetings and people kind of getting paid to not do
Speaker 2: very much. But it was super interesting.
Speaker 3: As a meeting hater myself, I guess whenever I read
Speaker 3: I note when they're like, it rings a bell in
Speaker 3: my head. When I see another study group or work
Speaker 3: committee or something like that getting formed, I'm like, oh God,
Speaker 3: that sounds so awful. But no, I thought that was good.
Speaker 3: And look, I mean, you know, this gets back to
Speaker 3: many of our big themes, and I get why the
Speaker 3: US and the West is anxious and all this stuff.
Speaker 3: But on the other hand, I would just say things
Speaker 3: like economic development is technological development. This goes back to
Speaker 3: Ricardo Houseman and the ability to make complex machines. That
Speaker 3: is what it means to get wealthier, or that seems
Speaker 3: to be the ability to do complicated things and move
Speaker 3: up the value chain. And when we look at Boeing
Speaker 3: and we look at what our own manufacturing like a
Speaker 3: lot of the issues I get the impression are projecting
Speaker 3: our own problems abroad. Like, you know, one way for
Speaker 3: China to close the gap on aircraft to make better
Speaker 3: and cheaper airplanes, But another way for China to close
Speaker 3: the gap on aircraft is for the US to not
Speaker 3: be able to make planes. And we can converge in
Speaker 3: two directions, and one way of maybe if we want
Speaker 3: to avoid that divergence would be getting better at making
Speaker 3: airplanes ourselves.
Speaker 2: Well, the other thing I was thinking about, and this
Speaker 2: is sort of speculative or kind of fuzzy, but the
Speaker 2: socioeconomic I guess aspect of this, which is, you know,
Speaker 2: a lot of the jobs in advanced technology they might
Speaker 2: pay well relative to other manufacturing jobs, but like some
Speaker 2: of them aren't very much fun. Right, It's like if
Speaker 2: you're working in a fab or something, you're wearing like
Speaker 2: one of those suits and you're staring at tiny chips
Speaker 2: all day and you're indoors, et cetera. But at the
Speaker 2: same time, in China, you know, we've seen a lot
Speaker 2: of like popular dissatisfaction. Yeah, you have the live flat
Speaker 2: movement where people are like, why should I even bother
Speaker 2: trying because my life is never going to get better?
Speaker 2: And so I kind of wonder like how all of
Speaker 2: that plays into some of this as well.
Speaker 3: There's a really good video by Asianometry that people should watch.
Speaker 3: It's basically what does someone who work in a fab
Speaker 3: actually do? And it's an issue here. I mean they
Speaker 3: talk about, you know, this is not a job. I mean,
Speaker 3: there are jobs in engineering and tech and hard tech
Speaker 3: in the US that many people would find to be
Speaker 3: an extraordinary, challenging and interesting and highly remunative career. But
Speaker 3: there are also a lot of jobs in engineering and
Speaker 3: hard tech in the United States that I think or anywhere,
Speaker 3: that people would find to be quite miserable, et cetera.
Speaker 3: But this is why we need humanoid robots.
Speaker 2: That's right, Okay, shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 3: Follow our guests Gerard de Pippo He's at GDP nineteen
Speaker 3: eighty five and Rebecca Chung Wilkins, She's at our Chun Wilkins.
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